Decision on Executive Life Bids Nears
Like thousands of other Executive Life Insurance Co. annuity and policyholders, Vince and Sue Watson say they are “holding (their) breaths” until Insurance Commissioner John Garamendi recommends which of eight investor groups should be allowed to acquire the failed insurer.
Their 11-year-old daughter’s future depends on the decision, which is expected today. Her parents hold an Executive Life annuity, which they hoped would provide their daughter--who suffers from severe brain damage--a secure future.
The Watsons are rooting for a French investor group, one of the front-runners in the bidding for Executive Life, because they believe that it would give them the greatest security by purging the company of the junk bond portfolio that got it into trouble in the first place.
Garamendi must choose between risk and return for Executive Life policyholders. Some bids proposed to buy the company’s assets relatively cheaply while promising greater security; others offered more money in exchange for a somewhat higher risk.
The concept may be simple but the details are deadly complicated, and each bidder has been pushing its own plan as both fair and secure. The most compelling question has centered on “bonds-in or bonds-out” proposals--whether to strip off Executive Life’s troublesome but valuable junk bond portfolio immediately or sell it off gradually.
The leading bonds-out proposals have been made by the French group--led by Altus Finance and Mutuelle Assurance Artisanale de France--and by Broad Inc., a large insurance holding company proposing to dump the junk bonds. The leading bonds-in proposals came from a group headed by investment bank Hellman & Friedman and by National Organization of Life & Health Guaranty Funds, which represents state guaranty associations. Both of those propose selling off the bonds gradually over five years.
The Altus group proposes buying most of Executive Life’s junk bonds for $3 billion. But critics say the bid is too low and note that the junk bond market has soared more than 30% this year.
Hellman & Friedman, an investment bank leading a rival bonds-in bid, says the bonds are worth at least $4 billion. They claim that the Altus plan would amount to a fire sale that would give the French group windfall profits at the expense of Executive Life policyholders--and millions of other purchasers of insurance who contribute to state guaranty funds.
But many policyholders are not persuaded by the argument. They saw Executive Life suffer huge losses in 1990 because of troubled junk-bond investments, and they are not persuaded that the same problems would not occur in the future if the junk bonds are retained.
The Action Network for Victims of Executive Life, which represents 2,000 policyholders, issued a statement Wednesday backing the bonds-out bids. The group said such a buyer would create a “well-capitalized insurance company which would secure the policies that they were depending on in their retirement years.”
Vince and Sue Watson also don’t trust junk bonds. Despite the junk bond markets’ recent strong performance, they want them out of Executive Life’s portfolio. When they were granted the Executive Life annuity in a malpractice settlement over the medical treatment that left Katie severely handicapped, they were told that the company was “rated A-plus” and had “virtually no risk.” After those descriptions proved completely misleading, “we’re not very trusting, at this point,” said Sue Watson. Since Executive Life was seized in April, the Watsons have been collecting Katie’s annuity payments through a hardship provision in the state’s seizure, but they are unsure how much of her monthly $3,500 expenses will be covered after Executive Life is sold. They’ve had to put their house on the market and prepare to move all seven of their children in order to afford care for Katie.
The Watsons, like many holders desperately dependent on Executive Life annuities and life insurance policies, don’t want any more uncertainity in their lives, and they want the company to be revived without its high-risk, high-yield junk bond portfolio.
“I don’t know if we could stand to live with that kind of risk again. We’ve been burned, and to go with anything with junk bonds, we won’t sleep well at night,” Vince Watson said. The political pressure on Garamendi is intense. On the one hand, many policyholders, such as the Watsons, want security above all and are demanding that the junk bonds be dumped.
On the other hand, critics of the Altus plan say that it doesn’t allow policyholders to share in profits from the bond portfolio. Hellman & Friedman argue that their own plan, by selling the junk bonds gradually, will allow policyholders to share in profits, while a $1-billion capital cushion they have pledged will protect policyholders from loss.
“We would have to lose more than a billion dollars on our investment before policyholders lose a dollar,” says Warren Hellman, a leader of the group, which also includes Fund American Enterprises, the Zell/Chilmark Funds and General Motors pension funds.
Insurance industry sources and Executive Life policyholders were focusing attention on bids by the Altus group and Hellman & Friedman group. But they said Broad Inc., a $13-billion life insurance and financial services group, was also a serious contender. That group has the advantage of boasting the most experience in actually running insurance companies. Broad says its plan would rid the company more completely of junk bonds than the Altus bid, and it claims that its return to policyholders is $300 million higher than competing proposals.
The insurance industry bid made through NOLHGA is also given a shot, but is widely seen as an attempt to raise the price of Executive Life in order to reduce the burden on guaranty funds in 47 states. NOLHGA would be involved in any bailout because its guaranty funds would bridge the gap between the promised payouts of any of the bids, which range from 81 to 90 cents per dollar of policy, and full payment of policies.
Other bids have been submitted by an investor group--including music mogul David Geffen, Texas investor Richard Rainwater and money manager Bechtel Investments--and by the creditor’s committee of First Executive Corp., Executive Life’s parent. Two other bids have been submitted by holders of municipal bonds backed by Executive Life-backed guaranteed investment contracts.
Some pressure arose Wednesday for a delay in making a decision. State Sen. Art Torres called on Garamendi to delay his decision until more public hearings could be held, saying policyholders have not been given ample opportunity to voice their concerns.
Garamendi’s office said it would not delay the decision. After Garamendi makes his recommendations, Los Angeles Superior Court Judge Kurt Lewin is scheduled to begin hearings Friday on the bailout of Executive Life. Lewin will make the final decision.
