There's good news for muni-GIC holders.

But decision is bad news for Exec Life policyholders

There are not quite enough eggs in the basket left at seized insurer Executive Life Insurance Co. of Los Angeles to make all its claimants whole.

The big $10-billion-in-assets Los Angeles insurer, which under the direction of Fred Carr invested billions of policyholder bucks into junk bonds, was taken over in April by state Insurance Commissioner John Garamendi.

The fighting over who gets what Executive Life eggs heated up last week, following Los Angeles Superior Court Judge Kurt Lewin's Nov. 15 ruling that some Executive Life debt holders -- those who had purchased about $1.85 billion worth of municipal guaranteed investment contracts, so-called muni-GICs -- are entitled to equal status to life policyholders.

The decision increased the number of people who could make a grab at Executive Life's eggs, but not the number of eggs.

Lewin's decision meant life policyholders, annuitants and some pensioners would get 72 cents on the dollar of what they invested, versus 89 cents before his ruling. A French partnership, in a bid recommended to Lewin by Garamendi, would have given the policyholders 89 cents. Garamendi is appealing the judge's decision.

Now arbitrageurs who bought muni-GICs -- municipal bonds that were guaranteed by Executive Life contracts -- are rubbing their hands gleefully, although they are worried about Garamendi's actions.

Following Lewin's decision, the trading price on muni-GICs jumped to 47 cents on the dollar, compared to 32 cents just before the ruling, said Kevin Sheridan, vice president of Chap, Delaine & Co., a New York-based brokerage. The muni-GICs had traded as low as 25 cents on the dollar, so arbs have made a killing.

No one knows what fraction of the muni-GICs are owned by arbs. Major distressed securities investors say more than 50 percent, and possibly 75 percent. New York-based investment houses Goldman Sachs, M.D. Bass and BDS Securities (formerly R.D. Smith) are named as large muni-GIC investors.

Representatives of the muni-GIC holders, however, argue that only a small fraction, or perhaps 25 percent, of the muni-GIC are held by speculators.

"The bulk of the people I've talked to at banks and credit unions bought them at par and are still sitting on them," said Mark Oberhoffer, a Smith Barney vice president monitoring the court proceedings for muni-GIC holders.

Last week, the state's Department of Insurance forced muni-GIC holders to decide whether to keep their muni-GICs or sell out now at sizable profits.

Garamendi's decision to appeal was made after muni-GIC holders demanded back-interest on their bonds. The other policyholder classes have received back-interest.

In its appeal, the Department of Insurance successfully requested a stay of Lewin's ruling, which froze interest payments to the muni-GIC holders.

The bonds eased to about 45 cents on the dollar last week on word of the freeze.

If the appellate court overturns the decision, the bonds will likely trade at 10 cents on the dollar, said Paul Debban, managing director, reorganized securities group, of the Seidler Amdec Securities Inc. brokerage in downtown Los Angeles.

There could yet be a nasty surprise for speculators: Courts in the past have distinguished between original investors and later arbitrageurs.

Mentioned in court last week was the Washington Public Power Supply default case of 1982. In that case the judge ruled that bondholders had to show the original confirmations of purchase to receive full credit for their bonds. Those who bought later received reduced settlements, noted Oberhoffer.

Garamendi contends that muni-GICs are non-insurance products, and noted that the Department of Insurance worked with the state Legislature to deem the muni-GICs as not insurance products.

Lewin, however, ruled that muni-GICs are nearly identical to certain Executive Life pension offerings, which Garamendi has said should be given the first-class treatment that policyholders are getting.

Last week hearings were held in court to analyze elements of the deal for policyholders that Garamendi recommended to Lewin as the best: a $3.55 billion bid by French investors Mutuelle Assurance Artisanale de France and Altus Finance.

Despite Garamendi's recommendation, Lewin has indicated that he is still open to other bidders or modifications of existing bids.

Representatives of the National Organization of Life and Health Insurance Guaranty Associations continued negotiations last week with Garamendi and MAAF-Altus officials to determine whether the organization will make up the difference between the 72 cents the MAAF-Altus bid would provide policyholders and full coverage.

The organization has agreed to provide 19 cents on the dollar to supplement a MAAF-Altus bid and make policyholders whole since MAAF-Altus made its first proposal in August.