First Executive to Take Big Loss on Junk Bonds : Earnings: The Los Angeles life insurance company will take a $515-million charge in the fourth quarter. It has been a major buyer of high-risk, high-yield bonds.

First Executive Corp., one of California’s fastest growing and once most profitable companies, will report substantial fourth-quarter and year-end losses as the result of a souring junk bond portfolio, the company announced late Friday.

The Los Angeles insurance holding company, the parent of Executive Life Insurance Co., has been one of the nation’s biggest buyers of high-risk, high-yield junk bonds and now holds nearly $7 billion in these securities. During the fourth quarter of 1989, the value of these bonds plummetted, and they are now worth $1.4 billion less than what First Executive paid for them, the company said.

First Executive will take a charge against earnings of about $515 million for the fourth quarter to account for the declining value of its investment portfolio. The charges, added to a $112-million charge that the company took early last year to account for problems at its New York life insurance subsidiary, are likely to cause First Executive to post a $300-million loss for the year.

Company Chairman and Chief Executive Fred Carr Carr said he believes that the junk bond market has gotten unjustly pummelled, but he acknowledged that “market conditions may worsen before they get better.”

Carr nevertheless took steps to reassure policyholders, investors and others that First Executive is still financially sound and holds substantial cash reserves. Its life insurance subsidiaries continue to meet regulatory standards for financial stability, he noted.

Meanwhile, California insurance regulators said Friday that they would force First Executive’s California subsidiary to reverse a controversial transaction that--on paper--miraculously turned a risky $750-million junk bond portfolio into much safer collateralized bond obligations.

The deal “made their balance sheet look better than it actually was,” an Insurance Department spokesman said. “So we are making them undo it. We felt it was more honest to recognize that they have the junk bonds than to make the junk bonds into something else.”

Executive Life Insurance Co. has agreed to increase its reserves for potential losses from its investment portfolio by $110 million, Carr said. This will have no effect on the company’s balance sheet because it has excess general reserves.

In addition, the Insurance Department has told the company that it must disclose the junk bond transaction in its 1989 annual statement. It must also file an application for approval of the deal--despite the fact that it was completed more than a year ago.

What the company did was essentially a juggling act with an increasingly unpopular pool of high-risk, high-yield debt securities known as junk bonds.

Executive Life, which had come under increasing pressure because of its huge junk bond portfolio, decided to sell the portfolio to a group of six limited partnerships. Those partnerships were 99% owned by none other than Executive Life, the Department of Insurance said.

The partnerships then pooled the bonds to create what are called collateralized bond obligations. These CBOs still contain the same bonds, but they are considered less risky by rating agencies such as Standard & Poor’s. Consequently, they become easier to sell.

These CBOs are also considered less risky by regulators, who require insurance companies to hold separate reserves for potential losses on their insurance portfolios and their investments. The riskier the portfolio, the more money insurance regulators require to be set aside in reserves.

Because CBOs often have investment-grade ratings, regulators require insurers to set aside less cash in reserves against them than against a junk bond portfolio, which by definition does not have an investment-grade rating.

But the Friday announcements were only the latest in a series of blows to hit First Executive over the past several months.

The company, which also has been engaged in a fight with one of its largest shareholders over its share price, had planned to sell its New York life insurance subsidiary for $460 million in an effort to boost capital, but the deal fell through. And now First Executive said the unit is off the market.

Moreover, the company’s policyholders, spooked by First Executive’s high-flying image and risky investment portfolio, have started to cash in their life insurance policies. And new customers are getting harder and harder to find, as shown by the company’s declining premium income.