First Capital Rose Fast, Sank Faster : Company Used High-Risk Bonds to Grow--but Bottom Fell Out

The ground shook the day after Robert Weingarten, then chairman of First Capital Holdings Corp., told a small group of insurance agents that E. F. Hutton Life Insurance would be renamed First Capital to reflect its newfound ownership by the fast-growing Century City firm.

Now, four years later, some agents regret that they didn’t recognize the Whittier earthquake as an omen.

“The thing I’m learning with all this is that just because a company is big and operates on the umpteenth floor of a skyscraper doesn’t mean that the people inside know what they are doing,” said Richard Bock, a managing general agent who has worked for First Capital for six years.

“People’s lives have been shattered and will be shattered. Once something like this starts, it is very difficult to put all the blocks back together again.”

On Friday, state insurance regulators placed severe operating restrictions on First Capital Life Insurance Co. after skittish customers flooded the firm with requests to cash in their policies. The surrender requests were prompted by news that the company was in such severe financial trouble that California Insurance Commissioner John Garamendi had traveled to New York to try to persuade Shearson Lehman Bros. to pump cash into the firm.

The moves may spell the beginning of the end for the once-high-flying firm that came virtually out of nowhere to become one of the state’s largest life insurers. The company’s subsidiaries rank in the top five nationwide in sales of single-premium deferred annuities and seventh in sales of universal life insurance.

California regulators acknowledge that Friday’s moves may be only the first steps in a series of actions needed to stabilize the firm. Industry experts believe that the company’s business will be sold in pieces to other insurers.

The problems of First Capital follow those of the larger Executive Life Insurance Co., another company that grew rapidly on the strength of a strong-willed executive and investments in high-yield, high-risk junk bonds.

First Capital’s rise started in 1983, when Weingarten paid $8 million to buy a mutual fund company called Pilgrim Group. Weingarten, who started a boutique research firm specializing in insurance stocks when he was a mere 21 years old, had only recently sold out of his second business enterprise--a magazine company that once owned Saturday Review and Financial World--and moved to Los Angeles.

Pilgrim Group was too small to notice before Weingarten and his striking, dark-haired wife, Palomba, entered the scene. But before Palomba’s birthday in October of 1985, Pilgrim’s assets reached an impressive $1 billion.

The company grew to these heights with an aggressive marketing strategy, which involved hiring salesmen to travel the country to introduce Pilgrim’s products to brokerage houses. This core group of salesmen would have Friday meetings with Palomba, who ran the mutual fund firm. They’d report their progress and snack on coffee and pastries served on silver trays, Bock said.

But already the Weingartens were branching out to turn First Capital into what they called a “manufacturer and wholesaler of investment products.”

In late 1985, the company purchased Fidelity Bankers Life Insurance for $75 million. In a matter of months, the Weingartens’ salesmen had collected $100 million in premiums--four times what Fidelity had generated in a whole year under its previous ownership. E. F. Hutton Life was First Capital’s next conquest, purchased in 1987 for $300 million.

First Capital was suddenly an emerging force in the industry, with about $1.5 billion in revenue.

But those familiar with the company’s rapid rise said it was fueling its stunning growth with an increasingly risky investment strategy.

To grow so fast, it had to offer investors unusually high rates on their annuities, said James P. Hanbury, an analyst at Wertheim Schroder & Co. in New York. That, in turn, forced the company to seek out even higher rates of interest in its investment portfolio to cover overhead and make a profit.

“If they promised to pay Y%, they had to go out and earn Y plus 2%,” Hanbury said.

To generate that kind of return, Weingarten turned to junk bonds, sold by his friend and now-convicted financier, Michael Milken.

“They let themselves get into a position where 40% of their investment portfolio could be described as junk,” Hanbury said.

After Milken was indicted and the junk bond investment house of Drexel Burnham Lambert collapsed, the market for the risky investments began to sour.

Now First Capital’s investment portfolio is worth $500 million less than what the company paid. And California insurance regulators maintain that the company cannot survive without a substantial infusion of capital.

Still, Hanbury said, the company might be revived with an injection of capital.

“They are not in horrendous shape. The basic problem, in the near term, is a lack of consumer confidence and adverse publicity,” he said.

Insiders contend that the writing may have been on the wall more than two years ago.

In 1988, the Weingartens sold their First Capital stock to Shearson Lehman Hutton for the princely price of $40 million. The shares would have been worth about $25 million had the deal been done at market prices.

Then in May of 1989, Palomba Weingarten bought Pilgrim Group from First Capital for $11.5 million. But she retained the right to manage First Capital’s pension plan. First Capital paid her $106,654 for those services in 1990.

Last March, Robert Weingarten resigned as First Capital’s chairman and chief executive after the disclosure that the company would have to restate its 1990 earnings to account for losses in its fast-deteriorating investment portfolio.

Weingarten earned $1.35 million in 1990. He will continue to serve as a company consultant, earning $500,000 annually, according to a recent company report.

Perhaps the company’s eventual demise should have been apparent from the start.

“Years ago, I asked Palomba how she and Bob had gotten ahead,” Bock recalled. “She said, ‘We always bit off more than we could chew, and then we fought like hell to save it.’ “I wonder now whether they bit off more than they could handle this time.”

First Capital Holdings Corp. At a Glance

* Headquarters:

Los Angeles.

* Business: Financial services company that sells life insurance and annuity products nationwide.

* Top executives and 1990 pay: Robert I. Weingarten, chairman and chief executive (retired), $1,350,000; Gerry R. Ginsberg, president and chief operating officer, $850,000; Philip S. Fitzpatrick, executive vice president and chief financial officer, $475,000; Rita C. Villa, senior vice president and controller, $220,000, and Kevin J. Perry, senior vice president and chief investment officer, $387,500.

* Major stockholders: 28% owned by Shearson Lehman Bros., a subsidiary of American Express.

Subsidiaries

* First Capital Life Insurance Co.: Sells life insurance and annuities; based in San Diego.

* First Banks Life Insurance Co.: Sells life insurance and annuities; based in Richmond, Va.

* World-Wide Reassurance Co.: An international life reinsurer based in Windsor, England.

Source: First Capital Holdings Corp.

First Capital’s Sudden Slide First Capital Holdings Corp. revenue and net income, in thousands Revenue Year 1986: $ 91,838 1987: 435,621 1988: 726,282 1989: 972,916 1990: 980,674 Net income Year 1986: $16,588 1987: 31,541 1988: 726,282 1989: 972,916 1990: 980,674 Source: Company reports

* INSURER’S OPERATIONS RESTRICTED

State regulators acted to stop a run by First Capital Life Insurance customers. A1