N.J. set to seize insurer noted for sound policies


NEW YORK -- Mutual Benefit Life Insurance Co., one of the most conservative and respected insurance companies in the United States, is to be seized by New Jersey officials this morning, and industry experts predict the takeover will weaken public confidence in the life insurance business.

The seizure of Mutual Benefit, based in Newark, would prevent the largest failure of an insurer to date. The company is in financial distress because of its troubled real estate investments.

The takeover is likely to have a significant impact on the debate in Washington over insurance regulation. Insurance executives have been arguing that stronger oversight by the states would be adequate to solve the industry's financial problems -- bad real estate loans, too many investments in high-risk "junk bonds" and too thin a cushion against losses.

But the seizure of Mutual Benefit, a blue-chip company, is expected to bolster support for federal regulation.

Mutual Benefit's difficulties are expected to tilt the debate in favor of those who argue that the government should at least get involved in regulating insurers' investments.

"Mutual Benefit was no Executive Life," said Joseph M. Belth, an Indiana University insurance professor, referring to the West Coast insurer that failed recently after it bet almost half its policyholders' money on junk bonds.

"Mutual Benefit was an old-line, conservative, stodgy company with a modest growth rate. The time has now come for some dramatic action to restore public confidence," he said.

Indeed, the most important consequence of New Jersey's action could be its effect on the public's faith in insurers.

When he asks a judge in New Jersey Superior Court to place Mutual Benefit under the protection of the state, New Jersey Insurance Commissioner Samuel F. Fortunato will also ask the court to impose an immediate freeze on all cash withdrawals from the company.

That freeze could easily last the rest of the year, industry experts said.

The freeze will make it impossible for policyholders to withdraw money they have invested with Mutual Benefit, either through life insurance programs or annuities, but death benefits will be paid.

As recently as 10 years ago, a moratorium on cash withdrawals from a life insurance company would have drawn little notice. Most policyholders bought coverage to provide for loved ones and did not plan to cash in their policies early.

But today, many consumers and businesses view life insurance as a wealth-building vehicle similar to a savings account. Denying policyholders access to their investments raises questions concerning the free flow of capital.

"This will, for sure, have a ripple effect," said George G. C. Parker, who teaches a course in financial institutions at the Stanford Business School and who is a director of an insurance company. "It will affect not only other insurers' ability to raise funds but their cost of funds as well."

Martin Weiss, head of an insurance research firm in West Palm Beach, Fla., predicted that the moratorium on withdrawals would almost certainly touch off withdrawals at other insurers.

"The problem is that if you first plug the hole in Executive Life and then plug the hole in Mutual Benefit Life, eventually other holes will spring up elsewhere," Mr. Weiss said.

In insurance circles, Mutual Benefit was considered among the most august companies.

Until 10 days ago, A. M. Best Co. had assigned Mutual Benefit an A-plus rating, meaning the rating agency considered the insurer's claim-paying ability to be unimpeachable.

But the company, which on Dec. 31 had 400,000 policyholders and $13.5 billion in assets, has seen its net worth fall steadily because of a sharp increase in bad real estate loans.

This year, that led other leading rating agencies to downgrade Mutual Benefit and caused some of the company's larger policyholders to begin withdrawing money from their accounts. Early last week, A. M. Best also lowered its rating.

At the end of last week, the insurer still had more than $2 billion in investments that it could quickly convert to cash, but the news on Friday that New Jersey planned to seize Mutual Benefit sent policyholders around the country streaming into insurance agents' offices to seek their money back.

Some policyholders went to Mutual Benefit's headquarters to ask for refunds. New Jersey officials expected more crowds at the Newark offices today.

Senior officials in Gov. Jim Florio's administration said that while Mr. Fortunato had originally planned to act on Wednesday, the publication of his plans in New Jersey newspapers on Friday had touched off the equivalent of a run on a bank. Mr. Fortunato, these officials said, has no choice but to act today.

Given the extent of Mutual Benefit's exposure to further declines in real estate values and considering the weak investor interest in financial institutions in general, some insurance experts are predicting that Mr. Fortunato's efforts to find a "white knight" to save the company will fail.

If that happens, the moratorium on cash withdrawals might never be lifted, and Mutual Benefit might have to liquidate at substantial losses to policyholders.

The one hope, according to some experts, is that a buyer might receive some state or federal guarantee against losses.

Given the budget problems in New Jersey and the outcry over the use of public money to bail out savings and loan institutions, it is far from clear that such guarantees would be forthcoming.

"Nobody is dumb enough to exchange good capital for bad assets," said Mr. Weiss, the Florida-based insurance researcher. Since the asset quality in this case is poor, my best forecast is that this company and all others in similar shape will have to be liquidated."

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