First Executive Posts Huge Loss in 4th Quarter : Earnings: Junk bonds were blamed for the $836 million in red ink. Regulators also have taken additional action against the Los Angeles insurer.
First Executive Corp., the troubled Los Angeles-based life insurance holding company, on Monday reported an $835.7-million net loss for its 1989 fourth quarter, much larger than expected and due mainly to continued declines in the value of its junk bond holdings.
The writedown on its investment portfolio amounted to $859 million, which was $344 million more than the company in January had said it would take for the quarter. The company said it took the bigger writedown in part because the market value of the junk bond portfolio deteriorated considerably after the year ended.
Insurance industry analysts said the huge writedown didn’t appear to pose an immediate threat to the company’s viability, and First Executive said its main insurance units, Executive Life of California and Executive Life of New York, have enough cash and liquid investments on hand to meet foreseeable needs.
First Executive grew to prominence in the 1980s by investing heavily in high-yield, high-risk bonds sold by Drexel Burnham Lambert Inc. and offering exceptionally high returns to buyers of life insurance and annuity products. But like other companies that invested a big portion of their assets in junk bonds, First Executive’s fortunes have declined as the junk bond market collapsed in recent months.
In its earnings statement, First Executive said the fourth-quarter loss, equivalent to $9.98 per share, contrasts with net income for the 1988 fourth quarter of $48.2 million, or 42 cents per share. First Executive reported a net loss for the full year of $775.6 million, or $9.67 per share, contrasted with net income of $174.5 million, or $1.51 per share, for 1988.
In over the counter trading, First Executive’s stock ended the day unchanged at $2.75 a share.
In a separate development, the company disclosed a series of actions by regulators, including the launching of a formal investigation last month by the Securities and Exchange Commission.
The SEC is said to be looking into whether the company failed to disclose severe financial problems when it sold an offering of its own securities to the public last year. Although an informal SEC inquiry on the subject has previously been reported, the announcement that the commission is now taking formal action suggests that the SEC believes it has sufficient evidence of wrongdoing to go ahead with a full investigation.
Fred Carr, First Executive’s chairman and chief executive, refused to comment on the SEC investigation.
In an SEC filing, First Executive also revealed that the California Insurance Commissioner recently ruled that First Executive had entered into illegal arrangements with a partly owned subsidiary, First Stratford Life Insurance Co., concerning reinsurance. Former Drexel Burnham Lambert junk bond chief Michael Milken also owns a minority stake in First Stratford. The exact nature of the problem wasn’t disclosed, but sources said First Stratford’s own heavy investments in junk bonds violated California reinsurance regulations.
A spokesman for First Executive said: “It appears to be a technical issue that should be resolved in the near term.” A spokesman for Milken said he had not seen the filing but added: “Milken is not involved in the operations or regulatory issues involving this company.”
First Executive confirmed that 45% of its total invested assets remain in junk bonds, an exceptionally high proportion for an insurance company. The company also disclosed that it had agreed with the California regulators not to buy any more junk bonds without first notifying them. New York regulators have already severely restricted the junk bond purchases of the firm’s New York unit.
Disclosure of the much larger than expected fourth-quarter writeoff angered some securities analysts, who said the company hadn’t warned them about it at a meeting in California a month ago, when the company gave a relatively rosy presentation of its financial outlook. Frederic Townsend, a principal of the Connecticut firm Townsend & Schupp, which analyzes insurance companies, said Monday that “this is much worse news than they told us.” He added: “Their credibility is pretty much smashed.”
Carr refused to comment. However, the company said the rate at which customers are pulling money out of the company through surrenders of annuities and life insurance policies has begun to drop, approaching “normal” levels after a big surge earlier this year.
The surrenders have been a major source of concern for regulators, and are considered the biggest threat to the company’s survival. A decline in surrenders would therefore be good news. Carr, however, declined to give specific figures for the surrenders, although the company warned that Monday’s news of larger than expected losses might temporarily cause another increase in surrenders.
Analysts now are concerned about how well the company performed in this year’s first quarter, which has already ended. The company is weeks away from disclosing figures. Carr refused to go into details but said: “The company continues to perform very well in the first quarter in what has been a difficult period.”
DREXEL ASSETS ON THE BLOCK
The now bankrupt junk bond king is not-so-quietly selling its assets, including its prized computer database. D4
