Insurer’s Failure Ensnares Thousands of Casualties : Executive Life: Pension payments have been slashed. A crisis of confidence threatens the industry.
William Beale and his wife, Elvera, went on a vacation in early April to the Grand Canyon and returned to discover their financial future suddenly shaky, as they found themselves among those caught up in the failure of Executive Life Insurance Co.
The couple are supposed to receive $22,000 from a retirement annuity coming due in November. But Beale, a 74-year-old resident of Leisure World in Seal Beach, says: “I haven’t the slightest idea what will happen. We’ve been told all along you never miss with insurance.”
They are not alone. Misplaced confidence in the sanctity of an insurance company has ensnared thousands of unwitting casualties. People such as the Beales bought individual policies for an economically secure old age.
On April 11, California regulators seized Executive Life in the largest failure of a life insurer in history. A sister firm, Executive Life of New York, also has been placed in conservatorship by regulators there. And this week the insurers’ parent company, First Executive Corp., sought protection from creditors by filing for Chapter 11 bankruptcy.
In the aftermath, retirement payments to thousands of workers who never heard of Executive Life have been slashed by 30% beginning this month. After taking control of the company, California Insurance Commissioner John Garamendi ordered Executive Life to cut all annuity payments--including those bought by companies after terminating pension plans--to conserve the insurer’s inadequate funds.
The ripple effects from the Executive Life failures--and subsequent seizures of the insurance units of First Capital Holdings Co.--threaten to create a crisis of confidence for the insurance industry, which depends on the faith of the public to market its products, and for the corporations that turned to Executive to handle their pensions.
It’s not an isolated problem. The potential victims are in all 50 states and the District of Columbia, notes Sen. Richard Bryan (D-Nev.), who directed a recent Senate Commerce Committee hearing on the insurance industry problems. Executive Life of California alone has 170,000 life insurance policies and 75,000 retirement annuities with a value of $45 billion.
Many find themselves in a sort of financial limbo because their employers--an impressive roster that includes Revlon, RJR Nabisco, Merritt Peralta Hospital Center in Oakland, Smith International Inc. and Bulova Watch Co.--swapped their pension plans for Executive Life annuities.
“I guess I’ll make it, but I’m sure there are a lot of people who can’t,” says Ralph McMichael, who retired after 43 years as a manager for Stoody Co., a welding products firm based in the City of Industry. His pension check has been reduced from $522 a month to $365.
Even some individuals hurt in accidents or by medical malpractice have had their settlement payments coming from Executive Life cut back.
In San Diego, a woman whose sole income comes from a malpractice settlement for botched medical treatment received her May check on Wednesday. It was $2,186, slashed from the normal allotment of $3,123. “I haven’t digested it yet,” she says. “But it will put a lot of pressure on me to change my life. I haven’t thought it through.”
Indeed, California regulators are compiling an ever-growing list of potential victims as they pore through the books of Executive Life, which grew rapidly during the 1980s as it was drawn to the siren song of high-yield, high-risk junk bonds. Garamendi will hear some of their stories Friday when he meets with members of the Action Network for Victims of Executive Life at the Los Angeles County Hall of Administration.
The seeds of the disaster were sown in the 1980s when many firms dipped into their pension funds, ripe with surpluses because of gains in the stock market, and pulled out the excess money for other corporate uses. In some cases, companies terminated their pension plans, replacing them with annuities--long-term contracts providing lifetime payments for the workers in question. The excess pension money was then used to help pay the massive debt resulting from a takeover of the company.
This was a standard tactic, and no one paid much attention until Executive Life got into financial trouble as the junk-bond market crashed. The company had grown rapidly on the strength of high-interest payments made possible by its risky investments.
Now, no one wants to take full responsibility for the retirees whose pensions are in jeopardy. The government agency that protects retirees--the Pension Benefit Guaranty Corp.--already is running at a big deficit. And once a firm replaces its pension plan with an annuity, the federal protection stops.
Each employer with an Executive Life annuity is pursuing an individual course, deciding if it wants to replace the 30% cut from retirement paychecks, which began this month.
For the time being, Revlon, Blue Cross of California, and Merritt Peralta Hospital Center all are making up the losses. But this could change overnight. “We will pay in May and June, if necessary, and then the issue will be re-examined,” says Ben Tate, Merritt’s human resources director.
RJR, the giant food and tobacco company, won’t provide any additional funds. Among those RJR workers who are losing a portion of their pensions are former employees of the old Signal Oil, once a major California firm, and some retirees from Kentucky Fried Chicken. The average pension, $240, will be cut to $168 under the state’s mandate.
“We’re just monitoring it at this point,” says RJR spokesman Jason Wright.
Smith International, a Houston-based drilling firm, hasn’t decided what to do, says Ken Glass, the company’s employment manager. Officials at the Bulova Watch Co. won’t discuss the issue.
Maxxam Inc., which owns Pacific Lumber in Scotia, Calif., will make up the shortfall for 510 workers retired from Pacific Lumber. But it won’t for 11 welding companies once owned by Pacific Lumber but sold in 1987, said Bob Irelan, Maxxam’s vice president of public relations. “The new owners assumed the assets, liabilities and everything,” he said. “We are not voluntarily making payments to anyone outside the Pacific Lumber portion.”
