Plan Unveiled to Restructure Failed Insurer
Insurance Commissioner John Garamendi on Tuesday disclosed a “rehabilitation blueprint” for failed Executive Life Insurance Co. that will offer customers two choices--cashing out their policies at a reduced value or sticking with a newly formed company for a shot at regaining lost benefits.
Under the plan, the Los Angeles life insurance firm would be divided into two parts. One would be a new insurance company formed from the ashes of Executive Life and backed by deep-pocketed investors now being solicited. The other part would be a liquidating trust that would largely hold assets that are difficult to value, such as some real estate partnerships and possibly some junk bonds.
Garamendi’s restructuring plan for Executive Life is being watched closely as a potential model for bailing out other troubled insurers.
State officials declined to speculate on how much customers could lose if they choose to cash out their policies instead of swapping them for policies with the new company. Executive Life has nearly 250,000 policyholders and thousands more who have investment contracts.
Customers who choose to swap their policies for ones offered by the new company would enjoy what Garamendi called “windfall protection,” something akin to a profit-sharing plan that is an attempt to keep policyholders from cashing in their policies.
If the assets in the trust prove to be more valuable than they appear to be now--or if money is realized from various lawsuits, court claims and state insurance guarantee funds--policyholders would share in the “upside” and receive more of their lost retirement and life insurance benefits than those who decide to cash out.
Lawyers and others familiar with Garamendi’s plan expressed concern that customers lack the knowledge needed to adequately evaluate the odds that they will come out ahead by choosing the new company. Insurance department officials conceded that the decision could prove difficult for many policyholders.
“They have to have a certain amount of faith in the new management,” Deputy Insurance Commissioner Tom Epstein said.
Tom Meiss, an Executive Life customer who serves as a spokesman for “Action Network for Victims of Executive Life,” said the group was generally pleased with the plan. But he expressed concern that customers lack expertise to make a good choice.
“It must be in plain language so people can understand what their options are,” he said.
But several sources close to the deal predicted that cashing in policies “will not be an attractive option” for policyholders because they probably would forfeit substantial benefits. The insurance department said it will require those who choose to take policies offered by the new company to lock in their policies for a minimum period, probably three to five years.
The plan is Garamendi’s attempt to deal with the worst insurance failure in history. Insurance regulators on April 11 seized Executive Life, which has 170,000 life insurance policyholders and 75,000 annuity holders, amid concerns over losses caused by its holdings of risky, high-yield junk bonds. The department is prohibiting customers from cashing in their policies or obtaining loans against them. Death benefits are being paid in full, with annuities paid at 70%.
Under Chief Executive Fred Carr, Executive Life’s parent, First Executive Corp. in Los Angeles, was one of the best customers of former Drexel Burnham Lambert junk bond executive Michael Milken. Executive Life’s junk bond holdings make up $6.4 billion of its $10.1 billion in assets.
The plan--similar to a reorganization for the Baldwin-United Corp., the largest failure of an insurer in the 1980s--is contingent on the department reaching agreement with a bidder who meets strict standards that include committing $300 million to $500 million, knowing how to run a life insurance company and showing the know-how to manage a portfolio of junk bonds.
Separately, the deal also is contingent on Garamendi favorably resolving a $643-million tax lien asserted by the Internal Revenue Service against Executive Life. Garamendi warned that the entire deal could unravel if the IRS tax claim is upheld.
As disclosed by Garamendi last week, the French group Altus, which is 60% owned by the French bank Credit Lyonnais, has already qualified as a bidder. Regulators hope to negotiate a deal with Altus, then see if any other groups are willing to beat it.
Garamendi has said three other parties are showing interest. Sources close to the deal said several more prospective bidders have shown interest the past few days.
Some lawyers wondered whether the criteria for bidders is too restrictive and would effectively put Altus on the “fast track” in negotiating the deal. They noted that there are few bidders with the kind of money the department is seeking, and a small number of people with expertise at managing junk bonds.
That doesn’t appear to be a problem for Altus. It is being advised in the deal by Leon Black, a former senior executive with Drexel who now heads the Apollo Advisors institutional money management firm that is backed by Credit Lyonnais. In addition, John Kissick, who once ran Drexel’s corporate finance department in Beverly Hills, has been a consultant to Apollo.
Epstein, the deputy commissioner, defended the requirements set by the department as establishing a threshold to attract serious bidders.
“We don’t want to waste a lot of time with people who want to nose around and try to pick up pieces,” he said.
Some experts predicted that Executive Life eventually will have to be structured in a way similar to the “good bank” and “bad bank” deals arranged by federal regulators in handling some failed banks and thrifts. In those deals, the worst assets are put into one bank and the best are put into another and sold to investors. Those involved in designing the Executive Life plan, however, said the assets in the trust will not necessarily be poor quality.
Rehabilitating Executive Life
California insurance regulators have developed a plan to rescue Executive Life Insurance Co., which was seized by the state on April 11. Here is an outline of the proposal:
* Form a new insurance company that assumes Executive Life’s fixed assets and restructured liabilities.
* Create a liquidating trust to receive and distribute unallocated Executive Life assets, plus resources from guaranty funds and other sources.
* Provide “windfall protection” to policy and contract holders whose benefits are reduced. This will come from appreciation of the new company’s assets.
* Executive Life customers can cash in policies, but then could not receive proceeds from the liquidating trust.
* Those that transfer policies to the new company would receive similar benefits, but at lowered accumulated values. New policies must be held three to five years.
Source: California Department of Insurance
