Wheel of Fortune Turns Against First Executive : Insurance: The firm that grew rapidly on a foundation of junk bonds faces mounting problems. Some agents now have stopped selling its policies.
Walt Duemer, president of the leading marketing organization for First Executive Corp.’s life insurance policies, says he was forced to eat crow this week.
For months, he has told nervous private insurance agents to ignore the negative press that Los Angeles-based First Executive has received, to stop worrying about the firm’s heavy investments in junk bonds.
“When negative publicity has come out, I’ve said: ‘Don’t believe any of that stuff,’ ” Duemer says. Instead, he told the agents to look at what counts: the stellar ratings given to the company’s ability to pay claims by the venerable agencies Moody’s and Standard & Poor’s.
On Monday and Tuesday, however, following an avalanche of bad news from First Executive, the two widely watched ratings agencies lowered their ratings of the company. Duemer, president of the Exceptional Producers Group, said the agents he deals with--the largest ones that sell the policies of First Executive’s big California subsidiary--have now virtually stopped writing any new life insurance business for First Executive. And Duemer said that, since the ratings change, he has been left without a plausible argument to persuade them why they should.
The wheel of fortune has turned for First Executive: The days of explosive growth have ended, and the company’s problems--and stock price--have worsened so significantly just in the past two weeks that it announced Thursday that it is waiving a “standstill” agreement with a major shareholder, ICH Corp. The waiver will allow ICH to put together a group to make a bid by July to acquire First Executive. In Wall Street parlance, this may have put the company “in play.” But even assuming that one or more viable bids materialize, there is concern about how well the company will hold up in the interim.
The announcement came as First Executive Chairman and Chief Executive Fred Carr and the firm’s new president, Alan C. Snyder, were completing an emergency visit to the East Coast to meet with securities analysts, institutional investors and brokers in an effort to persuade them that the company still has a strong capital position and more than enough cash on hand to meet all obligations.
The company’s present situation is a far cry from the heady days of the early 1980s, when First Executive took the life insurance world by storm, fueling exponential growth by offering innovative products and using high-risk, high-yield junk bonds to offer rates that competitors couldn’t match.
Although there are no signs of panic, California insurance regulators and insurance industry analysts have been watching closely for any sharp upswing in the rate that customers are pulling their money out of First Executive through surrenders of life insurance policies or annuities.
Lorraine Johnson, an attorney in the California Insurance Department, says that so far there has been no indication of a run on the firm’s big California life insurance unit, Executive Life of California. But she says the department is monitoring the situation closely because “there is definitely concern.” Johnson adds that “certainly there are a lot of policyholders out there who are concerned about what they’ve read in the newspapers.” (A top regulator at the New York Insurance Department, which over the years has imposed tough restrictions on the company’s New York unit, says Executive Life of New York currently has plenty of reserves to meet any upswing in surrenders.)
To judge by First Executive’s public statements and its financial reports, the firm does have considerable cash on hand to cover any flight by policyholders--more than $2.5 billion in cash or securities readily converted into cash.
But even if policyholders are well protected, the recent developments have led to what amounts to a crisis of confidence by the company’s shareholders. Standard & Poor’s lowering of its rating followed these events:
- The firm disclosed last week that it plans to take a $515-million charge against fourth-quarter earnings, related to the declining value of its junk bond portfolio. As a result, First Executive says it will report substantial losses for the quarter and full year.
- Figures put out by the company last week suggest that, just since Sept. 30, the market value of its junk bonds portfolio has declined by about $1 billion, raising the possibility that further big writedowns may be necessary, especially if more bonds held by First Executive go into default. About 45% of First Executive’s total invested assets are in junk bonds. (Allan L. Chapman, vice president of First Executive, denies that additional writedowns are likely.)
- The firm announced earlier this month that the planned $460-million sale of its New York life insurance subsidiary, Executive Life of New York, had collapsed. Although the New York unit has been extremely profitable, the sale would have given a needed boost to the parent company’s cash flow.
- Last week, the firm also disclosed that the California Insurance Department had forced it to reverse a controversial transaction that had appeared to take $750 million of risky junk bonds off the firm’s balance sheet. The transaction had converted the junk bonds into supposedly safer “collateralized bond obligations.” The department said the transaction had the effect of making First Executive’s balance sheet look sounder than it actually was.