Ralph McMichael and Fred Calandra worked at Stoody, one of the welding companies. They have retirement cards saying “annuity group contract 128 Pacific Lumber Co.” But the company says it has no responsibility since it no longer owns Stoody.
“In their mind they have no further liability,” says Calandra, a Las Vegas resident and former vice president. Eligible to start drawing a retirement check in January, he is entitled to $390 a month, but will only get $271 because of Executive Life’s problems.
“My feeling is one of hostility and disappointment,” he says.
The cutback for annuity payments also applies to “structured settlements,” the arrangements made to provide long-term payments to accident or malpractice victims. Instead of providing a huge lump sum of cash, the insurance company in a settlement frequently will arrange an annuity to spread the payments over time. Some of the insurance firms turned to Executive Life to provide the annuities.
“It’s a very frustrating situation,” says a Los Angeles man whose teen-age daughter receives payments every two years to cover her extensive medical costs. Her leg was badly burned in a motorcycle accident, and she has undergone 12 surgical operations.
“For the last year everybody has been worried about Executive Life,” he says. “But we were trapped. You can’t call up and say, get me out of the policy.”
Some insurance companies have indicated they will honor the full amount of the structured settlements they arranged with Executive Life.
“We will honor the commitment and the obligation we have there,” says Donald J. Zuk, president and chief executive officer of Southern California Physicians Insurance Exchange, a major malpractice insurance carrier.
Kemper National Insurance Companies quickly decided to pay the shortfall because “we felt it was imperative annuitants get the income,” says spokesman Charles Johanns.
State Farm, however, is noncommittal about the annuity cutbacks. “We are going through it on a case-by-case basis to review the situation of each and every file,” said spokesman Bill Sirola.
The Executive Life crisis may provide the first massive test of state guarantee funds, established in 47 states to compensate policyholders. However, the guarantee funds may come too late to make up the losses of people whose checks and standard of living already have been substantially reduced.
If Garamendi can’t find other insurance companies to buy Executive Life, the firm might be forced into insolvency. The California guarantee fund, which began operation on Jan. 1, would come into play. But it has sharply defined limits, paying 80% of a policy, up to a maximum of $250,000 for death benefits and $100,000 for an annuity. For a corporate pension annuity, the maximum payout is $5 million under the state fund.
Garamendi already has decided that one Executive Life product--the guaranteed investment contract--doesn’t qualify for protection under the state fund because it isn’t a true insurance vehicle. The contracts, popularly called GICs, are sold in multimillion-dollar units to businesses and public agencies. The attraction was the “guaranteed” high-interest rate, which was guaranteed only by Executive Life’s financial health.
Buyers of GICs included employee benefit plans at Honeywell, Unisys, Xerox and Holiday Inns. The GICs are popular for savings and retirement plans, usually contributory plans in which employees choose among stocks, bonds and other investment opportunities, including guaranteed investment funds bought from insurance companies.
Some companies have frozen the share of the funds provided by Executive Life. This means an employee who retires or leaves the company and cashes in the plan can’t get all the money. At Honeywell, for example, an employee who cashes in the guaranteed income fund must leave 16% behind--that’s the share of the fund provided by Executive Life.
The money isn’t available because California regulators have frozen all distributions and dividends from Executive Life GICs.
Holiday Inns is the lone firm promising to make good on any losses from Executive Life GICs for employee benefit plans.
Insurance industry executives term Executive Life an unfortunate aberration. They insist that Fred Carr, the head of Executive Life, recklessly dabbled in junk bonds, a rarity in a conservative industry.
“By and large, the life insurance industry still is very sound and healthy,” says Richard Schweiker, president of the American Council of Life Insurance. “A handful of companies pursued high-risk investment strategies, but the average company has (only) 6% of its total assets in the high-yield bond category,” he says.
But the industry’s confidence was shaken anew when California forbade customers from cashing in their policies at First Capital Life to stem a run on the institution. First Capital was placed in conservatorship this week after creditors sought to place its parent in an involuntary bankruptcy.
The management of First Capital seemed to be the acme of respectability. Shearson Lehman Bros., a prestigious brokerage firm, owns 28% of First Capital and was the major seller of the policies. And Shearson, in turn, belongs to the giant American Express financial empire.
Regulators haven’t imposed any drastic annuity cutbacks at First Capital, as they did at Executive Life. But the atmosphere is nerve-racking and uncertain for policyholders.
Companies Try to Cope
Numerous companies have replaced their pension plans with Executive Life annuities. After California regulators put the company into conservatorship, payments on the annuities were cut by 30% to preserve the firm’s assets. Here is how some of the affected companies have reacted: Blue Cross of California: Will loan retirees the other 30%. Merritt Peralta Hospitals Oakland: Will pay 30% balance for May and June. Pacific Lumber: Will pay 30% balance for some retirees. RJR: Will not make additional payments. Revlon: Will pay 30% balance for May and June. SOURCE: The companies
Impact of Insurer Failures
California insurance regulators seized Executive Life Insurance Co. in April and First Capital Life Insurance Co. this week. Here is what it means to policyholders:
EXECUTIVE LIFE FIRST CAPITAL Death benefits Paid in full Paid in full Cash-in value Frozen Frozen Annuities Pay 70% Pay 100% Guaranteed investment contracts No dividends Pay 100%
SOURCE: California Insurance Department
