EXECUTIVE LIFE SEIZURE : The Costly Comeuppance of Fred Carr : Insurance: The chief executive’s gamble with junk bonds has brought Executive Life to its knees. Regulators have seized it, and bankruptcy may follow.
In the early 1980s, maverick Fred Carr rocked the staid insurance industry when he came up with a way to pay customers higher returns on life insurance policies and annuities than what his much larger competitors offered.
The trick was junk bonds.
Instead of investing in conservative securities such as Treasury and investment-grade bonds, Carr--chairman and chief executive of Los Angeles-based First Executive Corp.--invested policyholders’ money in risky junk bonds that returned a much higher yield.
The innovation turned the firm’s tiny Executive Life Insurance Co. into a significant player in the industry, with nearly $50 billion of insurance in force.
Today, Executive Life is in the hands of regulators after California Insurance Commissioner John Garamendi obtained a court order putting the troubled insurer in conservatorship. The move is almost certain to end Carr’s control of First Executive and its subsidiaries.
Executive Life became the most important customer of Michael Milken, who headed Drexel Burnham Lambert’s Beverly Hills-based junk bond department throughout the 1980s. The willingness of First Executive and certain large savings and loans to be steady buyers of junk bonds was credited as an important factor in keeping Milken’s juggernaut going.
But when Milken came under the criminal investigation that ultimately led to a 10-year prison sentence, the junk bond market collapsed. Carr too was investigated, but prosecutors never charged him with wrongdoing.
Carr, who learned the financial ropes in the go-go years of mutual fund sales in the 1960s, long scoffed at critics’ suggestions that his heavy reliance on junk bonds could bring disaster. In an interview last year, he said he was proud he invested in them.
“I’m proud to have invested in America,” he said.
Industry experts say the seizure of Executive Life, First Executive’s crown jewel, means that the chickens have come home to roost for Carr.
“It’s a comeuppance for playing spreads that were unrealistic and for beguiling people with promises that couldn’t be delivered,” said Joyce L. Culbert, an analyst with Firemark Insurance Research in New Jersey.
First Executive’s fortunes began turning in 1989, with the collapse of the junk bond market. At the end of that year, the company took an $859-million charge against earnings because of junk bond losses. Carr and First Executive continued to maintain that the company was financially sound and that there was no reason for policyholders to panic.
But the junk bond market remained depressed. Surrenders of policies by worried customers remained at a high level. First Executive reported a $465.9 million loss for 1990. It disclosed that the year-end market value of its junk bond portfolio was $2.6 billion below that carried on First Executive’s books.
Concerned state regulators blocked the insurance units from sending money upstream to the parent. And in the company’s 1990 annual report, its auditors declined to express an opinion on the company’s financial statements because of questions about First Executive’s ability to continue as a going concern.
The extent of Carr’s personal fortune isn’t known, although a significant portion of it reportedly was tied up in First Executive stock, which is now virtually worthless after closing at about 28 cents Thursday.
In 1989, after he received annual compensation of more than $2 million, he was ranked 97th in Forbes magazine’s list of the 800 best-paid executives in America. But in 1990 his salary package declined to $612,500.
Analysts said there appeared to be little chance that a “golden parachute” agreement, under which Carr stands to receive at least $6 million if there is a change in ownership of First Executive or Executive Life, will actually be invoked. Regulators are unlikely to allow funds from the insurance units to be used to pay Carr, and it appears that the parent company, facing massive liabilities, wouldn’t be able to do so.
Insurance and stock analysts said there now seems to be no possibility that First Executive will be able to avoid bankruptcy proceedings. And with the parent company’s liabilities evidently greatly exceeding its assets, there may not be much for creditors to divide.
“I think it basically puts the wooden stake into the heart of the parent company,” said Chuck Ronson, a securities analyst at Baird, Patrick & Co. in New York.
Garamendi made clear that Carr had been stripped of his positions as head of the insurance unit and its subsidiary, Executive Life of New York.
“Fred Carr is no longer the CEO of Executive Life of California and New York,” Garamendi said at a press conference. He remains chairman and chief executive of the parent.
Carr and other company officials didn’t return telephone calls seeking comment.
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