Report Challenges Claims of Health by First Executive

Los Angeles-based First Executive Corp. for months has referred to two confidential studies by a consulting firm as support for management’s claim that the insurance holding company and its life insurance units are strong enough to survive the firm’s recent financial calamities.

But the Insurance Forum, a respected industry newsletter, reported Tuesday that it had obtained copies of the still-secret reports and concluded that they don’t back up First Executive’s claim.

First Executive has reported huge losses because of the plummeting value of its heavy investments in junk bonds.

The newsletter said the reports by Milliman & Robertson, a Seattle-based actuarial consulting firm, were “inconclusive,” were based on unaudited data and possibly faulty assumptions supplied by First Executive, don’t consider the potential impact of an economic recession, ignore a possible substantial rise in claims because of deaths from AIDS and don’t consider the impact on the insurance units if the parent company is forced into bankruptcy proceedings.

First Executive referred to the consultants’ reports in its annual 10-K report to the Securities and Exchange Commission for 1989, citing them as evidence that the firm’s main life insurance subsidiaries, Executive Life and Executive Life of New York, remain sound. The 10-K stated that: “In the company’s view, these reports illustrate the capital strength and resiliency of each of Executive Life and Executive Life-NY.”

In March, the firm also sent out a purported summary of the consultants’ findings in a widely distributed “Report for Clients.” It contended that the consultants had found that, even assuming the gloomiest scenario, the units’ investments will show a gain between 1989 and 1994.

First Executive, however, so far has refused to make public the consultants’ reports, which have become the center of a legal battle. Joseph M. Belth, a professor of insurance and editor of the Insurance Forum, requested a copy of the reports from the New York State Insurance Department, but First Executive filed suit to block the department from making it public.

The case is still pending before a state appellate court. First Executive had said it would drop its objections and release the report at the end of August, but it hasn’t done so. Meanwhile, Belth said he obtained copies of the reports, not from the company but from a source he declined to identify.

Bill Adams, senior vice president for corporate services at First Executive, said the firm now plans to make public the original reports, as well as an updated report, next Monday. He asserted that the updated report answers the points raised in the Insurance Forum but declined to provide details.

He said the reports won’t be released until Monday because “we have some very important meetings with regulators and rating agencies” first. He added: “We’re trying to treat them with respect, and they prefer to see the information before it becomes public.”

The newsletter said the fact that First Executive provided the assumptions and unaudited data that Milliman & Robertson used to make its financial projections makes the conclusions suspect.

Belth also noted in the newsletter that First Executive is tightly restricted by regulators in the amount of profit it can take from its insurance units, and consequently the holding company has liquidity problems. First Executive said in a recent SEC filing that it may soon have trouble meeting debt payments and dividend payments on preferred stock, creating the possibility of a default.

The newsletter said the consultants’ report failed to take into account that a bankruptcy filing by First Executive would lead to strongly unfavorable publicity that might lead many customers to cancel policies.

Belth also said the reports failed to take into account that customers also might be scared off by plans to lower the amount of interest paid on policyholders’ funds. The newsletter said the consultants assumed that such a lowering of so-called credited interest will be necessary if U.S. interest rates remain at their current levels.

In a telephone interview Tuesday, Belth said his office in Ellettsville, Ind., wasn’t technically equipped to make copies of the reports available immediately by fax, although he offered to send copies to a reporter via mail or overnight delivery. He said the two reports total 181 pages. However, Tuesday’s issue of the newsletter contains what it says are direct quotations from the reports.

Bruce Winterhof, a Milliman & Robertson executive who helped prepare the reports, didn’t immediately respond Tuesday to a request for comment.