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Rating Firm Sees No S&L-Type Collapse for Insurance Industry

December 10, 1990

WASHINGTON (AP) _ A firm that has been rating insurance companies for 90 years told Senate investigators Monday that the industry is not heading for the same financial troubles that befell savings and loan institutions.

″We would not support the dire conclusions which have been reached regarding the potential insolvencies of several large and prominent insurers in the event of unspecified economic scenarios,″ said Michael Albanese, an analyst with A.M. Best Co.

Albanese testified before the Senate Judiciary antitrust subcommittee, whose chairman, Sen. Howard Metzenbaum, D-Ohio, contends the insurance industry is showing some of the same warning signs that preceded the collapse of scores of savings and loans.

″Like past S&L regulation, current insurance regulation in most states is not equipped to detect or prevent another financial debacle for millions of Americans, who would lose their pensions, investments and insurance,″ Metzenbaum said.

Albanese, whose company rates 1,500 life and health insurers and 2,300 property-casualty firms, told the subcommittee, ″We ... do not agree that the insurance industry as a whole at this point in time is on the brink of financial crisis analogous to that of the savings and loan industry.″

Thomas H. Borman, Minnesota commissioner of commerce, cited a recent Best finding that one-third of all consumers are concerned about the solvency of their insurance companies.

He noted a study by IDS Life Co. of Minneapolis concluded that one in five life insurance companies could fail in the event of a major recession or decline in the stock market. The biggest risk for the insurers, the study found, would be the lack of a market for the depressed commercial real estate and high-risk ″junk″ bonds that now make up a big portion of insurance company holdings.

Metzenbaum contends state regulators and generally accepted accounting practices allow insurers to conceal their true financial situation by valuing such bonds and real estate at purchase price, rather than at present value.

″This is yet another thinly disguised attempt to dupe the public into believing that their security blanket is not in jeopardy,″ Metzenbaum said. ″The insurance industry, and particularly the life insurance industry, has enormous sums invested in these troubled assets.″

Borman said state insurance regulators should learn from the mistakes of S& L regulators and require insurers to ″mark their distressed real estate holdings to market.″ That could be done either by requiring greater reserves or by writing down assets to current values, he said.

Terence Lennon, chief examiner of the New York Insurance Department, questioned the logic of such a move unless an insurer’s liabilities - its promise to pay off on policies in the future - also are revalued. Because of the wide variety of policies now available, he said, that would be a mistake.

Metzenbaum, noting that insurers now hold assets of almost $2 trillion, had asked six life insurance companies to testify at the hearing. They declined, and Metzenbaum said their refusal ″sends a loud and clear message - they cannot stand the tough scrutiny that the public demands and deserves.″

The American Council of Life Insurance, which represents most companies, was not allowed to testify but submitted a brief statement from President Richard S. Schweiker.

Because life companies have liabilities that are long-term, they match them with long-term assets - bonds, he said. Insurers list those bonds at book value because changes in market interest rates ″have almost no impact on the ability of the bond issuer to meet interest obligations or repay principal,″ Scheweiker wrote.

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