Hearings on Executive Life Bidding Begin

Hearings to determine who should be allowed to buy failed Executive Life Insurance Co. began Monday in Los Angeles Superior Court amid uncertainty about the insurer’s rehabilitation caused by another court ruling.

Judge Kurt Lewin ruled Friday that investors who bought $1.85 billion in municipal bonds backed by guarantee insurance contracts issued by Executive Life should be afforded the same protections as policyholders.

The decision has thrown potential policyholder payouts into question and has revived interest in a previously rejected buyout plan proposed by the National Organization of Health and Life Guaranty Assns.

It also has set back an agreement between regulators and NOHLGA, which represents state-operated guaranty associations, to reimburse about 97% of Executive Life’s customers for losses they would have suffered in the insurer’s failure.

Although regulators are expected to appeal Lewin’s decision, it will likely mean the extension of the rehabilitation process into next year. California Insurance Commissioner John Garamendi had hoped to complete the sale by year-end.

In testimony Monday, Michael Zimmerman, a Salomon Bros. junk bond expert hired by Altus Finance, said he believed that the year-end deadline was “aggressive, but not impossible.”

Executive Life, which once boasted about $10 billion in assets and operated in nearly every state, failed last April under the weight of a souring portfolio of junk bonds and a flood of policy surrenders.

Garamendi recommended that Altus and its partner, Mutuelle Assurances Artisanale de France, acquire Executive Life for $3.55 billion. Seven other proposals were considered by state regulators.

The testimony Monday centered on the safety and security of the Altus deal, which would remove Executive Life’s troubled junk bond portfolio from the company. Altus would buy the bonds for $3.25 billion, and MAAF would pump an additional $300 million into the insurer.

Most of the other plans would have kept the junk bond portfolio in the firm and allowed policyholders to share in any profits earned on future sales of the bonds.

While Altus is still considered the favored bidder for Executive Life, the process has been complicated by Judge Lewin’s ruling on the so-called muni-GIC holders.

Most bids had been predicated on the expectation that muni-GIC claims holders would be paid only a fraction of the amount given to policyholders. The ruling, if upheld, would mean that payouts to policyholders might drop from about 89 cents on the dollar to about 72 cents.

The ruling also means that the rescue could be expensive for the insurance industry, whose potential costs of the bailout could increase from about $1 billion to roughly $2 billion. Those rising costs are prompting NOHLGA to renew its interest in taking over Executive Life. The trade group believes that it would lower the industry costs with such an acquisition.

Even some policyholders, who had small policies that were fully covered by guaranty associations, are reconsidering their support of the Altus plan. Because of the muni-GIC holders, the policyholders are not eyeing the profit potential of the junk bonds.

“People who are not covered by the guarantee funds--the large contract holders--are going to have some opinion about passing the upside potential of the bond portfolio to an outside party,” said Richard Melton, senior vice president of Texas Commerce Bancshares, which owns about $200 million in municipal bonds backed by Executive Life.