Is state takeover of a major unit the knockout at First Executive? Insurance chief talks with prospective foreign buyer.

Is state takeover of a major unit the knockout at First Executive?

Insurance experts last week commended California Insurance Commissioner John Garamendi for placing First Executive Corp. subsidiary Executive Life Insurance Co. into conservatorship, but doubted that a buyer for the insurance company will be found.

If no buyer or major investor for the company turns up, a worst case scenario bailout of policyholders by liquidating the company and paying excess obligations through state guaranty funds would become far more likely.

Garamendi's actions made a bankruptcy filing by the parent company nearly inevitable, said analysts, because First Executive's source of funds to pay off bank debt and other obligations was the upward flow of money from its California and New York subsidiaries.

Some analysts expect bondholders to push the company into bankruptcy to obtain the scant resources of the holding company.

"First Executive equity holders have lost," said Garamendi.

Officials at First Executive declined to comment on the company's situation.

Garamendi announced April 11 that the state Department of Insurance would assume control of the $10.1 billion (assets) Executive Life subsidiary. The commissioner said that the department was conducting extensive discussions with a consortium of European companies and investors "who have presented a definitive program to rehabilitate the company and are capable of funding such a program."

To some investors, however, such statements sounded eerily like a series of empty promises by First Executive Chief Executive Fred Carr - made since the company's troubles became apparent in December 1989 - that he would find an outside investor to acquire the business. Garamendi said Carr was cooperating with the seizure.

"I'll believe it when I see the money come in," said William Bitterli, an analyst at Northington Partners stock brokerage of Avon, Conn. "The quality of the junk bonds (in the insurance firm's portfolio) and the financial condition of Executive Life makes it a big pill to swallow. There used to be a valuable franchise in the upper middle class market, but having their name plastered for two years reduces its value. This deal (to sell the firm) probably won't come through at all."

Others were more blunt.

"There have been more investors rumored interested in this company over the last three years than any company I've covered," said Chuck Ronson, an analyst at stock brokerage Baird, Patrick & Co. of New York. "I think he's (Garamendi) been taken in."

Garamendi said that the consortium of potential buyers was headed by Altus Finance, a major French financial services company that is connected with Credit Lyonnais.

"If successful, this program will enhance the security of policyholders, annuitants and other contract holders and will establish a sound, adequately capitalized company to carry on business in the future," said Garamendi, who did not release any of the terms of what he termed a possible buyout.

Garamendi may not have had much choice in deciding to seize the company.

While refusing to release the exact figures, he said that policy surrenders at Executive Life had increased "dramatically" after First Executive's April 1 announcement of a $466 million fourth quarter loss. At that time, First Executive's auditor, Price Waterhouse, had expressed substantial doubts about the company's ability to continue as a going concern.

One analyst said under some scenarios, Executive Life could survive even without an outside investor. "If they can stop people from surrendering and lower the interest rate, the company would probably survive on its own," said Fred Townsend, a partner at the insurance consulting firm of Townsend & Schupp. Garamendi said that most surrenders will not be permitted while the company is being restructured, save for medical payments, death benefits and monthly annuities.

Last year, the average interest rate to policyholders was about 9.08 percent, with a negative spread of 2.58 percent between the income the company received from investments and other revenue sources and what it paid out.

Following Garamendi's announcement, some life insurance companies scrambled to assure the public that First Executive's downfall is not a portent for the life insurance industry.

Thomas Sutton, chairman and chief executive of Pacific Mutual Life Insurance Co. of Newport Beach, pointed out that Executive Life is the only large life insurance company to have more than 20 percent of its assets in junk bonds. He added: "Obviously, Executive Life stands alone at this level, and has long been considered a maverick in the industry. Their focus on junk bonds has been well-known for many years. We have long stated that the promises they made to their clients were too good to be true."

In the event that the worst case scenario does occur, and Executive Life is liquidated, Garamendi offered policyholders heartening words: California Executive Life policyholders should be covered by the state life insurance guaranty fund.

In recent weeks, representatives of both the insurance commissioner and the guaranty fund itself questioned whether California's policyholders would be covered under the industry-funded bailout pool, which excludes from coverage insurance companies that are insolvent, impaired or unable to fulfill contractual obligations.

An executive at the guaranty fund also said that he believed policyholders will be covered.

"Under the definition in the guaranty fund law and the information provided by the commissioner, there is not any information like filed financial statements or performance by the company that would indicate that there is not coverage," said James Jackson, deputy general counsel at Transamerica Life Co. and vice chairman of the board of the California Life Insurance Guaranty Association.

Garamendi, however, said that he could not guarantee full reimbursement to policyholders. Under the state guaranty fund, reimbursement is limited to 80 percent of contractual obligations or $250,000 in life insurance death benefits, $100,000 in cash values, $100,000 in annuity benefits and a maximum of $5 million in multiple policies owned by a single policyholder.

Executive Life has 170,000 life insurance policies in force with a face value of $38 billion, creating a $2.5 billion statutory reserve liability; 75,000 annuitants comprising $2.5 billion in reserves; and more than 300 guaranteed investment contracts worth more than $3 billion, according to Department of Insurance figures.

Executive Life, like its parent First Executive has been in a negative tailspin since late 1989 because of losses in the entities' junk bond holdings.

Both First Executive and Executive Life have more than 60 percent of their invested assets in junk bonds. For several years First Executive was the largest customer of failed junk-empire stock brokerage Drexel Burnham Lambert.

Some analysts said that the timing of the Executive Life takeover had as much to do with Garamendi's political ambitions as with the company's financial difficulties.

One analyst who requested anonymity said that the commissioner sought to make sure that a problem passed on by his predecessor did not in time become associated with Garamendi.

Garamendi - who several times at the press conference began replies to questions with the statement "I am the conservator" - announced the conservatorship with the tough, colorful language that has become his hallmark.

"To the school teachers and hard hats, secretaries and doctors, hear this message loud and clear: We are going to do everything in our power to see that your money is there when you need it," he said.

Despite the fact that the New York Insurance Commissioner did not place the New York-based, wholly owned subsidiary of Executive Life, Executive Life of New York, into conservatorship simultaneously with Executive Life of California, Garamendi said that his department was coordinating its actions with the New York insurance commissioner and other states' insurance regulators.