Executive Life Deal Irks Some Bondholders : Insurance: They are threatening to derail a proposed sale if they do not get the same treatment as policyholders.
A group of municipal bondholders said Thursday that they will try to derail the proposed acquisition of the failed Executive Life Insurance Co. by a French consortium unless their claims for $1.8 billion are honored.
The investors bought bonds issued by dozens of public agencies for projects such as housing projects or farm loans. The municipal agencies in turn invested the money in guaranteed investment contracts, or muni-GICs, issued by Executive Life.
The bondholders were to be repaid by the interest from the muni-GICs. But the payment on the muni-GICs have been sharply cut by the failure of Executive Life in April. And under an agreement announced Wednesday by state regulators to sell the insurer to French investors, no provision was made for paying off the Muni-GICs, although policyholders and annuitants would receive 81% of their investments.
Robert Knight, chairman of the Taxable Municipal Bondholder Protective Committee, accused California Insurance Commissioner John Garamendi of politics in favoring life insurance policyholders over investors in the muni-GICs. “It sounds better to the public to say you’re taking care of the firemen and teachers rather than investors. He’s playing to the popular press,” he said
Knight argued that the investors in municipal bonds backed by the muni-GICs were “also firemen and schoolteachers.” He said that many small banks in Texas, Kansas, and other states had invested in bonds issued by municipal agricultural and housing loan institutions. Those institutions could not redeem those bonds after their investment in Executive Life’s muni-GICs went sour.
A spokesman for Garamendi said the holders of muni-GICs “do not have the same legal standing as other beneficiaries.” Earlier, Garamendi argued that muni-GICs are not “generally recognized as conventional insurance products.”
In testimony before the U.S. Congress in May, Garamendi testified that investors in the GICs consisted largely of “state and local government arbitrageurs and . . . qualified pension plans. For the most part, these are sophisticated investor organizations, for whom, quite frankly, I have less sympathy than for thousands of individuals.”
The GICs are instruments that promise to pay a set interest rate on an investment over a period of time. Executive Life sold them to dozens of municipalities and public agencies by offering high interest rates provided by its junk bond investments.
The debate over the treatment of muni-GIC holders has been raging since the state seized Executive Life. Knight’s group has objected to the treatment of muni-GICs under the state conservationship to Superior Court Judge Kurt Lewin.
The commissioner had earlier offered holders of muni-GICs 21 cents for each dollar of their investment. But after negotiations leading to the current bailout plan fell apart, no provision at all was made for the holders of the instruments.
Under the rescue plan announced Wednesday, Executive Life would be recapitalized with $3 billion provided funds provided by a consortium headed by MAAF, a Paris-based insurance company, and the sale of junk bonds to Altus Finance, a unit of Credit Lyonnais.
A number of local government agencies in Nebraska, Texas, Colorado and other states bought muni-GICs issued by Executive Life in 1986. The insurer’s failure has caused most of the agencies to default on their bonds.
The problem is even threatening some financial institutions that invested heavily in the municipal bonds. The bondholders argue that 15 small banks could fail and 15 more could face serious financial trouble if the muni-GICs payments are not honored.
Executive Life Muni-GICs The proposed sale of Executive Life Insurance Co. to French investors promises to pay policyholders 81% of their investment. But public-bond issuing agencies that bought guaranteed investment contracts (Muni-GICs) from Executive Life are not covered by the agreement. Here are the largest holders of the Muni-GICs:
Amount Bond issuer (in millions) Purpose Health, Educational and $400 Housing for poor, elderly Housing Facility Board, for handicapped Memphis, Tenn. Southeast Texas Housing 300 Multifamily housing Finance Corp. Adams County, Colo. 300 Local economic development El Paso Housing 200 Multifamily housing Finance Corp. Nebraska Investment 200 Farm loans Finance Authority Louisiana Agricultural 150 Farm loans Finance Authority Louisiana Housing 150 Low and moderate income housing Finance Authority
Source: Taxable Municipal Bondholder Protective Committee
