First Capital Has Huge Loss, Intends to File Chapter 11

First Capital Holdings Corp., the Los Angeles insurance holding company whose two main units have been seized recently by insurance regulators, on Monday reported a huge $770-million first-quarter loss and disclosed that it is headed for bankruptcy court.

Neither the sizable loss nor the disclosure that the company will be filing soon for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code were unexpected.

First Capital Holdings was virtually wiped out after California regulators recently seized the company’s San Diego-based First Capital Life Insurance Co. and Virginia authorities took control of its Fidelity Bankers Life Insurance Co.

As a result of those two actions, First Capital Holdings wrote off the assets of both life insurance companies, a move that completely devalues them and that caused the big quarterly loss. On an operating basis, First Capital lost $2.3 million in the quarter, which ended March 31. In the year-earlier quarter, First Capital earned $16.1 million.

The insurance units have combined assets of more than $8.5 billion. Their failures rank among the largest by life insurance companies ever and come on the heels of that of Executive Life Insurance Co. of California.

First Capital Holdings, which under former Chief Executive Robert Weingarten was highly profitable for several years, has been struggling in recent months as its junk bond portfolio suffered huge losses.

Regulators in both Virginia and California scrambled to head off a flood of policy surrenders--which is somewhat like a run on a bank--as concerns mounted over the company’s losses on its junk bonds.

Charles Perkins, a First Capital spokesman, declined to predict when the company might file for Chapter 11, which allows firms to reorganize under protection of the bankruptcy court. He said it still has some assets, notably a reinsurance operation in Great Britain.

The prospect of a Chapter 11 filing was expected after a group of lenders headed by Citibank sought to place the company in involuntary bankruptcy. Chapter 11 protects a company from creditors while allowing it to continue operating and come up with a reorganization plan.

The Citibank consortium loaned $275 million to First Capital last year, about $200 million of which is said to be from the New York-based lender itself.

The funds are secured by stock in First Capital and its units, which is now virtually worthless. Lenders in the group include such banks as Mitsui Manufacturers, National Westminster Bank and NCNB’s Texas unit.

State Insurance Commissioner John Garamendi has said he expects First Capital’s policyholders to receive all of their benefits. A spokesman for Garamendi on Monday said the loss posted by First Capital Holdings has no effect on that prospect because, in seizing the insurance unit, the commissioner sealed off the company from creditors to protect policyholders.

American Express, which owns 28% of First Capital through its Shearson Lehman Bros. unit, is writing off its $144-million investment. State regulators have been pressuring American Express for money to bolster First Capital’s insurance units.

In taking over First Capital’s life insurance units, the states have prohibited the companies from writing new policies or cashing in policies.