Rival Rescue Bid Issued for Executive Life

The insurance industry Thursday proposed a bold rescue plan for failed Executive Life Insurance Co. of California, claiming it would provide policyholders significantly more than a previous bid by a French consortium.

The National Organization of Life and Health Insurance Guaranty Assns., which represents 48 state guaranty funds, said its plan would pay 95% of the company’s 372,000 policyholders all death benefits and annuity payments and 100% of their account values.

“We think the (French) offer was significantly too low, and we believe we can do much better,” said Eden Sarfaty, president of NOLHGA.

If accepted, the new bid would amount to an unprecedented industry bailout. It may also help restore public confidence, which has been shaken by the failure of Executive Life and several other large life insurers this year.

Although details of the offer were sketchy, the organization said that it would be financed by $1 billion in premiums assessed to companies that are members of state guarantee funds. These costs ultimately could be passed on to policyholders and shareholders of life insurers.

The plan calls for a new company to be formed to assume Executive Life’s policies and its junk bond portfolio.

Sarfaty said the plan “offers ironclad security,” and that “all Executive Life policyholders across the country would be guaranteed benefits significantly better” than promised in August by Mutuelle Assurance Artisanale de France and Altus Finance.

The French plan also paid most policyholders’ death benefits and annuity payments, but promised only 81% of account value. Last month, NOLHGA had agreed to enlist its members to make up the 19% shortfall to policyholders under the French plan.

The industry bid took regulators and other potential buyers by surprise. Normally, state-operated guarantee funds help cover policyholder losses when an insurer fails and NOLHGA helps coordinate efforts between guarantee funds when more than one state is involved.

The guaranty funds from key states with large numbers of Executive Life policyholders, including California, Illinois, Pennsylvania and Texas, were the major players in developing the plan.

Insurance officials said they believe it would cost their industry less to buy and run Executive Life and rescue policyholders than to join a plan organized by a French consortium led by MAAF, the Paris-based mutual insurance firm.

“We see this as a positive step,” said Gene Grabowski, a spokesman for the American Council of Life Insurance. “Competitive bids can only enhance the value to policyholders and companies that are involved. The more bids the better.”

Both the French plan and the industry proposal would offer 100% of recovery to individuals with life insurance policies and annuities valued at $100,000 or less.

There are substantial penalties under the MAAF-Altus plan for early withdrawal of some of the cash value of an insurance policy or an annuity contract. Sarfaty said the penalties would be cut in half under the industry plan.

The annual fees charged to policyholders, $50 to $75 under the French bid, would be 50% less under the industry plan.

Sarfaty said the French group is valuing the junk bond portfolio of Executive Life at $2.7 billion, and would need to earn 20% before it could provide any additional money to policyholders.

The industry believes the portfolio is worth $3 billion, and would need to earn just 9% a year to offer additional recovery funds, he said. There could be enough money to provide significant help to policyholders with accounts above $100,000.

The government agencies that bought so-called guaranteed investment contracts also might share in the surplus. These contracts, known as municipal GICs, do not receive the protection of state insurance protection funds.

“This is a better arrangement for all concerned,” Sarfaty said.

Altus and MAAF disagreed. Under their proposal, Executive Life would be capitalized by selling its junk bond portfolio to Altus for $2.7 billion and taking in $300 million from MAAF, which would operate the new company.

“Any agreement that allows the junk bond portfolio to remain the dominant component of the insurance company’s asset base postpones dealing with the core problem and sets the stage for a repeat of the nightmare that has caused restless nights for policyholders,” the French bidders said in a joint statement.

The industry’s bid is the first of several offers that insurance regulators expect to receive before a court-imposed deadline of Oct. 11. State Insurance Commissioner John Garamendi said that regulators have been talking to several potential bidders and they believe two or three more will submit offers.

“Today it is very clear that the process we set up for bidding on Executive Life is working,’ Garamendi said. “NOLHGA said it wants to make a deal, and if it is better than the Altus proposal, great. But we also have been in touch with other serious bidders.”

Garamendi refused to name the other potential buyers.

But Fund American Cos., a Norwich, Conn.-based holding company that once owned Fireman’s Fund Insurance Co. of Novato, confirmed Thursday that it had planned to submit a bid soon. But the company said it is now reevaluating its position.

Some holders of Executive Life’s guaranteed investment contracts also have said they are interested in submitting a plan to purchase the company. They would trade in their contracts for equity in the company, but would provide no additional cash.

Garamendi said the key element of any deal was how policyholders would be treated. He said he could not evaluate the industry offer because he has not yet seen details of how each group of policyholders would fare under the plan.

Robert Evans, who represents a group of companies holding $800 million worth of Executive Life investment contracts in their employee pension funds, said the new offer “seems to be a creative approach to what is a huge problem.”

“The outline is intriguing--it could lead to a significantly higher recovery,” said Evans, who is assistant treasurer of Xerox.

Reaction was hopeful but uncertain among policyholders.

“We’re looking forward to seeing the plan,” said Maureen Marr, coordinator for the 2,000-member Action Network for Victims of Executive Life. “We want to see how this compares with the French bid. We want to make sure as many people as possible get as much of their money as possible.”

Rosenblatt reported from Washington and Kristof from Los Angeles.