Bondholders Rip Executive Life Plan

Lawyers for investors who bought more than $1.8 billion in municipal bonds backed by guaranteed investment contracts issued by failed Executive Life Insurance Co. on Wednesday sharply criticized a state rescue plan that would give those contracts little value.

But Insurance Department spokesman Bill Schulz defended the plan, saying the department’s goal is to protect policyholders and those who depend on Executive Life-sold products for their retirement rather than those who made speculative investments in the bonds.

Investors--many of them religious and charitable organizations, individuals, pension funds and small banks--bought the bonds in 1986. Money raised by municipal agencies through the bond sales was then used to buy guaranteed investment contracts, or GICs, from Executive Life.

GICs are usually sold to pension funds and promise a specific rate of return over the life of the contract, usually three to 10 years. The company sold 307 GICs.

Executive Life was seized by state regulators April 11 as its losses from bad junk bond investments mounted. Insurance Commissioner John Garamendi this week proposed a plan to revive the company.

In a memo detailing his proposed reorganization of the insurer, Garamendi said GICs bought by municipal agencies using money from their bond sales would be valued at just 30% of “higher priority assets,” such as insurance policies and annuities. That means that holders of the bonds will get, at best, 30 cents on the dollar, and possibly much less.

The dispute is over the different treatment Garamendi is giving GICs that were bought from Executive Life for pension funds versus the ones bought using the municipal funds. Richard Havel, a Los Angeles lawyer representing bondholders, said Garamendi’s plan is unfair, and he accused Garamendi of giving policyholders and annuity holders higher priority because those groups are “politically more attractive.” He added that bondholders are not necessarily professional investors but in many cases individuals.

Money was raised through bond issues by agencies for public works projects, such as low-income housing. But if the projects were not built, the agencies were then allowed to invest the money in “safe” investments. Since Executive Life and its GICs were rated highly in 1986, the investments were considered safe, Havel said.

Many of the investors say they have been surprised to learn that their money was used to buy the contracts and not used for municipal projects.

“I thought it was going toward such things as roads, schools and industrial parks. I assumed they made these investments,” said James Lovell, a retired welding products executive in Newport Beach.

Lovell said he invested in $25,000 in bonds issued by Adams County, Colo., which defaulted on $200 million in revenue bonds earlier this month in the wake of Executive Life’s seizure last month by state insurance regulators.