N.Y. Cites 1st Executive for ‘Sloppiness’

First Executive Corp.’s New York life insurance unit kept such sloppy records in the mid-1980s that there was no way to determine accurately how much reserves the company had on hand, according to a report by the New York State Insurance Department.

The report on Executive Life of New York cited the “company’s general sloppiness” and said there was a “continued lack of internal control” related to the firm’s reinsurance practices, in which risk is shared with other insurance companies. First Executive, a life-insurance holding company, is based in Los Angeles.

The report also said First Executive employees refused to cooperate with investigators from the New York department. It said they demanded that all questions from the auditors be submitted in writing and then in many instances failed to respond.

The report, covering 1983 through 1986, led the regulators to fine the unit $25,000. In an interview Thursday, Terence Lennon, chief examiner and assistant deputy superintendent in the department, labeled the violations “serious.” But he said there were signs that while record-keeping problems persist at the firm, it has improved substantially since the period covered by the report. He also said that, despite First Executive’s reported problems related to its heavy investment in junk bonds, he believes that Executive Life of New York currently is on sound financial footing.

“I believe the company can meet its obligations,” he said.

The New York unit is one of First Executive’s two main subsidiaries. The other is Executive Life of California, which lately has been under close scrutiny by the California insurance department.

Ronald L. Kerhli, president and chief executive of the New York unit, said he didn’t agree with the report’s characterization of record keeping as “sloppy.” But he acknowledged that in 1986 the firm took in such a large volume of new business, more than $800 million, that its record keeping system was severely strained. He said a new system is in place, and record keeping now is accurate.

Kerhli denied that the firm hadn’t cooperated with investigators. He said he insisted that they submit requests for information in writing so that the questions and answers could be logged and investigators couldn’t claim later that oral questions hadn’t been answered.

The report said the sloppy record keeping related to more than $288 million of policies being placed in temporary “suspense” accounts without proper reserves. Suspense accounts are used to hold new business until processing of the policies is completed. But the report said policies remained in the suspense accounts for months or even years.

An earlier investigation by New York regulators led them to impose a $250,000 fine against Executive Life of New York, the largest it had ever imposed. That investigation found that the unit had falsely claimed to have passed off some claims risk to other companies.

Lennon confirmed that one reason the new audit led to a relatively small fine was concern about First Executive’s financial problems. First Executive reported an $836-million net loss for its 1989 fourth quarter, due mainly to the declining value of its junk bond portfolio. In the first quarter of this year, though, the firm reported net income of $45.4 million.

New York regulators have begun a new routine audit of Executive Life of New York, covering the three years ended Dec. 31, 1989. Final results of that audit aren’t expected at least until next year.