State Regulators in Virginia Seize First Capital Unit
State regulators in Virginia seized Fidelity Bankers Life Insurance Co., a subsidiary of Los Angeles-based First Capital Holdings, Monday in an attempt to stem a flood of policy surrenders--the insurer equivalent of a run on a bank.
The receivership comes on the heels of a similar action taken Friday against Fidelity Bankers’ sister company in California, First Capital Life Insurance Co. Although First Capital was not taken over by regulators, California authorities severely limited its operations and barred the company from honoring requests to cash in or borrow from life insurance policies and annuities.
Fidelity Bankers, which operates in every state except New York, also placed a ban on cashing in and borrowing from policies, leaving more than 300,000 company customers without access to their funds. However, the company will continue to honor death claims and make payments to those expecting monthly annuity checks, regulators said.
The company, which has 213,329 life insurance policies and 97,174 annuities in force, is Virginia’s third-biggest life insurer and, by far, the largest company ever seized by that state’s regulators.
Both Fidelity Bankers and First Capital Life were hit with a flood of policy withdrawals spurred by news that First Capital Holdings--the parent of both insurers--is suffering from a souring investment portfolio.
The parent company, once a fast-growing and highly profitable firm, restated its earnings earlier this year to account for losses on high-yield, high-risk junk bonds that make up about 40% of the company’s investment portfolio.
At year-end, the market value of these bonds was $500 million less than the company’s cost, First Capital said in a financial statement. The company, nevertheless, reported a $7.1-million profit for 1990.
Virginia regulators said that Fidelity Bankers was fundamentally sound. However, after California moved against First Capital Insurance, so many policyholders attempted to cash in or borrow from their Fidelity Bankers accounts, Virginia’s deputy insurance commissioner testified, that “without supervision, we feel that the further transaction of business could be hazardous to policyholders.” The company might simply run out of cash, regulators explained.
Fidelity Bankers said it supported the action and is cooperating with regulators.
“While this was a difficult decision, we strongly believe that today’s action is in the best interest of our policyholders,” said Edward Simon, chairman and chief executive of Fidelity bankers, in a prepared statement. “I look forward to working closely with the commission to further strengthen our asset base and restore the confidence of our policyholders.”
The Virginia State Corporation Commission, as receiver for Fidelity Bankers, said it will attempt to “conserve and rehabilitate” the company.
Ideally, they plan to stabilize the insurer and return it to First Capital shareholders, said Kenneth Schrad, a spokesman for the department.
However, state officials would not speculate about how long that might take, or whether it can be accomplished. Schrad noted that Virginia regulators have never before seized a company this large. In the past, it has only had to act against unlicensed firms and small health maintenance organizations, he added.
Even though regulators remain optimistic about the chances for First Capital’s insurance units, stock market investors have turned sour on the parent. First Capital’s stock price was cut in half Monday, closing at roughly 47 cents per share on the New York Stock Exchange. Only two years ago, First Capital shares were selling for more than $14.
California Insurance Commissioner John Garamendi last week said that First Capital Life’s problems were serious and required immediate action. He said the company, which has $4.46 billion in assets and 250,000 policyholders, could be placed in state control in the near future.
State regulators have been pressing American Express Co.--whose brokerage arm, Shearson Lehman Bros., owns 28% of First Capital--to make a cash infusion into the company. The firm also has hired an investment banker to sell its universal life business. State regulators would also like the company to dispose of much of its junk-bond portfolio.
