First Executive’s Reinsurance Practices Examined

California insurance regulators say they have been scrutinizing the reinsurance practices of First Executive Corp., the fast-growing Los Angeles life insurer whose New York subsidiary last week was fined a record $250,000 by New York State regulators over the same issue.

“We’re looking at the situation and we’ve been looking at it for the same length of time New York has,” said one official of the California Department of Insurance. “We’ve been asking the same questions.”

But the official said the agency has not yet concluded whether any action similar to that of New York is necessary. That conclusion may not come until after regulators complete their next regularly scheduled examination of Executive Life Insurance Co., First Executive’s Beverly Hills unit.

The state agency is reportedly planning to accelerate that examination, which was set to begin late this year but will start “as soon as we can get some people together,” possibly within the next couple of months, one agency official said.

Reinsurance is a common practice by which insurance companies pass on some of their risks to other carriers. The original insurers pay the reinsurers a premium and subtract from their own financial reports the risks, or liabilities, passed on. This procedure, known as “surplus relief,” allows the original insurers to continue attracting new business without otherwise increasing their capital.

First Executive’s heavy use of reinsurance, particularly that provided by foreign companies outside the supervision of U.S. regulators, has raised regulatory questions before. After Executive Life’s last regular examination in 1983 by California authorities, the regulators ordered the company to dispose of several such agreements by sometime in 1988.

The company is hoping to replace those agreements, or “treaties,” with newly drafted versions yet to be approved by the California agency, according to William J. Adams, the general counsel for First Executive and Executive Life.

In the New York action, which covered the years 1983 through 1985, regulators ordered First Executive to make a cash infusion of $151.5 million to Executive Life Insurance Co. of New York, a subsidiary of Executive Life of California, to satisfy their objections to the company’s accounting on reinsurance matters. The amount equaled the reinsurance “surplus relief” disallowed by the regulators.

The state also fined the subsidiary $250,000, which it said matched the largest fine it has ever imposed on a regulated company. New York had also fined Executive Life a total of $150,000 in 1984, for what it said were violations of rules requiring the company to provide adequate documentation on request to state examiners.

On the reinsurance question, New York’s objections generally covered Executive Life policies with offshore reinsurers. Since an insurance company re-inherits the liabilities it had sold if a reinsurer fails, state authorities usually insist that liabilities assumed by overseas companies be backed by letters of credit drawn on U.S. banks. These letters of credit are supposed to ensure that money will be available to cover claims even if the reinsurer fails.

According to a regulatory report obtained by The Times, the department found that Executive Life Insurance Co. of New York based some of its reinsurance claims on letters of credit that had been back-dated or did not otherwise conform to the reinsurance agreements they were supposed to collateralize.

In other cases, the letters of credit were qualified in some way that restricted Executive Life’s authority to draw upon them. One letter was restricted by a clause allowing its issuing bank to charge First Executive for any amount drawn down by the New York unit. As the regulators interpreted the provision, First Executive was guaranteeing its own potential claims.

Viewpoint Disputed

Adams, the First Executive general counsel, disputed the New York agency’s viewpoint. “First Executive and Executive Life of New York are totally separate organizations,” he said. “First Executive is like a holding company that guarantees the obligations of a subsidiary.”

Several reinsurers used by the New York subsidiary have also been used by the California unit, according to First Executive filings with state regulators.

First Executive Chairman Fred Carr said Friday that First Executive’s California unit received “a clean examination report from the California department” after its last regular examination, which covered the period ending Dec. 31, 1983. Executive Life’s reinsurance policies were among the items covered by that report. He also noted that First Executive’s financial condition remains strong.

“Our equity was $1.4 billion, and we had no debt” at year-end 1986, he said, adding that the company has consistently infused capital into its life insurance units. “We’ve put more capital into the life insurance industry than any life insurance company ever,” he said.

First Executive has been controversial during much of Carr’s tenure at the firm, which began in 1974.

It was an aggressive and successful marketer of new varieties of life insurance designed to accommodate the high inflation of that time, which was sharply diminishing the value of conventional policies. That rendered the company an unwanted competitor of established insurers.

The company has also been a heavy purchaser of so-called “junk bonds,” the nominally risky, high-interest-paying debt issued by companies with credit of less than investment grade.

Junk bonds had not been customarily found in such concentrations in insurance company portfolios.