First Executive ‘Sound and Solvent,’ Carr Says : Thrifts: Appearing before Congress, he responds to concerns that his holding company is heavily invested in high-risk securities.

First Executive Corp. Chairman Fred Carr told Congress on Monday that the big insurance holding company, which has nearly half of its assets in junk bonds, will remain “sound and solvent” even if it is hit by a collapse in the junk bond market or further large-scale withdrawals by its customers.

Carr said First Executive has a strong cash position and insisted that junk bonds are less risky than real estate and mortgages, the more traditional investments for the insurance industry.

The Los Angeles-based company is unique among major insurance firms in its heavy investments in junk bonds, which are high-yield, high-risk debt securities. Taking an aggressive stance, Carr insisted that a real estate crash with resulting mortgage defaults is “every bit as likely” as a plunge in the junk bond market.

First Executive’s “investment strategy will be proven . . . to be sound and our family of companies will continue to be among the nation’s most profitable insurers,” Carr told the investigations subcommittee of the House Energy and Commerce Committee.

The company “has kept its promises to its policyholders in the past and I believe it will keep those promises in the future,” he said.

Under intense questioning, Carr strongly denied any business influence on First Executive by junk bond king Michael Milken, who had invested in First Stratford, a company that helped raise additional capital for First Executive.

All investment decisions and business policies at First Stratford were directed by First Executive officials, and Milken played no role in selecting investments, Carr insisted. The subcommittee had received reports that Milken, who has pleaded guilty to market manipulation in other securities, had helped choose some investments for First Executive.

Congress is worried by the “increasing use of junk bonds as security for insurance policies that people depend upon to be safe and sound,” said Rep. John Dingell (D-Mich.), chairman of both the subcommittee and the full committee. “Like other areas of life, we know that too much of a seemingly good thing can be harmful, or even fatal, if it is abused.”

Dingell said First Executive “has banked its future and the security of its policyholders on a high-risk, high-return strategy that far exceeds industry standards.” The insurance industry has about 7% of its assets in junk bonds, while First Executive’s holdings range from 45% to 60%, depending on differing definitions of a high-yield bond.

Political and regulatory officials in California have been worrying about the solvency of First Executive because California is one of just six states without a guarantee fund to protect policyholders if a life insurance or health insurance company collapses.

The state Assembly recently passed a bill to create a guarantee fund, and the issue is now being considered by the Senate. “I’m hopeful we have a chance of passing it (through the full Legislature) this year,” Patrick Johnston (D-Stockton), chairman of the Assembly Finance and Insurance Committee, told the hearing.

Johnston said he failed in efforts to include in the guarantee fund legislation a rule limiting junk bond investments to 20% of insurance company assets.

“If junk bonds are such a good investment,” Johnston said, there should be plenty of willing buyers ready to acquire the portfolios of insurance companies.

He said First Executive’s political and lobbying prowess stripped the 20% rule from his bill and also blocked the Assembly Rules Committee from issuing a subpoena to compel Carr’s testimony. First Executive “hired four high-power contract lobbyists to say we were picking on them,” Johnston said.

The assemblyman also criticized state Insurance Commissioner Roxani Gillespie for failing to help his inquiry into the financial problems of First Executive. “We have not had clarity from our commissioner,” he said. “Many questions remain unanswered.”

The Dingell subcommittee had hoped to have Gillespie as a witness at Monday’s hearing and postponed the session once before in hopes of assuring her appearance. “She declined both invitations, citing her need to remain in California to administer the implementation of Proposition 103,” the 1988 auto insurance rollback initiative, Rep. Dingell said.