First Capital Life Officials Probed for Policy Cash-Ins

California insurance regulators said Wednesday that they are investigating whether two top officials of First Capital Life Insurance Co. acted improperly when they cashed in their own life insurance policies before the company was seized this month.

The probe is focusing on the actions of First Capital President Fred Buck and Senior Vice President Julia S. Kelly. Sources close to the company say the two cashed in life insurance policies shortly before First Capital was taken over by regulators.

The value of the policies and the exact dates of the surrenders could not be determined. The investigation is part of a larger probe of “the business practices of First Capital,” a Department of Insurance spokesman said.

A key issue in the investigation is whether the two company insiders were able to pull funds out of First Capital Life quicker than other policyholders by using advance knowledge that the state would take over the insurer.

The state slapped operating restrictions on San Diego-based First Capital Life on May 10 after concerns about losses from junk-bond investments caused thousands of customers to attempt to cash in policies. The restrictions prohibited the company from accepting surrenders or writing new policies.

Four days later, regulators placed the life insurer, a subsidiary of First Capital Holdings Inc. of Los Angeles, in conservatorship. The failure is the second-largest ever of a life insurer.

As part of the probe, Insurance Commissioner John Garamendi met with Buck and Kelly. State officials would not comment on the meeting.

First Capital spokesman Charles Perkins said he was aware of a meeting but did not know the purpose. Neither Buck nor Kelly could be reached for comment.

In the weeks prior to First Capital’s takeover, thousands of policyholders submitted surrender requests worth $265 million. Because of the volume of the requests, it was taking First Capital about 30 days to process each application.

Thousands of the company’s customers are still waiting to receive funds requested before the regulatory seizure. But the ban on surrenders is still in force, and state officials cannot say how long it will remain.

Insurance experts maintain that any action Garamendi might take against the two executives would hinge on when they attempted to surrender their policies, whether they benefited from inside information and whether the company favored their requests over other such requests.

The insurance department is now auditing the books of First Capital, which has $4.5 billion in assets and 260,000 policyholders nationwide.