The combined impact of this news erased more than two-thirds of the value of First Executive’s common stock in less than a month. Between Dec. 29 and last Tuesday, First Executive’s common stock plunged to $3 a share from over $9. The stock rose 50 cents a share on Wednesday, and following Thursday’s announcement, it gained another 12.5 cents a share to $3.625 in over-the-counter trading.
Carr, who has stated strongly in public that the recent bad news overstates the firm’s problems, couldn’t be reached for comment Thursday. He was said to be in an airplane, returning to Los Angeles. However, Chapman said the company “is in a very strong financial condition.”
The company’s true heyday was in the early 1980s when, using such then-new products as single-premium deferred annuities, Carr was able to lure huge numbers of customers with attractive rates and the special tax benefits that such products then offered. A prominent mutual fund manager in the late 1960s, Carr had come to First Executive with little expertise in the insurance industry. When business took off, Carr was noted for the steps he took to lavishly reward top agents and brokers who sold his products, including trips to London and Rome, complete with surprise side trips on specially booked Concorde jets.
Since then, the company has weathered repeated major reversals. The collapse of companies such as Baldwin-United and Charter Co., which sold products similar to those offered by First Executive, left a taint on the firm even though it remained financially sound.
Congress revised the tax laws in 1988 to take away many of the advantages of deferred annuities. And Carr and his company have come in for bad publicity from his long, close association with Michael Milken, Drexel Burnham Lambert’s former junk bond chief who is under indictment on racketeering charges.
Carr’s association with Milken was a crucial element of First Executive’s success, which was based in large measure on astute purchases and trading of junk bonds. First Executive has acknowledged that it has been under investigation by federal prosecutors in the Milken case, although no action appears imminent and the company strongly denies any wrongdoing.
But in the company’s report on its performance for the quarter ended Sept. 30, 1989, filed with the Securities and Exchange Commission, First Executive stated: “The adverse publicity has diminished consumer and agent confidence, and in combination with other factors, may have contributed to lower sales and higher surrenders than might otherwise have been the case.”
The most decisive blow so far, however, has been the collapse of junk bond prices in recent months, touched off by defaults and bankruptcies by several notable companies financed by junk bonds. According to Fred Townsend, an analyst at the Connecticut-based insurance rating firm of Townsend & Schupp, although First Executive is taking a $515-million year-end charge, that amounts to only a portion of the decline in market value of the junk bonds in its portfolio.
Aside from immediate worries that customers or even whole marketing agencies might abandon First Executive, its current financial situation and ratings decline raise longer-term worries, analysts say. A chief concern is whether the company will be able to raise its capital back up to the point where regulators will allow it to expand business.
Life insurance companies are required to have big cushions of capital reserves on hand to meet claims, so they must raise capital to grow. In the past, Carr raised the money to grow from public investors, selling various issues of preferred stock or, last year, a rights offering of special stock and warrants.
But, Townsend says, investors may now be so worried about the state of First Executive’s junk bond holdings that they won’t be willing to put up more cash. “If he can’t get cash, he can’t put any more money into the California subsidiary,” Townsend says. The California unit is considered to be in more immediate need of new capital than the New York unit.
First Executive’s Chapman acknowledges that it would be difficult to raise money now. But he asserts that with the growth of the business temporarily stalled, there isn’t any immediate need to raise more capital.
Protestations by Carr and other First Executive officials that the company’s economic fundamentals are strong might carry more weight if some securities analysts hadn’t been made nervous by a variety of accounting practices that have been called into question. In 1987, the New York Insurance Department imposed its biggest fine ever on a life insurance company--$250,000--for Executive Life’s reinsurance practices that violated state regulations. Regulators concluded that Executive Life of New York had been trying to cover up that it was undercapitalized.
The juggling of junk bonds into “collateralized” securities, originally discovered by Joseph Belth, editor of a newsletter called the Insurance Forum, also gave cause for concern.
Chapman said the company has complied with generally accepted accounting practices.
CONGRESSIONAL PROBE
A Senate panel has opened an investigation into First Executive’s “junk pensions.” D2
