Q&A; : French investors agreed...
Question: When will the deal be completed?
Answer: Regulators expect to close the deal within 80 days. However, it requires court approval, so the timetable could be slightly different.
Q: What happens to policyholders?
A: Policyholder accounts will be restructured and essentially transferred to a new company, tentatively called Newco, which will hold no more than 10% of its assets in junk bonds. Based on current estimates of Executive Life’s assets and liabilities, the restructuring reduces cash values of each policy to roughly 81% of their current values. (The exact percentage reduction could change based on a number of variables that will be resolved when the deal is closed.)
That means policyholders could lose 19 cents on the dollar, although that amount could be reimbursed through state guarantee funds.
Investment returns and annual premium payments promised by the old Executive Life are also likely to change. Newco’s initial credited rates of return would be based on a formula that looks at yields on five-year Treasury securities, less 1 percentage point. Regulators estimate that the rate would start out at about 7%.
Q: Are policy surrenders allowed?
A: Yes, but it will be expensive. If policyholders decide they don’t want to transfer to the new insurer, they can cash out at a rate not to exceed 75% of the restructuring percentage. In other words, if the Newco policies pay 81 cents on the dollar, those who opt out will get no more than about 60 cents on the dollar.
Those who do transfer but find they want to cash in their policies before the end of a five-year moratorium period would have to pay surrender fees. The amount of those fees would differ based on when the surrender is attempted and individual circumstances, according to attorneys who helped structure the deal.
Q: What about policy loans?
A: The rate charged on current policy loans could rise. It will be set by Newco. But Newco has agreed not to charge more than the maximum rate allowed by law. No additional policy loans will be allowed for a five-year period following the closing of the deal.
Q: Will policyholder losses be reimbursed by state guarantee funds? If so, when would they be reimbursed?
A: That depends. Guarantee funds are a state-by-state affair, governed by separate rules and limitations. Generally speaking, however, most states cover up to $100,000 in cash value and up to $300,000 for death benefits. (California limits death benefit coverage to $250,000.)
California insurance regulators are attempting to coordinate coverage with the 48 states that have life insurance guarantee funds--New Jersey, Louisiana and the District of Columbia do not currently have such funds--to ensure prompt payment. But these funds, which are supported by assessments on healthy insurers operating in each state, have not yet indicated how much and how quickly they would be able to pay.
Additionally, it is unclear whether policyholders who refuse to go along with the restructuring would be able to get reimbursed for their losses. These individuals, who would get about 25% less than those who go along with the restructuring, “would certainly get no more than policyholders who stick with the program and they could get less,” said Tom Epstein, one of California’s deputy insurance commissioners.
Executive Life’s bailout
The rehabilitation of failed Executive Life Insurance Co. of California calls for the liquidation of the existing company with its assets and liabilities going to three new entities:
Executive Life
Junk bonds Investco
Altus Finance pays $2.7 billion for junk bonds which have a face value of about $5 billion. If profits on the junk bonds exceed certain levels within the first five years, Investco would share a percentage of these profits with policyholders.
What the policyholders will get: Possible excess benefits Most assets and all contracts1 Newco
Newco will receive $2.7 billion from Altus’ purchase of Executive Life junk bonds. An investment group headed by MAAF, a Paris-based mutual insurance company, will provide another $300,000 in capitalization to Newco, which takes over restructured policies and contracts originally issued by Executive Life. Newco guarantees that policyholders will be paid at least 81 cents on the dollar.
What the policyholders will get: New policies and participation Real estate and other assets
Liquidating Trust2
Receives the real estate and some other assets of Executive Life. Also holds all contingent claims against the company, including a $643-million claim from the Internal Revenue Service, shareholder and policyholder lawsuits. If assets exceed liabilities, proceeds from the sale of these assets will be distributed to Newco policyholders.
What the policyholders will get: Excess benefits The French Connection Two investment concerns based in France are providing the financial muscle for the rehabilitation of Executive Life Insurance Co. MAAF A Paris-based mutual insurance company with $5.31 billion in assets heads an investment group that includessix other European companies. It is purchasing a major equity interest with a $300-million capital infusion in the restructured Executive Life. Altus Fiance A unit of the French financial services conglomerate Credit Lyonnais has agreed to buy Executive Life’s junk bond portfolio for $2.7 billion and will be a lender to the MAAF investor group. 1 Does not include municipal guarantedd investment contracts. 2 includes enhancments from state guarantee funds and litigation. Source: California Department of Insurance and MAAF
