Pacific Mutual Selected to Run First Capital : Ruling: Newport Beach company is picked over three other bidders. Judge agrees with state officials that it offered more benefits to policy, annuity holders of failed insurer.

Pacific Mutual Life Insurance Co. won a court battle Tuesday for the right to take over management of First Capital Life Insurance Co. in San Diego, the nation’s second-largest insurance company failure.

Los Angeles Superior Court Judge Kurt Lewin selected Pacific Mutual over three other bidders that had fought during hearings two months ago to win the court’s approval for control of First Capital.

Lewin agreed with state insurance officials that Pacific Mutual, the state’s largest life insurance company, offered more benefits to First Capital’s 250,000 policy and annuity holders than any of the other bidders did.

Thomas C. Sutton, Pacific Mutual’s chairman, said in a prepared statement that he was pleased with the judge’s decision. Sutton, alluding to the court battle, said his company was able to reach “an equitable settlement with all concerned parties.”

“Our motivation to reach a settlement was to end further delays and avoid a lengthy appeal process,” he said. Sutton, however, wasn’t available Tuesday to explain his comments about an apparent settlement that could include other bidders.

At least one bidder, a group led by Leucadia National Corp., had objected to the bidding procedures instituted by state Insurance Commissioner John Garamendi and had threatened to appeal any adverse decision. The group’s lawyer couldn’t be reached for comment Tuesday.

Leucadia, which is aligned with First Capital’s creditors, had offered the highest return to creditors than other bidders and the least to policy and annuity holders.

Last week, though, Pacific Mutual was allowed to restructure its bid to give creditors a larger share of the profits that the Newport Beach company hopes to make during the five years that it operates First Capital under what the industry calls a rehabilitation plan.

Lewin also gave the other bidders a chance to change their bids. None did.

Under the plan, Pacific Mutual will invest $50 million in a newly formed life insurance company, tentatively called Newco, that will assume First Capital’s assets and liabilities.

First Capital’s policyholders will be able to recover the full cash value of their policies if they retain their holdings in the company for five years. Otherwise, they will get 90% of the cash value in the first three years, 93% in the fourth year and 96% in the fifth year.

The other bidders--the Leucadia group, Shearson Lehman Brothers Inc. and Transamerica Occidental Life Insurance Co.--also offered full policy benefits after five years. But they offered less interest and profit participation to policyholders.

Pacific Mutual’s original plan split any profits it made 50-50 between policy and annuity holders and creditors. But in its restructured plan, in now offers policy and annuity holders 10% of any profits and a lower 6.5% annual return on their policies. The return had been 7%. Creditors will get 90% of the profits.

When First Capital was seized in May, 1991, the insurer had 42% of its assets in risky, high-yield corporate securities, also known as junk bonds, and a slew of bad commercial loans. Garamendi has since sliced the junk bond portfolio in half, and Pacific Mutual plans to reduce it to 5% over the next five years.

Pacific Mutual, which has about $10.7 billion in assets and 200,000 policy owners, will merge First Capital into its own individual life insurance operations at the end of the five-year rehabilitation period. The merger will give it twice as many policy holders and nearly 40% more assets.