20 Insurers Act to Aid Takeover of Executive Life : Bailout: Transamerica Occidental Life and Prudential Life are among those offering to kick in $1 billion in guarantees.
Trying to resolve several issues that threatened to scuttle the insurance industry’s takeover of Executive Life Insurance Co., 20 of the nation’s largest life insurers stepped forward Monday to provide $1 billion in additional financial guarantees.
The major insurers, which include Los Angeles-based Transamerica Occidental Life and Prudential Life in New York, said they would kick in their own company funds in the event that state insurance guaranty funds were unable or unwilling to pay policyholder claims.
The financial backing of the major insurers is designed to buttress a buyout plan of failed Executive Life submitted by the National Organization of Life and Health Insurance Guaranty Assns. NOLHGA represents state guaranty funds, which protect insurer policies.
The announcement came in response to various legal and operating questions raised by California Insurance Commissioner John Garamendi, who tentatively recommended that NOLHGA should be allowed to take over Executive Life.
“We are confident that the NOLHGA proposal and our enhancements meet the commissioner’s concerns and offer the strongest package of protections for policyholders,” said Eden Sarfaty, president of NOLHGA.
NOLHGA initially offers policyholders more than 89 cents on the dollar for their investments, several cents more than competing offers. But it leaves in the company the vast junk bond investments that caused Executive Life to fail.
In addition, NOLHGA’s individual members pledged to make up to small investors an additional 11 cents. The state funds generally pledge to make good life insurance policies and annuities worth up to $100,000 and $300,000 in death benefits.
The industry offer was chosen from eight groups that participated in a three-month auction for Executive Life, which failed last April under the weight of a souring portfolio of junk bonds and a flood of policyholder surrenders.
However, Garamendi said that NOLHGA had to address nine financial and legal issues before he would give the offer his final stamp of approval. Among the questions Garamendi raised about NOLHGA’s bid was whether state guaranty associations were financially and legally able and willing to pay the $1 billion or more for policyholder claims. Additionally, Garamendi wanted further information on who would be operating the revived firm.
NOLHGA named a board of directors, made up primarily of retired chairman and chief executives of some of the industry’s biggest companies. However, the day-to-day operating team has not yet been named.
The industry group also increased its initial cash contribution to Executive Life from $5 million to $300 million. It also documented that it was able to assess the insurance companies $9.5 billion over the next six years to cover any losses at Executive Life.
However, it is unclear whether NOLHGA’s answers were sufficient for Garamendi.
“We haven’t seen the details of the revised proposal yet,” said Mary Sue Maurer, a spokesman for the California Department of Insurance. “We will take the next few days to evaluate it and make our decision.”
If Garamendi does not accept NOLHGA’s alteration, he is likely to recommend bids from a French investment group led by Altus Finance or an investor team headed by investment banker Hellman & Friedman. Those two groups have until Nov. 11 to improve their offers.
The Altus group has criticized the industry bid as still having too few protections for policyholders burned by the collapsing value of Executive Life’s huge junk-bond holdings. Altus’ offer involves selling the junk bonds and recapitalizing the insurer with the proceeds.
The French investors propose to sell the bonds immediately for $3 billion to an affiliate of the French bank Credit Lyonnais and provide $300 million in new capital.
“Our bid, which is the only one that replaces the riskiest junk bonds with $3.3 billion cash, is also the only bid that truly provides security and liquidity to all policyholders,” it said.
Garamendi’s recommendation will be made to Superior Court Judge Kurt Lewin, who is overseeing Executive Life’s conservatorship and will make the final decision.
