Big Insurance Firms Fail Test -- Reserves, Surplus Falling Below Accepted Levels
Seven of the 21 life-insurance companies based in Washington, including three of the four largest, failed to meet a common test of financial strength used by state regulators, according to 1990 year-end financial reports for the companies.
The test is whether the companies' mandatory reserves and surpluses total at least 5 percent of their assets.
No state law or regulation requires that level of reserves. But regulators say falling below that level can trigger concern about an insurance company's health.
Concern about insurance companies has been heightened in recent weeks after regulators in other states seized four large life-insurance companies.
Most recently, Mutual Benefit Life Insurance Co. collapsed and was taken over by New Jersey authorities. Concern has risen about the entire industry, particularly about heavy investments by some companies in junk bonds and real estate.
Regulators say Washington policyholders are in no danger because they are covered by an industry guaranty association, which requires all insurers doing business in Washington to come to the aid of policyholders of any insolvent insurance company.
Regulators are paying close attention to any signs of problems.
"We have talked to the managements of all these companies about this, and they know this is an issue we are interested in," said Ed Southon, deputy state insurance commissioner.
"Just because they are below the 5 percent does not mean they are in any danger of insolvency," Southon said. "We are encouraging the companies to bolster their surplus."
Southon said all 21 insurers are solvent and "none is in imminent danger of insolvency."
Washington's largest life-insurance company, United Pacific Life of Federal Way, would have failed a proposed limit on holdings of junk bonds if that limit had been in effect last Dec. 31.
United Pacific Life ended last year with $1.78 billion, or 32 percent of its assets, in junk bonds, the company's report shows. Insurance Commissioner Dick Marquardt has said he will ask the Legislature next year to limit such holdings to 20 percent of assets.
State officials say United Pacific sold much of its junk-bond portfolio earlier this year. Such bonds, which have contributed to the demise of some insurance companies, now amount to about 19 percent of United Pacific's assets, said Southon.
The company reported that on June 30, its junk bonds had been reduced to about $1.08 billion.
"Their portfolio (of bonds) is very strong, and they are extremely solvent and liquid," Southon said of the company. "Of their $5 billion in assets, they have cash or cash equivalents of about $1.5 billion, so they are highly liquid."
United Pacific's surplus and reserves at the end of last year were 6.1 percent of its assets, more than enough to pass the 5 percent test.
But the state's next three largest life insurers, all of Seattle, fell under the 5 percent threshold: Safeco Life Insurance Co. had 4.6 percent, Merrill Lynch Life Insurance Co. had 4.4 percent and Great Northern Insured Annuity Corp. had 4.7 percent.
John Woodall, assistant deputy commissioner for company supervision, said the 5 percent test is a "rule of thumb" among insurance regulators. "That is the first trigger that the regulator looks at. If it is less than that, then it is an indication that you should figure out why."
For example, United Olympic Life Insurance Co. of Bellevue had a surplus and reserves equal to 3.7 percent of assets last Dec. 31.
"We are in close touch with United Olympic and are monitoring them closely," Woodall said. "We do not feel that the company is in immediate danger, but we are certainly working very closely with them."
Some companies say the 5 percent ratio calculations would be fairer if the companies could include voluntary reserves and capital in addition to surplus and mandatory reserves.
"Insurance accounting is so arcane that it is hard to pick up all the pieces," said Vic Moses, vice president and chief actuary for Great Northern Insured Annuity Corp. "The 5 percent ratio is very simplistic and pretty tough to use."
Great Northern has put about $18 million of capital into a New York subsidiary, "which is substantially overcapitalized," said Moses. "Those assets would otherwise be in our surplus" and would boost the company's ratio above 5 percent, he said.
Alton Cogert, chief financial officer of Metropolitan Mortgage and Securities, corporate parent of Western United Life Assurance Co. of Spokane, said that company has $17.5 million of preferred and common stock which, if added to surplus and reserves, "would put us well in excess of 5 percent. That's how we look at it, and that is the fair way to look at it."
