IRS Slashes Claim Against Exec Life : Insurance: State regulators say they are close to settling the issue for a fraction of the original $643-million assessment.
California insurance regulators said Tuesday that they are close to settling a huge Internal Revenue Service tax claim against Executive Life Insurance Co. for just a fraction of the original $643-million assessment.
The claim, which once threatened rehabilitation plans for the failed Los Angeles-based insurer, is expected to be settled for $72 million to $77 million, said Ted Baker, a lawyer hired by regulators to negotiate with the IRS.
“It is possible that the IRS’ final number will be higher than what we expect,” said Baker, a partner in the Washington law firm of Scribner, Hall & Thompson. “But our hope is to resolve the issue for a payment in the area of $5 (million) to $10 million.”
Since about $67 million in back taxes has already been paid, the claim should have little effect on policyholder payouts, which are expected to range between 72 cents and 89 cents on the dollar, regulators said.
The payout will be determined by a formula that takes several factors into account, including some unsettled issues such as the IRS claim and whether the holders of $1.85 billion in municipal bonds backed by Executive Life are treated the same as policyholders. The municipal bond issue is now before the 2nd District Court of Appeal in Los Angeles.
The large difference between the original claim of $643 million and the proposed settlement amount is the result of “whittling down the issues” that were in dispute, Baker said.
Regulators, who have long maintained that the IRS claim was inflated, said the IRS had raised every potential issue possible in the original claim simply to protect the federal agency’s rights. Now it seems that many of these issues have been resolved or eliminated, and the remaining questions are expected to result in a relatively modest tax bill.
The amount of the claim is still subject to negotiation. And regulators stress that the final amount could be more or less than what’s now anticipated.
However, if the regulators are successful, the settlement would be yet another coup for the failed company’s policyholders, who have been grappling with uncertainty and potential losses since insurance regulators seized Executive Life in April and froze its customers’ accounts.
Executive Life, once one of the nation’s fastest-growing life insurers, failed under the weight of a souring portfolio of junk bonds and a flood of policy surrenders. At the time, many of the company’s nearly 400,000 policyholders feared complete loss of their investment.
However, after a heated auction for the company and a turnaround in the junk bond market, policyholders have now been assured that they will get the bulk of what they are due.
Los Angeles Superior Court Judge Kurt Lewin is reviewing rehabilitation plans for the company. The favored plan was put forward by a French group including Altus Finance and Mutuelle Assurances Artisanale de France. It proposes to buy Executive’s junk bonds for about $3.25 billion and pump an additional $300 million in capital into the insurer.
But some policyholders are pushing for a different deal that would leave the junk bonds in the company and allow policyholders to share in any potential profits on their sale.
Regulators hope to complete a deal by year-end, but all the complex issues involved in the rescue operation may not be resolved by then.
