Ruling Deals Setback to Exec Life Policyholders : * Insurance: A judge says investors who bought municipal bonds backed by the insurer should be treated the same as other customers.
In what could prove a costly blow to policyholders of Executive Life Insurance Co., a Los Angeles Superior Court judge ruled that investors who bought $1.85 billion in municipal bonds backed by the insurer should be treated the same as all other company customers.
The decision by Judge Kurt Lewin throws a proposed rehabilitation plan for the failed Los Angeles-based insurer into turmoil and jeopardizes the relatively generous and consistent payouts to the company’s nearly 400,000 policyholders.
Under a plan recommended by state insurance regulators Thursday, most of Executive Life’s policyholders would be guaranteed at least 89 cents on the dollar of their account values. Friday’s ruling drops that to between 72 cents to 75 cents.
“If this decision stands, it is a serious setback for certain Executive Life insurance policyholders who will suffer a loss of about 17 cents on every dollar,” Insurance Commissioner John Garamendi said in a statement.
Regulators said they were contemplating an appeal, but no decisions has yet been made.
On Thursday, Garamendi recommended that Executive Life, which collapsed from junk bond losses and policyholder withdrawals, be acquired for $3.35 billion by a French investor group that includes Altus Finance and Mutuelle Assurances Artisanale de France. The proposal was praised by policyholder groups, who earlier had feared they would lose much of their money.
However, the Altus plan assumed that the holders of so-called muni-GICs--municipal bonds backed by guarantee investment contracts issued by Executive Life--would not be treated the same as the insurer’s policyholders. Instead, they would be considered general creditors of the company and collect only about 30 cents on the dollar.
Lewin ruled, however, that the muni-GIC holders were being unfairly treated. They are, in fact, policyholders and are due all the protections given to holders of life insurance or annuities, he said in a six-page decision released late Friday.
Altus said it intends to continue to pursue its buyout but that the money it provides to the insurer will have to be shared among more claimants.
The decision could increase the cost of Executive Life’s bailout by about $1 billion to the insurance industry, which will be called upon to finance any shortfall through premiums paid to state guaranty funds.
The ruling also may derail an agreement between the National Organization of Life & Health Guaranty Assns., which represents 47 state-operated guaranty associations, and Garamendi that would have allowed most of Executive Life’s policyholders to recoup 100% of their funds.
Under NOLHGA’s “enhancement agreement,” guarantee associations would compensate policyholders for any shortfall in policies worth less than $100,000 in cash value and $300,000 in death benefits regardless of where they lived.
Exactly how much California policyholders could lose if NOLHGA is unable to negotiate a similar deal now that the subsidies will be far greater was unclear Friday.
