Hurdles still remain for Exec Life rescue.

Hurdles still remain for Exec Life rescue

Holders of guaranteed investment contracts issued by Executive Life Insurance Co. are threatening to torpedo a complex deal proposed last week to rescue the company's policyholders but not them.

"We believe our case is strong enough to prevent the deal from going through," said Thor Erickson, a representative of the Taxable Municipal Bondholders Protective Committee, an Alliance, Neb.-based association of about 1,300 GIC-holders with money invested in Los Angeles-based Executive Life. "Many individuals who purchased bonds didn't know their money was going into GICs. Now Garamendi is saying that they are speculators. That's ridiculous!"

The buyout plan approved by California Department of Insurance Commissioner

John Garamendi deems holders of $1.9 billion in GICs complex investors. They would thus be excluded from receiving 81 percent of the value of their policies, which is what holders of the company's annuities and whole life insurance policies will receive. Indeed, it appears they will get nothing.

Garamendi had earlier offered to pay GIC-holders 30 percent of what other policyholders would receive in any settlement, an offer the GIC-holders rejected.

Litigation by a group of Muni-GIC holders to determine whether they should be classified as policyholders or investors - and whether they should be treated the same as policyholders by the Department of Insurance - will be heard before Los Angeles County Superior Court on Sept. 30.

Executive Life, the largest subsidiary of bankrupt First Executive Corp., was seized by Garamendi on April 11, as its junk bond portfolio plunged in value and customers rushed to cash in their policies.

Under the newly unveiled plan to rescue Executive Life, a French investment group led by Paris-based mutual insurance company Mutuelle Assurance Artisanale de France would infuse a newly created insurance company with $300 million in capital. To that would be added $2.7 billion in proceeds from the sale of three-quarters of Executive Life's junk bond portfolio to another French investors, Altus Finance.

Policyholders would tentatively receive about 81 percent of the value of their policies, with state insurance guaranty funds expected to contribute additional funds into the new company, tentatively dubbed "Newco."

Garamendi said that when estimated money from state guaranty funds is taken into consideration, about 90 percent of all 372,000 policyholders are expected to receive their entire investment back.

He also said policyholders would get additional money should the market value of the sold junk bond portfolio or the profit level of Newco appreciate above a certain level.

Garamendi is now encouraging other insurers to weigh in with proposals better than the MAAF/Altus Finance plan. He said at least one other potential investor is seriously considering making a proposal.

In addition to the GIC-holders squabble, however, there are other issues which could block any deal.

The Internal Revenue Service is continuing to demand that Executive Life pay $643 million for taxes interest and penalties it believes is due from tax years 1981-83.

"I can't say anything except that those liens are still in force," said Robert Giannangeli, a IRS spokesman. "I think we will have to be part of any settlement."

Garamendi also warned that the IRS code does not appear to contemplate the kind of rehabilitation plan that has been designed, and the way in which the IRS treats the agreement could affect its chances for success.

The MAAF/Altus deal also could fall through should there be a drastic decline in the stock and bond markets, Garamendi said.

Another unknown is how much the various state life insurance guaranty associations will kick in to help policyholders.

A representative of an organization representing Executive Life policyholders and annuitants praised the plan and said it is now up to the insurance industry to make up the remainder of what is owned to policyholders.

"We believe that the 81 percent policy value that the French investment group's plan provides should be viewed as a beginning towards that goal - and that the ball is now in the insurance industry's court," said Maureen Marr, coordinator for the Action Network for Victims of Executive Life. "The insurance industry, through the state guaranty funds, has a responsibility to make good on their commitments to insurers. We await word from them towards filling in the shortfall to policyholders."

James Jackson, deputy general counsel of Los Angeles-based Transamerica Life Cos. and vice chairman of the California Life Insurance Guaranty Association, said it appears the state guarantee funds will negotiate with Garamendi to determine what their contribution should be. He said he had no estimate of what part of the 19 percent policyholder shortfall under the plan the guaranty funds would make up.

Analysts generally praised Garamendi's plan, noting that its return improves upon the 70 percent payout ratio on annuities authorized by the court conservation order.

"I give the commissioner very high marks for this if it goes through," said Richards Barger, a leading Los Angeles insurance attorney and a former California insurance commissioner himself.

Some analysts, however, said too many factors are unknown to figure whether the new insurance company will be adequately capitalized.