Executive Life Failure Reaches Muni Bonds

State finance agencies in Colorado and Nebraska have defaulted on $400 million in municipal bonds backed by Executive Life Insurance Co. policies, adding to the carnage wrought by the nation’s biggest life insurance company failure.

Payments scheduled this week were missed on $200 million in agricultural revenue bonds issued by the Nebraska Investment Finance Authority and another $200 million in revenue bonds issued by the Adams County, Colo., Industrial Authority.

The agencies said they did not have the funds because insurance regulators, in an effort to preserve the assets of Los Angeles-based Executive Life, are refusing to pay on policies purchased to back these bonds.

The Colorado and Nebraska defaults were not the first--and are not expected to be the last--municipal issues hurt by the regulatory seizure of Executive Life and Executive Life of New York, the two largest insurance subsidiaries of Los Angeles-based First Executive Corp.

The El Paso Housing Authority defaulted on $200 million in bonds last month. And at least another $1 billion in bonds issued by government agencies in Louisiana, Texas and Tennessee are also backed only by guaranteed investment contracts issued by Executive Life, industry experts said.

Although these bonds were offered by agencies that normally finance housing and industry, the proceeds of these particular bond issues were never used for anything but investment purposes, said Ronald Vannuki, managing director of Drake Capital in Santa Monica.

Municipalities sold the bonds to private investors at one rate and used the proceeds to buy an investment contract from Executive Life that would pay a little more than the municipality needed to pay investors.

“It looked like a safe investment because (the municipalities) were not buying junk bonds with the proceeds, they were buying a guaranteed investment contract,” Vannuki said. “The rub is First Executive used the municipalities’ money to go out and buy junk bonds.”