First Executive’s Sale of N.Y. Unit Falls Apart

First Executive Corp. said Thursday that a longstanding agreement to sell its New York life insurance subsidiary for $400 million has collapsed.

In a brief statement released after the stock market closed, First Executive, based in West Los Angeles, said the agreement “is no longer in effect.” The company, headed by insurance industry maverick Fred Carr, said the sale fell through because the purchasing company, a newly created entity called WW Acquisition Corp., had failed to obtain financing due to “market conditions.” First Executive officials declined to elaborate, but this is believed to be a reference to the current depressed state the market for junk bonds, which would have been used to help finance the transaction.

The company said, however, that it is still interested in selling the unit and will continue talks with WW Acquisition as well as “others.” But First Executive said it also would consider the possibility of keeping its New York unit. In an interview, Carr intimated that talks were under way with other possible buyers, but he declined to identify them or say how far talks had progressed.

The pending sale had been heavily criticized by some First Executive shareholders, who questioned whether the purchase price was adequate and who also expressed concern about a possible conflict of interest because of Carr’s business relationship with Martin J. Wygod, a private investor and chairman of Medco Containment Services Inc., who was listed as one of the two principal owners of WW Acquisition.

Neither Wygod nor Leo M. Walsh Jr., the other principal owner, could be located for comment late Thursday.

First Executive had also said the sale depended on approval by state insurance regulators. It couldn’t be learned immediately whether regulators had raised any objections to the sale.

First Executive, an insurance holding company, is also the parent of a California-based life insurance company, Executive Life of California, and of a Delaware concern, First Delaware Life Insurance Co. The company gained widespread attention in the mid-1980s for big profits generated by its heavy investment in high-yield, high-risk junk bonds, and its sale of innovative products including single premium annuities.

But the firm lately has run into a number of problems, and the price of its stock has plummeted. It has drawn heavy attention from state insurance regulators, first in New York and recently in California, for its use of junk bonds and accounting practices related to the insurance units’ reserves to cover claims.

A change in federal tax laws made some of its best-selling products less attractive to customers. And the sharp decline in the junk bond market in recent months is believed to have had an impact on the value of the firm’s investments.

In trading in the over-the-counter market, First Executive’s stock closed Thursday at $9 a share, down 37.5 cents. A year ago, its shares had been trading at $13.50.

First Executive’s decision last May to sell the New York unit was widely viewed by insurance industry analysts as a move to withdraw from New York and escape the rigid scrutiny of the state’s insurance department, one of the strictest in the country.

The New York department in 1987 imposed a record $250,000 fine on Executive Life of New York for improper practices concerning reinsurance. More recently, New York insurance regulations were changed to tightly restrict insurance concerns’ junk bond holdings.

But Carr has denied that problems with regulators had anything to do with the planned sale. “We thought there were various products in other (states) that we could sell and make substantially more on than the products we were selling in New York,” Carr said Thursday. But he said the rationale for the sale may have been wrong because the unit has performed much more profitably than expected.

Announcement that the sale had fallen through eliminated a question mark that had been hanging over the agreement for some months. The company had predicted that the sale would close sometime in the fall, but no announcement concerning the sale was made until Thursday.

Although a definitive agreement wasn’t signed until last May and the sale wasn’t consummated, First Executive already figured the impact of the sale into earnings reported for the first quarter of 1989. The company claimed a $150-million pretax loss on the sale, because the selling price was lower than the value of the unit as carried on First Executive’s balance sheet.

The loss enabled the company to take a $38-million tax deduction in its first quarter. It remained unclear how the failure of the sale will be reflected on the company’s earnings. Carr said “the loss once recorded will remain as it is,” but he declined to elaborate.

It was disclosed late last month that the California Insurance Department has begun looking into a series of First Executive transactions in which the firm transformed about $756 million in junk bonds into collateralized securities. The transactions had the effect of getting the highly risky junk bonds off First Executive’s books. But the regulators are believed to be concerned about whether the new securities are really risk free.