State OKs Rescue of Executive Life : Insurers: A French group offers to buy the industry’s largest junk bond casualty. The $3-billion deal would pay policyholders 81 cents on the dollar.
State insurance regulators announced an agreement Wednesday to rescue Executive Life Insurance Co. of California--the industry’s biggest junk bond casualty--by selling it to a French consortium in a complicated deal worth $3 billion.
The proposed transaction promises to pay most of Executive Life’s policyholders at least 81 cents on their investment dollar. Additionally, regulators said about 90% of the individuals holding annuities and whole-life contracts would be able to recover the rest of their investment from guarantee funds operated in 48 states.
However, to get the full amount, policyholders must agree to remain with the revived firm for at least five years, during which they would have limited access to their funds. Many would also see the interest rates on their accounts pared substantially, regulators said.
The deal comes after several months of intense negotiations following the state’s seizure of Executive Life in April as its junk bond portfolio lost value and policyholders made a run on the institution by trying to cash in their policies.
The state takeover was a risky move by Insurance Commissioner John Garamendi, the aggressive, politically ambitious regulator who told policyholders that their best chance for recovering their money was through a state conservatorship. The company has about 208,000 life insurance policyholders and 164,000 annuity holders in 50 states.
The restructured firm, which would take over all of Executive’s life insurance policies, would be capitalized with $300 million from a French-led investor group and $2.7 billion raised by selling the bulk of Executive Life’s junk bond portfolio to another French firm.
The buying group is led by MAAF, a Paris-based mutual insurance company with about $5.3 billion in assets. Altus Finance, a $12.4-billion investment and financial services holding company affiliated with the state-owned French bank Credit Lyonnais, will also participate as a lender and buyer of junk bonds.
Investors holding about $3 billion in Executive Life’s municipal guaranteed investment contracts (Muni-GICs)--instruments bought by states and cities to finance bond issues--are not covered under the agreement, Garamendi said. It is unclear whether these investors will get anything. Garamendi said that talks between the department and the Muni-GIC holders broke down and that the issue will be decided in court.
A spokesman for the group representing holders of $1.8 billion in Muni-GICs criticized the deal. “In absence of being able to get a fair ruling from the conservator, we are prepared to litigate,” said Robert Knight, chairman of the Taxable Municipal Bondholder Protective Committee.
But other policyholders and insurance industry representatives praised the agreement.
“Commissioner Garamendi’s announcement should allow anxious Executive Life policyholders and contract holders to sleep more soundly tonight,” said Maureen Marr, founder of the Action Network for Victims of Executive Life. “We view this bid as a complex but encouraging proposal, which is a major step toward making Executive Life investors whole.”
The American Council of Life Insurance said the deal appeared to “provide much improved security for policyholders and make it possible to reorganize the company in a reasonably short period.”
Garamendi cautioned that the deal could be derailed by several factors, including unpleasant surprises in Executive Life’s balance sheet, a severe economic downturn and settlement of a $643-million tax claim with the Internal Revenue Service.
“The investment group and Altus are content with the prospect of finalizing this agreement in the current economic climate,” he said. “However, should there be a drastic decline in the stock and bond markets, the agreement would be seriously jeopardized.”
Additionally, other buyers will have the opportunity to bid on Executive Life for the next three months, when the the deal is expected to close. Garamendi said at least one other bidder may try to top the French offer, but he declined to identify the investor. Other industry officials said it was unlikely that today’s deal would be surpassed by another.
The winning bid must be approved by Superior Court Judge Kurt Lewin, who is overseeing the state’s conservation of the company. A ruling is not expected before late October.
Representatives of the buying consortium said they were confident the deal would go through as planned. “We believe we structured the best possible deal for policyholders,” said John F. Hartigan, a partner at the Los Angeles law firm of Morgan, Lewis & Bockius, who represented the buyers.
Executive Life’s failure was the first in a series of collapses at large insurance companies that has undermined the faith that Americans have placed in them as risk-free investment havens. It was the largest unit of First Executive Corp. of Los Angeles. First Executive’s other big subsidiary, Executive Life Insurance Co. of New York, also has been seized. It is unaffected by the tentative deal announced Wednesday.
The details of the rehabilitation are complex, but it essentially takes the assets of Executive Life and places them in three companies--tentatively called Investco, Newco and a liquidating trust.
Investco will receive Executive Life’s junk bonds, which the insurer values at about $5 billion, but which have market values about half of that. The company will be primarily owned and operated by Altus Finance, which will pay about $2.7 billion for the bonds. However, if Altus’ profits exceed certain levels, policyholders who agree to the restructuring will receive a share of the excess amounts.
The $2.7-billion payment will go to Newco, which will be the surviving insurance company. Newco, which will also get Executive Life’s investment grade bonds, other securities and assets, will be operated by the investment group headed by MAAF. That consortium will contribute an additional $300 million to Newco to back the company’s policies.
Newco will operate like any other insurer. However, the Executive Life policies transferred to it will be worth about 81% of what they were previously worth. Death benefits remain at 100%, however. Additionally, policyholders would face surrender fees if they wanted to cash out in the first five years of the deal.
Premium and interest rates on policies will be set by Newco. Interest rates paid to policyholders are likely to be pared, said one source close to the deal, because Newco will only invest in high-grade bonds, which pay less than Executive Life’s junk bond portfolio.
Newco would be barred from investing more than 10% of its assets in junk bonds during the term of the five-year deal. If Newco earns more than certain amounts, policyholders will again participate in a share of the wealth.
Meanwhile, the rest of Executive Life’s assets--primarily real estate--will be placed in a liquidating trust with a large number of existing and contingent liabilities, including the claims of Muni-GIC holders, the IRS claim and dozens of shareholder and policyholder lawsuits filed against Executive, its parent company and its former officers and directors. If assets in the liquidating trust exceed liabilities, policyholders will again reap the rewards.
Policyholders who do not want to switch over to Newco would be allowed to opt out, according to regulators. However, if they do, they would be limited to receiving no more than 75% of the payments given to remaining Newco customers. If the Newco policyholders receive 81 cents on the dollar, as currently anticipated, those who opt out would get no more than 60 cents, according to regulators.
What guaranty fund coverage policyholders would receive was unclear Wednesday. Garamendi said he was working with state guaranty fund managers in an effort to coordinate coverage and ensure that policyholders get all that they are due. However, the guaranty funds, which operate in every territory except New Jersey, Louisiana and the District of Columbia, have differing rules and limitations.
Generally speaking, though, they cover policy values up to $100,000 and death benefits to $300,000. California’s guaranty fund covers up to $250,000 on death benefits.
