Garamendi Says First Capital Needs Cash Infusion to Survive

California Insurance Commissioner John Garamendi said Tuesday that troubled First Capital Holdings Corp. will need a “substantial infusion of cash” to survive and that the state was hopeful of rescuing failed Executive Life of California.

In an interview after a Senate hearing, Garamendi said the state will take a tough line in talks with American Express, demanding that the firm supply the funds needed to bolster Los Angeles-based First Capital.

“If membership has its privileges, then ownership has its responsibility,” Garamendi said, offering a new twist on the well-known American Express advertising slogan. American Express owns Shearson Lehman Bros. Inc., the brokerage house that has a 28% share of First Capital and was the biggest marketer of the company’s insurance and annuity products.

Garamendi said American Express, as Shearson’s parent, must provide the “full amount of money necessary to stabilize” First Capital, which has 40% of its assets in junk bonds.

“First Capital is an important part of the American Express operation,” he said, after appearing before a Senate hearing to discuss another major insurance problem in California, the state’s April 11 seizure of Executive Life, a subsidiary of First Executive Corp. of Los Angeles.

Shearson Lehman produced more than $3 billion worth of business for First Capital in the past five years, accounting for 75% of the insurance company’s activity, according to Garamendi.

The commissioner held his second day of discussions with officials of Shearson and American Express on Tuesday, with meetings scheduled in Washington and New York.

In a statement, Shearson said it presented a number of proposals to Garamendi to enhance First Capital’s financial position and protect the interest of its customers who are policyholders.

Sources indicated that as a minority shareholder, Shearson has offered to protect its customers, but that Garamendi was pressing for broader financial support that would provide help for all First Capital policyholders.

First Capital stock slumped 87.5 cents to $1.125 on the New York Stock Exchange, an all-time low.

Meanwhile, Garamendi told the Senate Commerce Committee hearing that he hopes to “revitalize” Executive Life and avoid liquidation. State regulators are consulting with several groups of insurance firms about the possible sale of Executive Life.

However, if a rescue sale can’t be fashioned, and Executive Life falls into insolvency, California’s new insurance industry guaranty fund would be available, if needed, to help the policyholders, Garamendi said.

Because of the financial uncertainty surrounding Executive Life, “I cannot at this time give an estimate of what the ultimate outcome will be for the policyholders,” Garamendi told the Senate hearing. “There are just too many unknown factors.”

However, there already are potential major losses for businesses and individuals attracted by the high yields Executive Life offered when its junk bond portfolio seemed to promise the lure of higher-than-average profits.

Executive Life is paying the full amount of benefits on life insurance policies, but Garamendi has restricted payouts for other policies.

Retired workers whose companies replaced their pension plans with Executive Life annuities are receiving only 70% of their normal pension payments. Several firms, including Revlon, Pacific Lumber and Blue Cross of California, have agreed to make up the remaining 30% of the retirees’ pension check through direct payments or loans.

But it is uncertain what action, if any, other companies will take to help their retired workers who depend on Executive Life annuities. Sen. Howard Metzenbaum (D-Ohio), who has investigated Executive Life, told the hearing Tuesday that an estimated 50 firms replaced their pension plans with Executive Life annuities.

In Los Angeles, Maureen Marr, organizer of an Action Network for Victims of Executive Life, said Tuesday that in the 12 days since she started the volunteer group to represent retirees and policyholders she has received 300 letters and 600 phone calls from persons worried about their financial future

Also at risk for big financial losses are the companies and municipal agencies that purchased guaranteed investment contracts from Executive Life. These financial instruments offered unusually high interest rates.

Garamendi has suspended all interest payments on these contracts and says it is doubtful they could be considered as insurance products eligible for coverage under the new state guaranty law.

The commissioner’s plan to salvage Executive Life could be ruined if the Internal Revenue Service successfully presses a $643-million claim against the firm for back taxes. “If the claim stands, this game is over,” Garamendi said. “It will kill any chance we have to rehabilitate this company.”

Executive Life is an issue far beyond the borders of California and New York, the two states in which regulators seized the insurance company’s major operations, said Sen. Richard Bryan (D-Nev.), who conducted the committee hearing. The company’s “300,000 policyholders live in all 50 states and the District of Columbia,” Bryan said, noting that Nevada residents have 2,300 Executive Life policies with a face value of $400 million.

“This case clearly raises doubts that existing state regulation offers the needed protection to policyholders and taxpayers,” he said. But both Garamendi and the New York state insurance commissioner, Salvatore Curiale, said they can protect consumers and policyholders through aggressive state oversight of the industry.