$50-Million Deal for First Executive Annuities Canceled

First Executive Corp., the troubled Los Angeles life insurer, received an embarrassing blow Wednesday when Coleman Corp. said it will cancel an agreement to buy nearly $50 million in First Executive annuities for its employee pensions. Coleman cited a recent drop in the ratings of First Executive’s ability to pay claims.

The announcement came less than a week after the Senate labor subcommittee said it was looking into Coleman’s purchase of First Executive annuities as part of an investigation into “junk pensions” put in place by corporate raiders after they acquire a company and cancel its existing pension plan. Coleman, the Kansas-based maker of camping equipment, was acquired by New York investor Ronald O. Perelman last year. It was learned Wednesday that the Labor Department also has begun an investigation into Coleman’s dealings with First Executive.

Several ratings agencies last week disclosed that they were lowering their ratings on First Executive’s ability to pay claims after the company announced that it was taking a $515-million charge against fourth-quarter earnings and would report a large loss for 1989.

First Executive’s problems stem from its heavy investment in high-yield, high-risk junk bonds, which make up about 45% of the company’s invested assets. The value of that portfolio has declined sharply as the junk bond market entered a sustained slump several months ago.

Since then, independent insurance agents reportedly have all but stopped writing new business for First Executive, and regulators have been watching to see if large numbers of customers begin surrendering their existing life insurance policies or annuities.

In recent years, a considerable part of First Executive’s annuity business came from companies such as Coleman that were acquired or taken private. New owners canceled existing over-funded employee pension plans, which were replaced by annuities purchased from a First Executive subsidiary, Executive Life Insurance Co. of California.

But last week, the Senate labor subcommittee, chaired by Sen. Howard M. Metzenbaum (D-Ohio), said it was looking into whether these annuities were safe, in view of First Executive’s heavy investment in junk bonds.

In a written statement, Metzenbaum said Wednesday that he is “pleased to see that the concerns some of us in Congress have about ‘junk pensions’ may have inspired Ron Perelman to reassess his decision.”

James Conroy, special counsel and spokesman for MacAndrews & Forbes Holdings, the Perelman company that acquired Coleman, said the firm would now seek other insurers to write the annuities. Conroy said MacAndrews had decided to drop First Executive because the Standard & Poor’s agency last week lowered its rating of First Executive insurance by two notches, to A from AAA. He said MacAndrews has said since last year that it would only use an AAA-rated company. But he didn’t rule out that pressure from the Senate investigation and the Labor Department also influenced the decision.

“The concern we felt (about the ratings) was shared in a number of other quarters,” he said. “We think today we acted to meet everyone’s concerns.” He said Coleman representatives are due to meet in Los Angeles today with First Executive officials to negotiate a cancellation of the planned purchase of the annuities. Fred Carr, First Executive’s chairman and chief executive, declined to comment on the development.

The Labor Department and the Pension Benefits Guaranty Corp., a government agency that insures certain pensions, were said to be concerned that Coleman had agreed to purchase the First Executive annuities before receiving necessary government approval. Some Coleman retirees have said they already have begun receiving benefit payments from First Executive. Coleman already deposited about $40 million with First Executive as a “premium deposit.”

A spokeswoman for the Pension Benefits Guaranty Corp. said: “We are reviewing it to see if there was any premature distribution” of funds from the original pension plan.

Conroy, however, asserted that no rules had been broken and said First Executive had merely been hired on an interim basis to make some benefits payments to assure an orderly transition to the new pension arrangement.