Storm in Insurance Industry Has Passed

“Don’t look back; something may be gaining on you,” said Satchel Paige, the great pitcher and aphorist--and his advice holds today for worriers about U.S. insurance and other financial companies.

Sure, the news is ominous. Insurance regulators in more than a dozen states have asked for a review of First Executive Corp.’s junk bond portfolio to determine whether the firm’s insurance subsidiary, Executive Life, can continue meeting its obligations to policyholders.

Also, Standard & Poor’s has lowered its rating on the claims-paying ability of Executive Life, because its bonds and other assets were worth $2.5 billion less than their stated value on the company’s books at the end of last year.

The fear is that with junk bonds defaulting or being refinanced at lower interest rates, the insurance company may not have investment income to go on paying high interest on the annuity policies it sold in the 1980s.

And though First Executive--which built its business around high-yielding junk bonds--is an extreme case, it is not the only insurance firm getting nervous looks these days. After a decade of excess and imprudence, all financial institutions are under suspicion in the public mind.

But, in fact, grounds for suspicion are yesterday’s news, and there’s certainly no need for policyholders of First Executive or any insurance company to panic. When an insurance company fails, there are many ways in which policyholders are protected, from a buyout of the policies by another company to industry guarantee funds. Almost all states--including California since Jan. 1--have an insurance guarantee association, in which insurers active in the state finance a rescue fund to ensure that policyholders are not hurt.

To be sure, First Executive, with $17 billion in assets and more than $50-billion face value of life insurance outstanding, would represent a big bailout, a leading insurer says. Other insurance companies would resist, especially as First Executive and its Chairman Fred Carr had beaten them competitively in the ‘80s by recklessly using junk bonds. Lawsuits would argue that First Executive mismanaged its insurance business and was therefore ineligible for assistance, or that the corporations and pension fund administrators who bought annuities from First Executive knew what they were doing and deserve whatever loss they take.

But First Executive’s customers include the pension funds of Pacific Lumber, Revlon, Cannon Mills, Bulova Watch, Walter Kidde, H. H. Robertson and other large companies. If the worst happened, the insurance industry would protect their pensions to avoid a regulatory backlash and massive loss of confidence in insurance.

And the worst may very well not happen. First Executive may announce this week that it had a large loss in the fourth quarter of 1990. But “Executive Life won’t be affected,” says William Adams, senior vice president. “There is no worry about immediate cash flows.”

The larger truth about the present is that it’s the calm after the storm, not before it. The real danger to the financial system occurred in the past two years, when the full extent of the horror was only guessed at. In the past two years one shock has followed another: the fall of Drexel Burnham Lambert, the collapse of the junk bond market, the full truth of the savings and loan disaster, the fall of Campeau Corp., the debt-swollen department store company. Finally, the invasion of Kuwait last August and the onset of recession produced a time of acute tension.

But then the fever broke, and the effect was therapeutic, says Joel R. Mogy, an investment adviser in Beverly Hills. Mogy, who tracks 750 stocks, notes that last year, when the Dow Jones average fell 4.3%, stocks such as First Executive declined from almost $10 a share to under $1.

The point is that the flawed merchandise has been washed out of the markets. Now is not the time for fear but for separating the bad from the good and getting on with business.

It’s a time for realizing that the life insurance industry is a vast network of companies with $9 trillion in policies, $1 trillion in investments and minimal exposure to junk bonds. Its outlook is better now than in the past decade, when insurance company presidents acknowledge that they lost business to First Executive’s Fred Carr.

Carr, 60, had sold high-performance mutual funds in the 1960s until that game collapsed. In the ‘70s and ‘80s, he turned to insurance and gained a big competitive edge by investing his company’s premiums in high-yielding bonds. The income allowed him to offer a higher interest rate than his competitors on annuity policies--sometimes two percentage points higher. Carr’s higher return was based on junk, of course, but for a time that didn’t matter, to customers or even insurance regulators. First Executive grew from $2 billion to almost $60 billion of life insurance in force; its stock hit $20 a share in 1986.

Tuesday, First Executive closed just below $1.10 a share, amid fears that it would collapse and competitors would have to rescue its policyholders. Reality is harsh--but bracing.

Nobody is offering high returns based on junk bonds anymore, and if they were, nobody would believe them. Common sense is sound business.