Mutual Benefit Insurance Fails After Run on Assets : Economy: It is the largest such collapse in U.S. The New Jersey company cites bad real estate investments.

In what amounts to the largest U.S. life insurance company failure in history, Mutual Benefit Life Insurance Co. on Monday asked New Jersey regulators to take control of the company because of its sagging real estate investments and a run by its policyholders.

New Jersey Insurance Commissioner Samuel Fortunato will submit a plan today in state Superior Court to rehabilitate the firm. The proposal, which needs court approval, would allow the company to continue paying death benefits, health and accident claims and annuity payments but would halt all loans and other withdrawals by policyholders.

The collapse of Mutual Benefit is the latest blow to the nation’s life insurance industry and follows the failures of Executive Life Insurance Co. and First Capital Life Co., the Los Angeles-based companies that were brought down by junk-bond investments earlier this year.

Because Mutual Benefit was seen as a conservative, blue-chip company, its woes sent shudders through the executive suites of even the soundest insurance firms.

The expected state seizure of Mutual Benefit comes in the wake of a run on the institution by worried policyholders. The nation’s 18th largest life insurer, with assets of $13.8 billion, was inundated by customer requests to cash in about $1 billion in policies in recent weeks.

More than 37,000 of Mutual Benefit’s 400,000 individual life insurance customers live in California. The company also insures an unknown number of Californians through 2,796 group policies, said Bill Schulz, a spokesman for Insurance Commissioner John Garamendi.

In addition, more than 200,000 people nationwide belong to pension plans that own Mutual Benefit annuities.

New Jersey officials said Mutual Benefit remains solvent and that the freeze on loans and withdrawals would pose only “a temporary hardship” to policyholders.

Still, the expected seizure of Mutual Benefit--the equivalent of a bank holiday designed to cool off the run on assets--added fuel to the panic that has already consumed many policyholders, industry experts said. It also raises questions about the crazy-quilt of state insurance regulations and the safety net of state guarantee funds to protect policyholders.

Mutual Benefit’s woes also cast a harsh light on an insurance company rating system that is supposed to guide consumers toward the soundest underwriters. Until 11 days ago, Mutual Benefit enjoyed a top A+ rating from A.M. Best Co., the industry’s oldest and most respected rating agency.

“There is something happening out there that is akin to what happened in the early part of the Great Depression,” said William O’Neill, vice president of Standard & Poor’s Insurance Rating Services in New York.

“Whenever there is even an inkling of financial stress at a company, people are panicking and pulling their money out. And that tends to become a self-fulfilling prophecy. No financial institution can withstand a sustained run on the bank.”

Unlike Executive Life and First Capital, Mutual Benefit has always enjoyed a blue-chip reputation as a conservative, well-run company. Where Mutual Benefit went wrong was in commercial real estate as it put $5.1 billion--nearly 40% of its assets--into a portfolio of mortgage loans and properties, much of which has since gone sour.

Mutual Benefit is the sixth large life insurer to be taken over by state regulators this year. The previous largest failure was Executive Life, which had assets of $10.2 billion. The failed insurers have combined assets of $40 billion.

Since Friday, when Mutual Benefit’s woes were splashed across the front page of the Bergen Record in New Jersy, concerned policyholders descended upon Mutual Benefit’s home office here in vain attempts to pull their money out.

Regulators say it is skittish investors who have forced virtually all of the insurance company seizures this year by straining companies’ balance sheets to the breaking point.

Over time--possibly several years time--policyholders will find that the regulatory system works and that people’s life savings do not get wiped out in insurance company failures, other experts maintain. But, for the moment, the psychology of panic is prevalent.

Part of the problem, too, is that many of these seized insurers, including Executive Life, received high marks from the nation’s best known insurance rating firms until right before they collapsed.

Mutual Benefit was no exception. Indeed, though recently downgraded, the company still carries a “Contingent A” rating from A.M. Best Co. Standard & Poor’s, meanwhile, gave the company an AA+--also one of its highest scores--until late May when Mutual Benefit was “downgraded” to a single A.

Those are still high marks, executives at both firms acknowledge. However, they maintain that Mutual is still a reasonably strong company. There is still a good chance that all the company’s policyholders will be paid 100 cents on the dollar.

Nevertheless, industry spokesmen say that the bulk of the nation’s life insurers remains healthy.

Mutual Benefit’s woes are also shining a spotlight on state regulatory systems and guarantee funds. Most states have guarantee funds that protect at least a portion of the cash surrender value and death benefits promised in a life insurance policy.

Guarantee fund coverage would only come into play if Mutual Benefit were found insolvent and could not be sold--an unlikely possibility, industry experts maintain.

Zonana reported from Newark and Kristof from Los Angeles.