Bit of Deja Vu in Pacific Mutual’s First Capital Bid : Insurance: The Newport Beach firm became a powerhouse after itself failing during the Great Depression.

Founded in 1868, Pacific Mutual Life Insurance Co. survived several recessions in the last half of the century only to be brought to its knees during the Great Depression.

Seized by the state, the company subsequently reorganized and became California’s largest life insurance company. Now, in its bid to take over the failed business of First Capital Life Insurance Co. in San Diego, Pacific Mutual is relying on the lessons learned from its own history, and a steady, conservative investment philosophy that has made it one of the highest-rated life insurers in the nation.

State Insurance Commissioner John Garamendi has recommended that Pacific Mutual get the nod because its offer returned more benefits to First Capital’s 250,000 policyholders than those of the other bidders. In fact, in the department’s evaluation, Pacific Mutual headed the list on every significant financial consideration involved in what the industry calls a “rehabilitation” of First Capital.

A final decision on whether Pacific Mutual acquires First Capital--the nation’s second-biggest insurance company failure behind Executive Life Insurance Co. of Los Angeles--will likely come after a Los Angeles County Superior Court judge hears remaining testimony this week on four bids.

Thomas C. Sutton, Pacific Mutual’s chairman and chief executive, said he believes that the fact that the company is a mutual organization--owned by its policyholders rather than by stockholders--is an advantage over the competitors, all of which are stock companies.

“We have the one constituency to satisfy,” he said. “And we can afford to take a longer-term view. Doing something like this is not going to help current earnings. It only has value in the long term, and that value is only to the extent we can retain those policy owners.”

Pacific Mutual’s bid is aimed at picking up more customers through the eventual merger of First Capital into its individual life insurance operations. First Capital would give it twice as many policyholders and nearly 40% more assets.

At the end of March, Pacific Mutual had about 200,000 policyholders--mostly individual life customers--and $10.7 billion in assets. First Capital had about 250,000 policyholders--mostly holders of annuities--and $4.1 billion in assets. A merger would allow Pacific Mutual to climb from the nation’s 29th largest life insurer to the 17th largest, just ahead of Allstate Insurance Co., based on 1990 figures.

A chance to expand wasn’t Pacific Mutual’s only interest in bidding.

Sutton has led or participated in several industry groups’ efforts to address insurance insolvency issues. He has become familiar with how some insurance companies got into trouble and has several ideas about how to correct the problems.

“One of the things we’ve been concerned about is the negative publicity about the life insurance industry,” he said. “That certainly has a big effect on us in the sense that we have spent an enormous amount of time talking directly to policy owners, to agents who sell our products, to rating services, to everybody who will listen . . . about ourselves.”

Pacific Mutual also has hired about a dozen top executives from First Capital since the mid-1980s, and their knowledge of their former employer has bolstered Pacific Mutual’s confidence that it can correct the problems.

In addition, Sutton said, “First Capital is here. It’s a California problem. It’s nice to have a California solution for it.”

Sutton and others in the industry believe that First Capital’s operations would meld well into Pacific Mutual’s, even though the failed insurer has a slew of risky, high-yield corporate securities, known as junk bonds, and a chunk of bad commercial loans.

“It’s highly unlikely that Pacific Mutual would be hurt by this acquisition,” said Ernest Long, executive director of the California Life Insurance Guaranty Assn., which protects 80% of policyholder account values up to $100,000.

The nation’s biggest industry rating agency, A. M. Best Co. in New Jersey, also isn’t worried.

“Initially, I think it’s a fine fit for Pacific Mutual,” said Larry Mayewski, a Best vice president. “The company is acquiring seasoned assets at a modest cost. They believe they will be able to generate good returns. And its rehabilitation plan maximizes the value to First Capital policyholders.”

Pacific Mutual has long enjoyed an A+ rating from Best. And it believes that its top rating won’t suffer with the acquisition of First Capital. But Mayewski said the annual evaluation of the company won’t be completed for several weeks.

When the state seized it last May, First Capital had 42% of its assets in junk bonds, but those investments are quite different in nature from the junk bonds that brought down Executive Life Insurance Co. in Los Angeles--the nation’s largest failure when the state seized it in April, 1991.

Executive Life took major positions in shaky companies, which put it in control of the management at those firms. First Capital has a more diversified junk bond portfolio with smaller ownership stakes.

Under Garamendi, the state agency has reduced First Capital’s junk bond portfolio nearly in half to 23% of its invested assets at the end of March. Its bad loans represent about 4% of its portfolio.

Pacific Mutual believes that it can manage the junk bonds, though it keeps its own similar investments to about 2.3% of its portfolio. Its expertise, Sutton said, is residential real estate and mortgage loans, which make up 23.5% of its investments.

The rest of the portfolios at both Pacific Mutual and First Capital, he said, consists of investment-grade stocks and bonds and government securities.

Pacific Mutual ran into trouble during the Depression because out-of-work customers, citing illness caused by worry and frustration, began making claims on the company’s popular “non-cancelable disability income policy.” The product prohibited the firm from canceling policies if customers became uninsurable.

The company learned that it hadn’t charged enough in premiums or varied its rates among different age groups. It also had failed to sock away enough in reserves. In 1936, the state insurance commissioner seized the company and ordered its reorganization as a mutual company. Despite its name, Pacific Mutual had until then been owned by shareholders.

Company executives turned Pacific Mutual around and fought off shareholder lawsuits. It eventually made good on its non-can policies and, after winning the last court fight, changed into a mutual company in 1959.

Since then, the company has burgeoned.

In 1955, it had $500 million in assets. It took 17 years to reach the $1 billion mark, then six years to pass the $2 billion mark. It has added $8 billion more since 1978.

Like First Capital, Pacific Mutual sells individual life insurance and annuities. But unlike the failed company, the Newport Beach firm has two other highly successful lines of business.

One line, headed by PM Group Life Insurance Co., handles employee benefits, primarily group life and group health insurance. Its main focus is on companies with fewer than 50 employees, but it also serves employers with as many as 2,000 workers. Among its customers are Irvine Co. and the cities of Irvine and Newport Beach.

The other line, mainly Pacific Investment Management Co., has become a premier manager of pension funds and other fixed-income assets. It has earned an international reputation for managing those assets for clients such as AT&T.; At the end of March, PIMCO and its sister subsidiaries were managing nearly $40 billion worth of assets.