Pacific Mutual Backed as Buyer for First Capital

State Insurance Commissioner John Garamendi recommended on Friday that Pacific Mutual Life Insurance Co. of Newport Beach take over the failed First Capital Life Insurance Co.

The recommendation, subject to court approval, comes two months after Garamendi announced tentative support of a competing bid from New York-based Shearson Lehman Bros.

Pacific Mutual, a healthy, 125-year-old insurer with $10.65 billion in assets, offered First Capital policyholders more than any of the other bidders. In addition to Shearson, they included Transamerica Occidental Life Insurance Co. and Leucadia National Corp., parent of Colonial Penn Life Insurance, Garamendi said Friday.

“Pacific Mutual has offered policyholders the best security and the highest dollar value,” Garamendi said.

San Diego-based First Capital, which had $4.5 billion in assets and about 252,000 customers, was seized by California insurance regulators last May after its Beverly Hills-based parent, First Capital Holdings Corp., made a Chapter 11 bankruptcy filing.

It was the second-largest California life insurance failure in history, after the seizure of Executive Life Insurance Co. in April, 1991. First Capital Life’s sister firm, Virginia-based Fidelity Bankers Life Insurance Co., is also under regulatory control. ITT Hartford has made a tentative deal to buy Fidelity Bankers.

Since those regulatory seizures, policy and annuity holders have been prohibited from surrendering or borrowing from their accounts. Regulators say those policy moratoriums will be lifted when buyouts are completed.

All bidders for First Capital Life promised to pay 100 cents on the dollar to customers who stuck with the rehabilitated company for at least five years. However, Pacific Mutual offered somewhat more generous investment returns on policies and annuities, and greater opportunities for policyholders to participate in the profits of the company, Garamendi said.

Additionally, the Newport Beach-based insurer--which will pour $50 million of capital into First Capital--reduced penalties for those who decide to opt out of the deal and cash in their policies in the first few years.

Those who choose to cash in policies within the first three years will receive 90% of their money under the current Pacific Mutual plan, versus only 75% under plans submitted earlier. It was unclear whether industry-supported guaranty associations--which protect life insurance policyholders from large losses--will reimburse all or a portion of the 10% loss for policyholders who chose to opt out.

Pacific Mutual also opened a toll-free telephone line to answer questions from First Capital policyholders. Although the company cannot now call up account information on First Capital customers, it can respond to questions about credit rates, borrowing options and other specifics about how holders of different products will be treated in the buyout. The number is (800) 800-3340.

The Pacific Mutual agreement still faces several hurdles, including approval by Los Angeles Superior Court Judge Kurt Lewin. Lewin is presiding over the rehabilitation plans for both First Capital and Executive Life.

Also, spurned bidders for First Capital Life and creditors of its parent will have the opportunity to object to the Pacific Mutual buyout in court. Even in the best-case scenario, officials involved in the plan do not expect a final ruling for at least several weeks.