Q&A; : What Exec Life’s Deal Will Mean
A Superior Court judge on Thursday approved the $3.55-billion sale of Executive Life Insurance Co. of California to a French-based investor group, setting into motion the rehabilitation of the failed company.
Although the complex transaction promises to provide more than 95% of policyholders with 100 cents on the dollar up to $100,000 of account value, some policyholders will not get their full investment back, at least not immediately.
Here is how the deal is likely to affect policyholders:
Q What does Thursday’s court ruling mean?
A Superior Court Judge Kurt Lewin decided that the proposed bid of Altus Finance and Mutuelle Assurance Artisanale de France was the best and that they should be allowed to buy Executive Life. The ruling sets in motion the adoption of a rehabilitation plan, which must be submitted to policyholders and approved by the courts. This process will begin in January and could take several weeks.
Q Assuming that the plan is adopted, what happens then?
A The day the transaction closes, accounts will be credited with an estimated restructuring amount, which can be adjusted up or down over the next 90 days, when the buying group completes its closing balance sheet. The restructuring percentage now is estimated at 72.7 cents on the dollar. Policyholder accounts should also be credited with an “enhancement” amount right after the deal closes. This amount will generally equate to the difference between the restructuring amount and 100% of the first $100,000. For example, a person with a $100,000 policy would get credited with a restructured account value of $72,700. He would get an additional $27,300 from the state guaranty associations to end up with the same $100,000 he started with.
Q What happens if someone wants to withdraw funds?
A The plan calls for a five-year moratorium on policy withdrawals. However, there are options for those who want to cash in their policies before the new company is formed. There are two possibilities.
First, policyholders can “opt out,” or withdraw all of their funds immediately. These customers will not get the restructuring percentage, but an amount equivalent to the per-share value of the company’s assets if it was liquidated. This amount is expected to be substantially less than the restructuring percentage. In addition, those who opt out will not be entitled to guaranty fund coverage. If they get 60 cents on the dollar from Altus, that is all they get.
Second, if someone must surrender a policy later--before the end of the five-year moratorium but after the first several months--he will get the restructuring percentage plus the enhancement amount. But then he faces a tiered surrender schedule, which forces him to pay hefty surrender fees in the first few years but relatively minor fees if he surrenders near the end of the period. The surrender fees will be levied against the restructured account value and the enhancement amount.
Q What happens to someone with a hardship?
A In hardship situations, the policyholder can cash in a policy without being subjected to the moratorium penalty. But he may have to pay whatever surrender fees are required by the policy. Each hardship application will be evaluated on a case-by-case basis.
Q Are company pensions covered by the guaranty associations?
A That depends on what kind of pension it is and the rules of the state guaranty association where the pension is headquartered. Group annuity contracts are always covered. However, unallocated qualified retirement annuities and so-called pension GICs are not necessarily covered. Whether these two types of contracts get guaranty association payments will depend on the rules of the state where the pension trustee is located.
Q Will policyholders be able to borrow against the cash value in their accounts during the five-year moratorium period?
A Yes, they can borrow up to 50% of their account value. They can do that at any time during the five years. In addition, those who continue to pay new premiums will be able to borrow 100% of the new premium amount. The rate of interest will be set at 2.25 percentage points above the crediting rate on policies, which is guaranteed not to fall below 4%.
Q What happens to those who have annuities that mature (or have matured) during the moratorium?
A That depends on what kind of annuity it is. Some have an option that allows them to begin receiving monthly stipends. They might also be able to leave the funds in and just receive earnings on the account. However, they will not be able to withdraw their funds in a lump sum at maturity, as some of these contracts originally promised.
Q What are the profit-sharing provisions in this deal?
A There are a number of ways policyholders can share in the profits of the company. However, these participations are only available to those who stick with the rehabilitated firm throughout the moratorium period. At that point, any profits earned on surrender fees, opt-outs, mortality experience and certain investments that exceed certain thresholds will be shared with policyholders.
The amounts will depend on how many policyholders stick with the company and how much profit there is in certain categories. However, those who have been covered by a guaranty fund enhancement agreement are limited to receiving no more than 110% of their original account amount. Any amounts above that will go to uncovered policyholders and the guaranty associations.
Q If an account now has a $500,000 cash value, how much will it be worth after the deal goes through?
A It is impossible to say for sure, but assuming that the restructuring percentage is 72.7% and the policyholder gets guaranty association coverage for the first $100,000, he would end up with $390,800. That’s 100% of the first $100,000 and 72.7% of the remaining $400,000, or $290,800.
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