If First Executive goes bust, policies will still be secure.

If First Executive goes bust, policies will still be secure

Despite portents that West Los Angeles-based First Executive Corp. may go bankrupt, sources familiar with the company said that individuals' policies will probably be safe, forestalling the need for an industry or a taxpayer bailout of policyholders.

Policyholders are relatively secure because the company still has significant liquid assets and because - after retained lawyers - small policyholders are the most senior creditors in line should the company go under, said most sources.

"I don't think taxpayers will have to bail out policyholders," said analyst Chuck Ronson of securities brokerage Baird, Patrick. "Policyholders in the first two classes (which include most small policyholders) will be made whole."

While life insurance companies doing business in the state contribute to a fund to bail out policyholders at insolvent institutions, some industry critics have feared that taxpayers might be tapped to foot part of the bill if a large loss overwhelmed the fund.

"This is completely unprecedented in the history of insurance companies in the United States," said Joseph Belth, an Indiana University professor of insurance who has warned of the danger of First Executive's investment policies for many years. "We are talking a huge exposure and there is no way to know what it is."

Few institutions have as much junk as First Executive or its subsidiaries, Executive Life and Executive Life of New York. Junk bonds comprise 66 percent of First Executive's invested assets, said a company official.

Analyst Ronson calculated the insurance company's total exposure to insurance-related liabilities was $11.8 billion at Dec. 31. About 50 percent of that is money policyholders can demand that the company pay back to them before their policies mature.

If its junk bonds were sold at market value, the company would have $9.7 billion in total assets to cover its liabilities, with the shortfall likely to be borne by institutional investors with larger and more risky investments.

First Executive last week announced that it lost $366 million in fiscal 1990 and that Price Waterhouse, its independent auditors, expressed "substantial doubt about (First Executive's) ability to continue as a going concern."

First Executive revealed that it had been told by an agent for bank creditors that such a qualified auditors' opinion means that the insurance holding firm may be in default on its bank loans.

Any bondholders' attempt to force the company to pay its debt could be the most dangerous scenario for the company and policyholders, Ronson said.

Such a move could spur state regulators to put the two subsidiaries, Executive Life and Executive Life of New York, in conservatorship to protect shareholders' claims on assets, Ronson said.

In turn, that could lead to panic among shareholders and greater policy surrenders.

Many factors - such as surrender fees, the difficulty of obtaining new insurance and exclusions of coverage on new policies that they might obtain - exist to dissuade individuals from surrendering their policies.

Still, about 40 percent of policyholders who could surrender their policies did so in 1990.

Apparently not all policyholders fear they will lose their investments. Recently, investment firm R.D. Smith Inc. acquired $20 million in Executive Life guaranteed investment contracts, relatively risky policies which pay a fixed rate of return on invested capital, said Ronson.

An R.D. Smith spokesman confirmed that large acquisitions have been made but refused to comment on the amount.

Despite that, California's 33.839 Executive Life policyholders may not be covered by a life insurance guaranty fund established Jan. 1 to reimburse customers if their insurer goes insolvent.

The fund does not protect policyholders at insurance companies which are insolvent, impaired or unable to fulfill contractual obligations.

Also not covered are policyholders with guaranteed investment contracts, which represent some 46 percent of liabilities of First Executive which must be held to maturity.

Also unclear is how big a hit the fund could take before it's forced to delay payment to policyholders.

Total payment to the guaranty association is limited to 1 percent of institutions' California written life insurance and annuity premiums in a given year.

James Jackson, vice chairman of the guaranty fund, said that any sum which exceeds the maximum amount assessable in a single year would be paid by succeeding years' assessments.

Even if policyholders lose money - and there are significant limitations on reimbursement from the fund - many contend they are not innocent victims. These critics note First Executive customers have received returns on their investment far greater than they would have from life insurance companies with more conservatively managed portfolios.

No large life insurance companies have gone bankrupt in California in recent history, said California Department of Insurance spokesman William Schulz.

He said that the department had no comment on the First Executive situation but has an ongoing examination of the company.

If the holding company, First Executive Corp., filed for bankruptcy, that would not necessarily mean bankruptcy for its two major subsidiaries, Executive Life and Executive Life of New York.

Regulators in California and New York, in an effort to keep the subsidiaries solvent, have refused to allow funds to flow from the subsidiaries - and policyholders - to the parent company and bondholders and shareholders.

Speculation is also growing that state regulators may step in and put the insurance subsidiaries into state-run conservatorships. "The grounds for conservatorship are hazardous conditions, impairment or insolvency - it can be any one of these," Schulz said.

There may be political motivations for closing Executive Life soon, said one political consultant on insurance matters: "The longer (recently elected California Insurance Commissioner John) Garamendi goes on with Executive Life still operating, the more likely when it is shut down people will say, |Why didn't you shut it down then?'"

Behind First Executive's 1990 loss, which compared to a loss of $776 million in 1989, was a $660 million decline in the value of investments, mostly because of defaulted junk bonds.