Shearson in Talks to Buy 1st Capital : * Acquisition: The investment house reportedly is close to signing a $50-million deal for the failed life insurance firm.
California insurance regulators and Shearson Lehman Bros. are close to signing an agreement that would allow the New York investment house to acquire failed First Capital Life Insurance Co. for $50 million, sources close to the talks said Monday.
The proposed agreement would provide for the rehabilitation of First Capital Life, a San Diego-based insurer with $4.5 billion in assets, and promises policyholders full recovery of their investments.
Neither Shearson nor insurance regulators would talk about details of the First Capital deal, but both acknowledged that the negotiations were under way.
Shearson spokesman Steven Faigen said the company is engaged in talks with Insurance Commissioner John Garamendi “to resolve the situation at First Capital Life in a way that provides the greatest benefit to all policyholders.” An insurance department spokesman said regulators had been talking to Shearson for some time and the “discussions are progressing.”
First Capital Life, a subsidiary of First Capital Holdings, was seized by Garamendi in May after its losses from junk-bond investments mounted, and policyholders began a rush to cash in their policies.
The seizure came after Garamendi unsuccessfully tried to force Shearson’s parent, American Express Co., to inject more capital into the insurer. American Express owned 28% of Los Angeles-based First Capital Holdings.
The failure followed the April collapse of Executive Life Insurance Co., also brought down by bad junk-bond investments and policyholder surrenders. Garamendi, however, indicated that First Capital Life was in much better financial condition than Executive Life, which last month was sold to a French investor group in a complex, $3.55-billion transaction.
First Capital Life’s proposed rehabilitation differs from Executive Life’s in several key ways: All policyholders would be paid 100 cents on the dollar; state life insurance guarantee associations would not be involved, and the junk bonds would be retained by the company.
Under the proposal, Shearson and American Express would guarantee that policyholders who keep their policies with First Capital Life through a five-year rehabilitation period will recoup their entire investment, plus at least a 4% annual rate of return. First Capital Life has about 190,000 policyholders and 62,000 annuity holders.
Individuals who want to surrender their policies before the end of the five-year period will be forced to pay substantial surrender fees, according to sources involved in the negotiations. The exact amount of the surrender fees is not known. State life insurance guarantee associations will not be called on to make up any losses by First Capital policyholders. In Executive Life’s case, the state funds will make up 11 cents to 28 cents on the dollar for policies under $100,000. Those with Executive Life policies above $100,000 will not recoup their entire investment.
The sale of First Capital Life ultimately will have to be approved by a state court. The court could entertain objections to such a sale or possibly consider other offers.
First Capital Life’s woes are largely the result of soured junk-bond investments. First Capital Holdings had roughly 40% of its assets in these high-rate, high-risk bonds. At year-end 1990, these securities were worth about $500 million less than the amount the company paid for them.
Since then, however, the junk-bond market has recovered, greatly boosting the value of the insurer’s portfolio. This improvement will allow Shearson to retain the insurer’s junk-bond portfolio. In Executive Life’s case, the junk bonds are being sold at a steep discount and the proceeds invested back into the company.
The proposed sale to Shearson will not affect Fidelity Bankers Life Insurance, another failed subsidiary of First Capital Holdings. Fidelity Bankers is being auctioned off separately by Virginia officials.
