Insurance Company Failure Rate Slowed

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NU Online News Service, Jan. 9, 3:49 p.m.EST?The pace of insurance company failures dropped nearlyin half last year, while aggressive lending practices almosttripled the bank failure rate, Weiss Ratings, Inc. reported.

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The Palm Beach Gardens, Fla.-based ratings firm noted that threelife and health insurers and 20 property-casualty insurers failedin 2002, compared with six life and health and 39 p-c companyfailures in 2001.

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Weiss included a footnote that stated if the 12 Reliance Groupcompanies that failed in 2001 were excluded, the number oflife-health and p-c insurers failures for that year would havetotaled 33. Consequently, excluding Reliance from the 2001 totals,the decline in insurance company failures between 2001 and 2002would have been smaller, at 30.3 percent.

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Weiss said failures of health maintenance organizations declined10 percent in 2002, with nine failed HMOs compared to 10 in2001.

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Among the largest failed insurance companies in 2002 noted byWeiss were: London Pacific Life & Annuity Co. with assets of$2.1 billion; Legion Insurance Co., $1.3 billion; VillanovaInsurance Co., $152.5 million; Paula Insurance Company, $128.4million and American Growers Insurance Co. $114.9 million

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Melissa Gannon, vice president of Weiss Ratings, Inc., said thepast year's insurance company failures were fueled by a weakeconomy and risky bond investments. "Fortunately, other mitigatingfactors, like stricter underwriting standards and increasing rates,reduced the severity of those problems," she said.

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Weiss tallied 11 banks that failed in 2002, compared with fourbanks that failed in 2001. The firm said risky lending andcorporate fraud were the primary drivers behind the increase inbank failures as aggressive lending practices from the '90s boomtook a toll.

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"Banks got caught up in a lending frenzy, just like the stockmarket frenzy, in the late 1990s," said Ms. Gannon. "Loans thatprobably would not have been made in saner times have beendeteriorating ever since, some due to the excessive risk and somedue to the downturn in the economy, which has affected theborrowers."

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Among the failed institutions were: Hamilton Bank NA, Miami;Nextbank NA,Phoenix, Ariz; Connecticut Bank of Commerce, Stamford.Conn.; Oakwood Deposit Bank Co., Oakwood, Ohio and Bank of Alamo,Alamo, Tenn.

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Ms. Gannon commented that "during the past three years, bothbusinesses and consumers have faced the challenges of a sputteringeconomy." She added that "it has been particularly difficult forfundamentally weak companies, which can only hang on for solong."

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To avoid financially weak companies, Weiss Ratings recommendedthat consumers and businesses monitor the financial health of theirHMO, insurance company, or bank using safety ratings with a solidtrack record for accuracy.

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The Weiss ratings are based on an analysis of a company'scapital, profitability, quality of investments, liquidity, andstability.

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Weiss issues safety ratings on more than 15,000 financialinstitutions, including life and health insurers, HMOs, Blue CrossBlue Shield plans, property and casualty insurers, banks, andbrokers. Weiss also issues investment ratings on more than 11,000mutual funds and 9,000 common stocks.

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Weiss Ratings is the only major rating agency that receives nocompensation from the companies it rates.

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