Insurer Group Raises Ante on Executive Life : Insurance: The enriched offer fuels speculation among industry analysts that the bidding will rise even higher as Friday’s deadline approaches.
The ante for Executive Life Insurance Co., the giant Los Angeles-based company that failed last April, jumped again Tuesday as the National Organization of Life and Health Insurance Guaranty Assns. unveiled a new, higher bid.
NOLHGA, which represents 47 state-run life insurance guaranty funds, says it will initially credit policyholders with 89 cents per dollar invested. That would be 4 cents more than an offer it submitted last week and 3 cents more than initial payouts offered by other bidders.
The industry group also modified other terms of its bid to make interest rates and charges more competitive with other buyout offers.
The enriched bid, good news for Executive Life’s 370,000 policyholders, fueled speculation that the bidding will rise even higher by the end-of-the-week deadline for revised offers from the eight bidders for the insurer.
“We expect that there may be other enhancements coming before the Friday deadline,” said Mary Sue Maurer, spokeswoman for the California Department of Insurance.
Added John Kleiman, an analyst with the investment firm of Conning & Co. in Hartford, Conn.: “The other bidders have got their pencils out now, and they’re trying to determine how high they can go and still make a return that compensates them for the risks they are taking.”
Eight investment groups submitted preliminary bids last week that promised policyholders between 81 cents and 86 cents on the dollar of account value. Most proposals also promise policyholders a share of any profits made on the sale of Executive Life’s bond portfolio, and some offer a share of the profits earned on the company’s continuing insurance operations.
A group led by Altus Finance and Mutuelle Assurances Artisanale de France, the first potential buyer to come forth, submitted the first revised offer last Friday, increasing its proposed payout to policyholders to 86 cents from 81 cents.
Insurance Commissioner John Garamendi is expected to recommend which bid should be accepted by Oct. 25. Los Angeles Superior Court Judge Kurt Lewin, who is overseeing the conservatorship of Executive Life, will make a final decision after court hearings.
“We firmly believe our proposal offers the greatest security and benefit to Executive Life policyholders,” NOLHGA President Eden Sarfaty said. “Our benefit floor is now the highest and strongest of any proposal. In addition, we offer policyholders clearly the best opportunity to share in any profits realized from the Executive Life portfolio.”
In addition to paying policyholders 89 cents on the dollar, the industry group proposes giving them a 25% share of profits earned on the company’s investment portfolio. The group has no profit motive so it should provide policyholders with the greatest returns, Sarfaty added.
However, Sarfaty said, the group still is committed to participating in other buyout offers for Executive Life by coordinating guarantee fund coverage offered to policyholders in the various states. Generally speaking, guaranty funds cover losses on cash values up to $100,000 and on death benefits up to $300,000.
In the case of Executive Life, about 95% of the company’s policies are below those thresholds. Between the buyout price and NOLHGA contributions, policyholders will be covered 100%. However, those holding municipal bonds backed by Executive Life-issued guaranteed investment contracts and policyholders with large accounts will face steep losses.
The company has about $1.85 billion in so-called Muni-GICs outstanding, and there are another $2 billion worth of uncovered claims, according to Arthur Dummer, co-chairman of NOLHGA’s Executive Life Task Force.
Most other potential buyers would not speculate about whether they planned to meet or exceed NOLHGA’s offer, which appears now to be the high bid.
However, a spokesman for the Altus group says state regulators must consider not only payout to policyholders but also longer-term security to customers in deciding which rescue play to accept.
Altus plans to take Executive Life’s huge portfolio of risky junk bonds out of the company, which would provide additional security to policyholders, an Altus spokesman said. Most of the other plans, including the NOLHGA bid, propose to leave the junk portfolio in place, selling it off over time.
The bidding process was put in place in August, some four months after Executive Life failed under the weight of a souring portfolio of high-risk junk bonds and a flood of policy surrenders.
The company’s sale is seen as pivotal, not just to its policyholders, but also to the industry, which has suffered a consumer confidence crisis since the company fell. It is also important to Garamendi, whose political future is riding in part on a favorable resolution of California’s first major insurance crisis since he took office in January.
Sweetened Bids Here are details of the two bids that were recently hiked in the continuing auction for Executive Life Insurance Co. Altus’ previous offer promised only 81 cents per dollar to policyholders, while NOLHGA previously promised 85 cents on the dollar. MAAF/Altus Initial payout to policyholders: 86% NOLHGA Initial payout to policyholders: 89% MAAF/Altus Policyholder profit participation: 6%-25% after Altus and MAAF obtain certain pretax profit levels NOLHGA Policyholder profit participation 25% of profits on bonds over a 9.1% return MAAF/Altus Interest rate*: 5-year Treasury note rate minus 0.75 pct. point NOLHGA Interest rate*: 5-year Treasury note rate minus 0.75 pct. point MAAF/Altus Rate charged on policy loans: 2.5 pct. points higher than rate paid to policyholders NOLHGA Rate charged on policy loans: 2.5 pct. points higher than rate paid to policyholders MAAF/Altus Junk bonds: Most sold for $2.85 billion NOLHGA Junk bonds: Retained by company MAAF/Altus New capital: $300 million NOLHGA New capital: $300 million * Paid on cash values for existing policies Source: Altus Finance, prospective bidders