"Some companies, and we are one of them, reserve more conservatively than they have to," said Neil Rucksdashel, vice president and legal counsel of Safeco Life Insurance Co. He said such voluntary reserves could be abolished and the assets put into surplus.
"That would improve our ratios and make us look better to some people," Rucksdashel said. "But it is just taking something out of one pocket and putting it in another. It's not a game we are particularly interested in playing."
James Hagerty, United Olympic president, said his company will soon receive additional capital from its parent company, USLICO Inc. of Arlington, Va., that will raise its surplus above 5 percent of assets.
"We recognize the 5 percent may be a standard, and there is a plan to infuse whatever level of capital is needed to meet that guideline," he said. "It is slated to happen as quickly after July 31 as we can make it happen."
Hagerty said low reserves and surplus "is a cause for concern for a company with aggressive investment practices, but in our case our practices have been very conservative. Junk bonds make up only about 2 percent of our assets, and that is quite low by any standards.
"The delinquency rate on our commercial mortgages was zero last Dec. 31, and it is now less than 1 percent," he said. "The industry average at year-end was about 3 percent and now it is over 4 percent."
One other Washington insurer, North Coast Life Insurance Co. of Spokane, also had too many junk bonds last Dec. 31 to pass Marquardt's proposed 20 percent limit. North Coast had $12.1 million, or 20.8 percent of its assets, in junk bonds.
Southon said North Coast is working on raising capital through a stock offering, which would boost its assets. "They could easily sell enough (junk bonds) to get below the 20 percent limit," Southon said.
A few Washington life insurers have heavy investments in real estate. State law limits such investments to 65 percent of assets, but Marquardt wants the Legislature to impose a limit of 60 percent.
According to the latest annual reports filed with Marquardt's office, all Washington life insurers would have met that 60 percent standard last Dec. 31. But Western United Life Assurance of Spokane had $273 million, or 58.2 percent of its assets, in real estate.
Cogert said almost all that real estate consists of real estate mortgages and trust deeds with loan-to-value ratios of 75 percent or less. "The savings and loans did not get into trouble by making 75 percent loan-to-value loans. They got into trouble by getting into junk bonds and commercial real estate."
Two other insurers reported that more than 30 percent of their assets were in real estate: Northern Life Insurance Co. of Seattle, with 33.3 percent, and North West Life Assurance Co. of America, with 32.9 percent.
Northern Life, the state's sixth-largest life insurer with assets of $2.1 billion, also had 12.2 percent of its assets in junk bonds and surplus and reserves equal to 5 percent of assets, according to itsannual report.
Through the Washington Life and Disability Insurance Guaranty Association, policyholders in Washington are protected up to $500,000 per person for individual life, health or annuity policies.
Under state law, all insurance companies doing business in Washington can be assessed by the association, which will pay claims of policyholders of any insolvent insurers.
Marquardt says this state has "one of the best insurance guaranty laws in the country. No life-insurance policyholder in this state has ever lost money due to the default of a life-insurance company. There have been insolvencies in the past, but in every case the policyholders were protected by the guaranty association."
Three legislators - Reps. Marshall Paris, R-Bothell; Rob Johnson, D-Mount Vernon; and Dennis Dellwo, D-Spokane - say they will co-sponsor a bill next year to limit insurance companies' investments in junk bonds to 20 percent of assets.
"Consumers have the right to expect that their insurance company is financially stable," said Johnson.
Dellwo said the measure will be a top priority in the House Financial Institutions and Insurance Committee, of which he is chairman.
Where to call -- If you have a complaint or a question about your insurance company, the Washington State Insurance Commissioner's office has a special hot-line, 1-800-562-6900.
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TESTING THE STRENGTH OF WASHINGTON LIFE INSURANCE COMPANIES
Here are the reserves, real estate and junk bonds held by life insurance companies based in Washington state. This chart shows that the 21 Washington-based life insurance companies vary widely in the amount of real estate and junk bonds they own. State law limits real estate holdings to 65 percent of an insurer's total assets. There is no limit on junk bonds, but regulators want the Legislature to impose a 20 percent limit. Regulators say a life insurance company should have reserves and surplus of at least 5 percent of its assets. Seven Washington companies failed to meet that standard last Dec. 31, according to annual reports the companies filed with the Washington Insurance Commissioner.
