Looking to France for Salvation : Garamendi selects European consortium to put Executive Life back together

After months of nerve-wracking uncertainty, the rescue of failed Executive Life Insurance Co. took a giant step forward. You could almost hear a collective sigh of relief from hundreds of thousands of policyholders. California Insurance Commissioner John Garamendi has recommended that a French consortium be allowed to buy the Los Angeles insurer for $3.55 billion.

The bid, which must be approved by a court, marks the end of Garamendi’s skillful engineering of an auction process begun last August to secure the most cash and security for policyholders of Executive Life. The company was seized by state regulators last April when policyholders rushed to cash out policies and annuities because of huge junk bond losses. Garamendi sought a private solution to one of the largest failures of an American insurance company.

The commissioner appears to have made a prudent decision, one that will create a viable “new” insurance company. Executive Life’s troublesome high-risk junk bonds will be severed from the insurance firm. The French companies of Altus Finance, a unit of Credit Lyonnais, and Mutuelle Assurances Artisanale de France, a large insurer known as MAAF, were the first to bid for Executive Life. They enhanced their original offer by $960 million in cash and improved benefits, beating out seven others.

Altus would pay $3.25 billion for the junk-bond portfolio. That money goes to the surviving insurance firm, to be known as Aurora National Life Assurance. That firm would be owned by MAAF, which would pump into it an additional $300 million. A court ruling on Friday, however, expanded the pool of policyholders to include holders of $1.85 billion in municipal bonds backed by Executive Life.

That would reduce the payouts to most policyholders to between 72 cents and 75 cents on the dollar, compared to the original 89 cents. It’s less clear now whether industry-financed guarantee funds in most states would make up the difference to provide 100% on policies of up to $100,000. Policies over that amount would receive only 72 cents on the dollar.

Still, Garamendi has observed a careful and professional process in selecting the French bid. His recommendation now goes to Superior Court Judge Kurt Lewin, with hearings to begin today. The state court, which is overseeing the conservatorship of Executive Life, will probably want to follow Garamendi’s decision.