Executive Life Collapse Imperils Bondholders : Simi Valley: The city deposited $15 million with the failed insurer to draw interest until needed to assist low-income home buyers.

Investors who bought municipal bonds issued by the city of Simi Valley to finance loans to low-income home buyers are among those who stand to lose most after the state’s recent takeover of the failing Executive Life Insurance Co. of California, city officials said Friday.

The city deposited $15 million in Executive Life’s accounts in 1989 to draw interest until the money was needed to finance mortgages for the first-time homeowners.

State officials have said that they doubt much of the money can be recovered and that holders of the city’s AA-rated bonds are likely to lose most of their investments.

But city officials said the effect of the insurance company’s failure is not yet clear. How much bondholders lose depends on the success of a state rescue plan that calls for the formation of a new insurance company.

Councilman Bill Davis said that the number of small investors hurt will probably be minimal.

“Ninety percent of the bondholders are big corporations. They are not your mom-and-pop investors,” Davis said. “But the city is still concerned. We’re hoping that some major corporation will come in and take over.”

Assistant City Manager Jay Corey said that Simi Valley officials did not pledge city money as security for the $15 million in bonds, so no city assets will be lost.

“It does not affect our financial strength,” he said.

Nor will the takeover harm the city’s loan program for first-time buyers which was to be financed by the bonds, he said. The reason is that the city issued another $12 million in housing bonds last October and that money will cover loans made so far under the program.

Corey said that Executive Life’s failure will not harm the city’s good bond rating.

“I think there is an understanding in the investment world that the problem is Executive Life,” Corey said. “It is unprecedented how a triple-A company so precipitously could end up in the tank.”

Davis agreed that the city cannot be held accountable.

“You think you’re going with the safest company around and it backfires,” he said. “You just don’t know who to invest with anymore.”

When the city invested the bond proceeds with Executive Life two years ago, the firm was ranked among the top 20 insurance companies in the country, Corey said.

The company was seized by state regulators April 11 as its losses from bad junk-bond investments mounted. It was the largest takeover of a life insurer in the nation’s history.

A team of bankers, insurers, attorneys and accountants assembled by state Insurance Commissioner John Garamendi is now trying to come up with a plan to revive the company.

Garamendi’s office recently suggested that city bondholders would get back no more than 30% of their investments. Corey said it will probably be three or four months before the city knows precisely how much holders of the city bonds will lose.

“We have received no word that would lead us to believe that there is significant cause for optimism,” Corey said.

City bonds, used to fund public projects, generally are considered safer. But the proceeds of those sales are often placed in guaranteed income contracts--such as the one between Simi Valley and Executive Life--until needed to build a project. In those cases, the guarantees are only as good as the company backing them.