Executive Life Buyout Rejected by Garamendi
Insurance Commissioner John Garamendi on Wednesday rejected the insurance industry’s buyout plan for Executive Life Insurance Co., contending that the group’s ability to pay policyholder claims was jeopardized by unresolved financial and legal questions.
The decision is the latest twist in a complicated 8-month-old process to resuscitate Executive Life, the Los Angeles-based insurer seized by state regulators in April under the weight of losses from junk bond investments and consumer demands to cash in their policies.
The action means that the bidding process for Executive Life has been reopened for two groups: a French partnership headed by Altus Finance, a unit of Credit Lyonnaise, and an investment group headed by Hellman & Friedman, the San Francisco investment banker.
Those proposals seemed to be long shots just two weeks ago when Garamendi tentatively approved a bid from the National Organization of Life and Health Insurance Guaranty Assns., which represents 47 state-operated life insurance guarantee funds.
But his approval was contingent on the group’s meeting nine conditions. Garamendi said the industry offer fell short by not clearing up questions about its ability to meet financial commitments, availability of cash and ability to complete the buyout quickly.
“While I appreciate the life insurance industry’s unprecedented cooperative campaign to salvage Executive Life, their proposal falls short of guaranteeing policyholders the rock-solid protection they deserve,” he said at a press conference.
Garamendi said there were uncertainties in the NOLHGA proposal because an insurance trade group has never before attempted the large-scale rehabilitation of a life insurer. “NOLHGA was unable to eliminate the many risks and uncertainties inherent in this experimental venture,” he said.
NOLHGA, one of eight groups that originally bid for Executive’s assets, vowed to continue to fight for the company.
“We are disappointed,” said Arthur O. Dummer, co-chairman of the NOLHGA/Executive Life task force. “But we are also determined that we are going to proceed with the plan. We hope that the court will agree with us that our plan is both the best and the safest.”
The final decision about who wins Executive Life is in the hands of Los Angeles Superior Court Judge Kurt Lewin, who is presiding over the company’s regulatory takeover. However, Lewin is expected to be heavily influenced by Garamendi’s recommendations.
The rejection of the NOLGHA bid is a blow to the industry, which hoped to show that it was able to bail out one of its own. The life insurance industry has been rocked by several large failures this year, prompting calls in some quarters for federal regulation.
The original bid by NOLHGA offered to pay policyholders 89 cents on the dollar--about 3 cents more than the second-highest bidder, according to state insurance regulators. But there also were questions about the group’s legal authority to run a life insurance company.
In an effort to buttress its earlier bid, NOLHGA on Monday responded to Garamendi’s concerns by saying it would provide $300 million in upfront funds, $1 billion in financial guarantees from state guaranty associations and a $1-billion credit line provided by 20 of the nation’s largest life insurers and Morgan Guaranty Trust Co.
Additionally, the various state guaranty associations pledged to set aside 15% of their future assessments to cover Executive Life’s claims. That added another $1.25 billion to their financial commitment, the group said. The industry group also marshaled a number of legal opinions that supported NOLHGA’s position that it could legally take control of a private life insurer and force its member companies to pay the tab.
Garamendi said safety issues transcended upfront payments to policyholders. A big concern was Executive Life’s $5.4-billion portfolio of junk bonds, which would have been retained under the NOLHGA proposal. Garamendi thought the offer did not adequately provide for potential downswings in the junk-bond market.
The $1-billion credit line provided by the insurance industry’s biggest players was also insufficient because it allowed these companies to be repaid ahead of uncovered policyholders.
With the rejection, the spotlight now turns to Altus Finance and Hellman & Friedman. Altus has offered to pay about 86 cents on the dollar, while Hellman would pay about 85 cents. All of the groups also promise some profit sharing if Executive Life earns more than certain set amounts.
NOLHGA will remain involved in any takeover in its traditional role of helping policyholders recoup their losses.
Life insurance guarantee funds typically reimburse policyholders for losses on policies worth up to $100,000 in cash value and $300,000 in death benefits. In this case, NOLHGA said it would kick in cash to make these small investors--who account for 90% of Executive Life’s business--whole. In other words, someone who held a $100,000 policy might get $86,000 from the buying group. NOLHGA would then pay this policyholder the remaining $14,000 so he could come out whole.
However, those who invested in municipal bonds backed by Executive Life contracts and those who hold unusually large policies stand to lose substantial sums.
Representatives of Altus and Hellman & Friedman praised Garamendi for identifying flaws in the NOLHGA bid.
Both Altus and Hellman said they believe their bids are superior to all others and both expressed confidence that they would win in the end.
Altus’ offer proposes to sell the junk bonds to an investment group for about $3 billion and capitalize the life insurance company with an additional $300 million. Mutelle Assurance Artisanale de France, which heads a consortium of French life insurers, would operate the new company.
Hellman & Friedman, which is teamed with Zell Chilmark Fund of Chicago and Fund American Cos., would leave the junk bonds in the company, but back them with a $750-million guarantee. Hellman & Friedman would also pump $300 million into the life insurer’s operations.
The bidders have until Monday to enhance their bids. Garamendi will announce his final recommendation on Nov. 14. Court hearings on the bids are slated to begin Nov. 18.