Executive Life Policyholders May Benefit : Insurance industry: Strong bids to acquire failed insurer means customers stand good chance of getting most of their investments. Company itself could become one of the nation’s strongest.
Policyholders of Executive Life Insurance Co. are now expected to recoup the bulk of their investments in the failed insurer because of unexpectedly strong bids to acquire the firm and news Saturday that the insurance industry has secured surprisingly strong financial support for its own offer, analysts said.
Indeed, so strong are the bids and financial might of the bidders that some analysts say that Los Angeles-based Executive Life--seized by state regulators in April in what was then the largest failure of an American insurance company--could emerge as one of the nation’s strongest life insurance companies.
That will be a big relief for Executive Life’s 400,000 policyholders nationwide--many of whom are in California--who had feared they would lose most of their investment in the firm’s insurance policies. It also could be a coup for state Insurance Commissioner John Garamendi, whose political fortunes in part are riding on his handling of the Executive Life failure.
“It is unlikely that every (Executive Life customer) will get back their total investment, but I think it will be close,” said Robert Hunter, president of the National Insurance Consumers Organization. “Given the fact that there are at least five bids that seem strong and real, I would expect there will be an upward adjustment--more money kicked in--before the competition ends.”
Executive Life failed after suffering huge losses on its vast portfolio of risky “junk” bonds and a flood of policy surrenders. Eight offers to acquire the insurer were submitted to state insurance regulators before the Friday afternoon deadline, and the bids were made public Saturday.
A rebounding market for junk bonds, due in part to lower interest rates and improved business prospects for companies issuing the bonds, helped prompt bidders on Friday to raise their offers by more than $500 million.
And industry experts said Saturday that offers will continue to be enriched over the coming week largely because of the emergence of five qualified bidders who have the cash or financial commitments to make the purchase.
However, two plans, submitted by holders of bonds backed by Executive Life-issued guaranteed investment contracts, are incomplete and seem merely to be attempts to hold a place in line for these investors in case they choose to submit a formal offer later. Another offer by creditors of First Executive Corp., Executive Life’s parent company, is a “supplement” to the insurance industry’s plan, better known as the NOLHGA bid.
The other five offers all contemplate significant cash payments and financial guarantees that would allow the company to meet all regulatory standards for safety. Some would boost the firm’s financial strength above industry norms.
Seven of the eight plans were filed Friday within hours of a bidding deadline set by a Los Angeles Superior Court judge overseeing the rehabilitation of Executive Life. The winning bid is expected to be chosen on Oct. 25.
Garamendi stands to gain politically from a favorable resolution of the Executive Life case because its failure was his first major test since coming into office last January.
Garamendi launched the company’s auction two months ago when he revealed a preliminary offer to sell the company to a group led by Altus Finance and Mutuelle Assurances Artisanale de France for about $3 billion. Other potential buyers were invited to outbid the Altus/MAAF group, which at that time promised policyholders 81 cents on the dollar for their accounts. Altus has since upped its bid to 86 cents on the dollar.
Several investment groups subsequently expressed interest in Executive Life and vowed to outbid the original Altus group offer. The offers vary widely in scope, but generally promise initially to provide policyholders with between 81 and 86 cents on their accounts, as well as some profit participation if the buyers are able to earn specified profits on their investment.
The biggest surprise was a formal bid by the National Organization of Life and Health Insurance Guaranty Assns., a group that represents 47 state-run life insurance guaranty funds that reimburse policyholders for certain losses from insurance company failures.
NOLHGA’s bid is seen as crucial because it comes with the weight of the entire U. S. insurance industry behind it. Also, the organization is the only bidder without a profit motive and thus is expected to be more generous to policyholders.
Industry experts had been skeptical of the group’s ability to obtain financial support for what would be an unprecedented move to take over a private insurer. In the past, the group’s role has been to disseminate information and coordinate guaranty fund coverage for policyholders of failed insurers that operated in several states.
However, in details of its bid revealed Saturday, NOLHGA said it received firm financial commitments from 46 of its 47 guaranty organizations. Altogether NOLHGA secured commitments for $947 million.
“This is an impressive sign of industry cohesiveness,” said Robert Arvanitis, senior vice president at Conning & Co., an investment firm in Hartford, Conn.
NOLHGA says it would pay out at least 85 cents on the dollar to policyholders initially and would allow policyholders to participate in profits from the new company.
An offer submitted by Broad Inc., a Los Angeles-based financial services holding company, would initially credit policyholders with 81 cents on the dollar, but would promise to pay policyholders somewhat better interest rates on the cash values of their accounts than originally promised by Altus.
A bid submitted by a group that includes San Francisco investment bankers Hellman & Friedman, Zell-Chilmark Fund of Chicago and Fund American Enterprises of New York, promises an 83% payout plus 50% of the group’s profits up to $200 million.
A similar payout is promised in an offer by Texas investor Richard Rainwater, Hollywood music mogul David Geffen and Bechtel Investments of San Francisco.
However, many of the fine points of these offers vary so widely that industry analysts believe it will be difficult for regulators to assess fully the viability of each plan. Additionally, each player has the option of upping the ante between now and next Friday.
“It’s a nightmare,” said Joyce Culbert, an insurance analyst with Firemark Group in New Jersey. “I don’t know where you start.”
Executive Life’s failure has been surpassed as the largest such collapse in U. S. history by the failure this summer of New Jersey-based Mutual Benefit Life.
Executive Life Bids Details of five of the eight buyout bids for failed Executive Life Insurance Co. have been disclosed. Details were not provided for a bid by the creditors of Executive Life’s parent company and two bids by holders of bonds backed by Executive Life-issued guaranteed investment contracts. The deadline for offers was Friday. Initial payout to policyholders Hellman & Friedman: 83% MAAF/Altus: 86% Rainwater/Geffen/Bechtel: 83% NOLGHA: 85% Broad Inc.: 81% Policyholder profit participation Hellman & Friedman: 50% of first $200 million or 15% of total profits, whichever is greater MAAF/Altus: 6%-25% after Altus and MAAF obtain certain pretax profit levels Rainwater/Geffen/Bechtel: 10% of profits over $3.1 billion value for bond portfolio NOLGHA: 25% of profits on bonds over a 9% return Broad Inc.: 25%-30% after Broad obtains certain profit levels Interest rate* Hellman & Friedman: 5-year Treasury note rate plus 0.5 pct. pt. MAAF/Altus: 5-year Treasury note rate minus 1 pct. pt. Rainwater/Geffen/Bechtel: 5-year Treasury note rate minus 0.80 pct. pt. NOLGHA: 5-year Treasury note rate minus 0.75 pct. pt. Broad Inc.: 5-year Treasury note rate minus 0.75 pct. pt. Rate charged on policy loans Hellman & Friedman: 2.5 pct. pts. higher than rate paid to policyholders MAAF/Altus: 2.5 pct. pts. higher than rate paid to policyholders Rainwater/Geffen/Bechtel: 2.5 pct. pts. higher than rate paid to policyholders NOLGHA: 4 pct. pts. higher than rate paid to policyholders Broad Inc.: 2.5 pct. pts higher than rate paid to policyholders Junk bonds Hellman & Friedman: Retained by company MAAF/Altus: Most sold for $2.85 billion Rainwater/Geffen/Bechtel: Retained by company NOLGHA: Retained by company Broad Inc.: Most sold for $2.7 billion New capital Hellman & Friedman: $300 million MAAF/Altus: $300 million Rainwater/Geffen/Bechtel: $300 million NOLGHA: $300 million Broad Inc.: $300 million * Paid on cash values for certain policies Source: Altus Finance, prospective bidders
