IRS Settlement Eases Pinch for Executive Life : Insurer: The reduced tax lien eliminates a cloud over the carrier’s rehabilitation. Meanwhile, Garamendi submits a new plan to boost payments to policyholders.
The Internal Revenue Service on Tuesday slashed its tax claim against Executive Life Insurance Co. to a fraction of its original size, settling an obligation once believed to be large enough to threaten rehabilitation plans for the failed Los Angeles-based insurer.
The IRS will settle the original $643-million lien for $73 million--about $67 million of which has already been paid. At that rate, the tax payment will have no adverse effect on policyholders awaiting reimbursements for losses incurred in the insurer’s failure, California Insurance Commissioner John Garamendi said.
“This agreement with the IRS brings another ray of sunshine to Executive Life policyholders who have lived under a dark cloud for the past nine months,” Garamendi said. The IRS claim stemmed from a technical accounting dispute that originated in 1981 and involved changes in the way insurance carriers are taxed.
Meanwhile, Garamendi said he submitted a new rehabilitation plan for the insurer to Los Angeles Superior Court Judge Kurt Lewin, who is presiding over Executive Life’s sale. Although the new plan is complex, it promises somewhat larger payments to policyholders, thanks to a provision that would reduce payments to speculators who hoped to profit by buying municipal bonds backed by Executive Life.
Executive Life, which failed last April under the weight of a souring portfolio of junk bonds and a flood of policy surrenders, is expected to be purchased by a French investor group, led by Altus Finance and Mutuelle Assurances Artisanale de France, for about $3.55 billion. What has not yet been determined is exactly how much policyholders will get in the deal.
Pivotal to the issue of policyholder payments is how bondholders, who bought $1.85 billion in municipal bonds backed by Executive Life, are treated.
Garamendi had wanted these bondholders to be relegated to general creditors’ status, which meant they would be able to recover just 30 to 40 cents on the dollar. That would leave comparatively more money for all other policyholders, who would then collect about 89 cents on the dollar in the Altus sale.
Judge Lewin ruled, however, that the bondholders should receive the same treatment as other policyholders. Insurance department staffers said that would increase the payment to bondholders and reduce payments to all others to about 73 cents on the dollar. Garamendi, who has long maintained that the majority of the bondholders are speculators who bought their stakes at pennies on the dollar, appealed the ruling, but the appeals court has not yet agreed to hear the case.
Under Garamendi’s new plan, effective only if the appeal fails and if Lewin approves it, the bondholders would retain their status as policyholders but receive payments based on how much they paid for their bonds. That would eliminate windfall profits on bonds that were bought for a fraction of their face value, Garamendi said.
Additionally, those who bought the bonds after Executive Life was seized would be paid based on the value of the bonds on April 11, when regulators took control. That provision is also designed to prevent speculator profits.
Bondholders’ reactions to the plan were mixed.
An attorney who represents some of the bondholders said such a deal would be unfair and would be challenged in court.
Norman Page, a Camarillo resident who also bought some of the bonds when first issued, was more amenable to the plan. “It is not fine, but it is certainly better than nothing,” Page said.
Regulators said they did not yet know how Garamendi’s new plan would affect policyholder payouts, although they generally believed that it would give policyholders somewhat more.
Garamendi’s plan is to be reviewed in court hearings starting Feb. 28. The sale and rehabilitation plan are expected to close this spring--nearly a year after the company was seized, Garamendi noted.
