Plan for Full Executive Life Payouts Told

Most policyholders of failed Executive Life Insurance Co. would recoup their entire investments under an agreement unveiled Wednesday by California insurance regulators and a group representing state guaranty funds nationwide.

State Insurance Commissioner John Garamendi said the deal with the National Organization of Life and Health Insurance Guaranty Assns. would provide 100% of payments for more than 95% of Executive Life’s policyholders.

The California Life Insurance Guaranty Assn. was the first to endorse the plan negotiated this week by Garamendi and the national association, an umbrella group for state funds based in Herndon, Va. Executive Life has 71,000 policyholders in California and 372,000 nationwide.

“I anticipate the other state guaranty associations will follow (California’s) early lead and ratify this plan to protect their state’s policy and contract holders,” Garamendi said at a news conference.

He said that California regulators will meet with officials of the various state guaranty funds over the next several days in an effort to persuade them to participate.

The deal would mean the state guaranty funds may fill the gap left by the sale of the insurance company for $3 billion to a group of French investors. The sale provides for coverage of 81% of most policyholders’ investments.

Garamendi wants the state guaranty funds to cover the 19% shortfall. The guaranty funds were created to pay the claims of insolvent insurers. They are financed through assessments on healthy insurance companies.

Forty-seven states and Puerto Rico have guaranty funds; the other three states are forming them. If funds in the other states agree to the plan, Garamendi said, the money they would be obligated to provide would make an additional $1 billion available to policyholders over several years.

California’s fund came into existence only last January, and there had been questions about whether it could be tapped to aid Executive Life policyholders. California law prohibits payments to policyholders whose insurers are found to have been insolvent or impaired before January, 1991. Garamendi has lobbied strongly to make his case that the company was not insolvent before that cutoff point.

The commissioner seized Executive Life, which had $10.1 billion in assets, in April after its hefty $6.4-billion junk bond portfolio sank in value and policyholders made a run on the institution, attempting to cash in their policies. The failure is the second largest ever of a life insurance company.

At the time of the seizure, Garamendi told policyholders that their best chance for recovering funds was to have the state serve as conservator of the company.

Earlier this month, a consortium led by MAAF, a Paris-based mutual insurance company with about $5.3 billion in assets, agreed to buy the ailing company. Altus Finance, a $12.4-billion investment and financial services company affiliated with the state-owned French bank Credit Lyonnais, would participate as a lender and a buyer of junk bonds.

The complicated deal promised to pay Executive Life policyholders at least 81 cents on their investment dollar. State regulators said they expected that about 90% of those individuals holding annuities and whole-life contracts would be able to recover the rest of their investments from state guaranty funds.

Garamendi said Wednesday that, if enacted for all eligible policyholders, the new guaranty agreement would ensure that those with accounts of $100,000 or less--about 95% of all policyholders--will receive their original contract values. Holders with contracts worth more than $100,000 may be eligible for additional payments under the French investors’ proposal to restructure the company, Garamendi said.

The agreement does not affect holders of municipal guaranteed investment contracts issued by Executive Life. The so-called muni-GIC holders have been at odds with Garamendi over their treatment under the company’s conservatorship.

Individual policyholders, who have been on tenterhooks for the past four months, were encouraged by the development.

“By California stepping forward first, hopefully that will start a chain reaction,” said Maureen Marr, founder of the 2,000-member Action Network for Victims of Executive Life, based in Los Angeles. “The insurance industry has been deathly silent so far. It’s encouraging that they’re participating before the company was forced to liquidate.”

For a time, she noted, policyholders feared that the insurance industry would balk at aiding victims of the Executive Life debacle. They feared that a long court battle might ensue.

Garamendi said that he and other regulators are in negotiations with “four (other) organizations, some international, and we expect that one or more will provide a bid in excess of” the French offer. The deadline for competing bids is Oct. 11. He declined to name the other potential bidders.

Should a higher bid be accepted that would promise to pay policyholders more than 81%, state guaranty funds might be liable for less than the 19% shortfall.

In Chicago, Robert F. Ewald, executive director of the Illinois Life and Health Insurance Guaranty Assn. and a member of the task force that negotiated the agreement, said he expected that his fund will participate in the settlement “or a substitute should a new bidder emerge.” For the 18,000 Executive Life policyholders in Illinois, he estimated that the state’s share would be $60 million.

John Gates, acting executive director of the California guaranty fund, said he doesn’t “have the slightest idea yet” how much the state’s insurers would be obligated to pay.

To be eligible for the additional payments, policyholders would have to agree to transfer their accounts to the new company and leave them for at least five years.

Garamendi also announced that North American Reinsurance Co., a U.S. arm of the Swiss Re Group, has agreed to guarantee that all death benefits under Executive Life’s term life insurance policies will be maintained. The French investor group had said that the new company would take on term life only if acceptable reinsurance could be obtained.

The agreement affects life insurance coverage worth $8.5 billion for about 15,000 policyholders.