Figures are from Dec. 31, 1990; companies ranked by assets.
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: : PER- : PER- : : :
: : CENT : CENT : : AS :
: : IN : IN : SURPLUS : PERCENT
: TOTAL : REAL : JUNK : IN : OF :
LOCATION : ASSETS : ESTATE : BONDS : 000s (2) : ASSETS =================================================================== United Pacific Life Insurance Co. .
Federal Way : $5,550,038 : 1.5 : 32 : $340,807 : 6.1 : ------------------------------------------------------------------- Safeco Life Insurance Co. (1) .
Seattle : 5,373,117 : 8.2 : 9.6 : 249,531 : 4.6 : ------------------------------------------------------------------- Merrill Lynch Life Insurance Co. (1) .
Seattle : 3,883,811 : 0 : 6.1 : 170,937 : 4.4 : ------------------------------------------------------------------- Great Northern Insurance Annuity Corp. (1) .
Seattle : 3,772,562 : 23.1 : 1.5 : 178,692 : 4.7 : ------------------------------------------------------------------- Farmers New World Life Insurance Co. .
Mercer Island : 2,130,168 : 14.1 : 1.0 : 570,999 : 26.8 : ------------------------------------------------------------------- Northern Life Insurance Co. .
Seattle : 2,061,569 : 33.3 : 12.2 : 103,704 : 5 : ------------------------------------------------------------------- United Olympic Life .
Bellevue : 829,280 : 25.4 : 2.2 : 30,422 : 3.7 : ------------------------------------------------------------------- Family Life Insurance Co. .
Seattle : 478,846 : 1.2 : 2.1 : 165,448 : 34.6 : ------------------------------------------------------------------- Western United Life Assurance Co. (1) .
Spokane : 470,566 : 58.2 : 0.9 : 12,033 : 2.6: ------------------------------------------------------------------- Sunset Life Insurance Co. of America .
Olympia : 296,824 : 13.8 : 1.0 : 41,898 : 14.1 : ------------------------------------------------------------------- North Coast Life Insurance Co. (1) .
Spokane : 58,331 : 2.7 : 20.8 : 1,724 : 3 : ------------------------------------------------------------------- Seafirst Life Insurance Co. .
Seattle : 34,152 : 0 : 2.9 : 5,637 : 16.5 : ------------------------------------------------------------------- North West Life Assurance Co. of America .
Bellevue : 34,070 : 32.9 : 0.7 : 3,740 : 11 : ------------------------------------------------------------------- Enumclaw Life Insurance Co. .
Enumclaw : 26,537 : 8.9 : 3.5 : 4,089 : 15.4 : ------------------------------------------------------------------- Safeco National Life Insurance Co. .
Seattle : 17,229 : 0 : 8.9 : 12,229 : 71 : ------------------------------------------------------------------- Empire Life Insurance Co. .
Seattle : 12,902 : 11.1 : 0 : 1,337 : 10.4 : ------------------------------------------------------------------- States West Life Insurance Co. .
Seattle : 11,813 : 0 : 0 : 5,041 : 42.7 : ------------------------------------------------------------------- Great Republic Life Insurance Co. (1) .
Seattle : 6,537 : 7.6 : 0 : 101 : 1.5 : ------------------------------------------------------------------- Pemco Life Insurance Co. .
Seattle : 6,259 : 0 : 0.6 : 4,322 : 69.2 : ------------------------------------------------------------------- GNA Life Insurance Co. .
Seattle : 4,479 : 0 : 0 : 1,853 : 41.4 : ------------------------------------------------------------------- Sunset Variable Life Co. .
Olympia : 3,857 : 0 : 0 : 2,651 : 68.7 : ===================================================================
TOTALS : 25,062,947 : 12.2 : 11.5 :1,905,395 : 7.6 :
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(1) Companies below 5 percent of assets standard. (2) Includes mandatory securities valuation reserves required by regulators to account for market fluctuations in bond portfolios.
Source: Washington Insurance Commissioner