State Proposal to Rehabilitate Executive Life Wins Approval : Insurance: The rejiggered plan is on hold pending a promised appeal by a dissident group of bondholders.
A patched-up proposal to rehabilitate Executive Life Insurance Co., which was seized by state regulators two years ago in one of the nation’s biggest insurance failures, was approved Friday by a Los Angeles County Superior Court judge.
However, the Los Angeles insurer faces another hurdle before emerging from conservatorship and resuming normal operations. Judge Kurt J. Lewin, as part of his ruling, put the rehabilitation plan on hold for 19 days pending a promised appeal by a bondholder group.
Still, Friday’s ruling marks an important victory for the French interests trying to acquire Executive Life. It was also a big win for California Insurance Commissioner John Garamendi, who crafted the original deal and later modified it to overcome a barrage of legal challenges.
“We are elated,” said a spokesman for the French investors, led by Mutuelle Assurance Artisinale de France. “The decision completely, and very strongly, endorses the modified plan.”
Crippled by the plummeting value of its vast junk bond holdings, and by a surge of worried customers who wanted to cash in their insurance policies, Executive Life was taken over by regulators in April, 1991.
Garamendi, as conservator of the company, responded with a two-step plan to revive Executive Life and to give preferred treatment to conventional policyholders over investors, who were also hurt by the insurer’s collapse.
The first part of the deal was completed in March, 1992, when the company’s junk bond portfolio was sold to Altus Finance, a unit of the French bank Credit Lyonnais, for $3.25 billion.
The second part calls for the Mutuelle Assurance Artisinale de France group to take over Executive Life, pump $300 million into the company and operate it under the name Aurora National Life Insurance Co.
That step, however, awaits the anticipated appeal from a group of so-called muni-GIC holders--big holders of municipal bonds backed by Executive Life guaranteed investment contracts.
The dissident muni-GIC group, which holds $1.63 billion in assets and is represented by the law firm of Pillsbury Madison & Sutro, has argued that Garamendi illegally delivered a huge windfall to Altus and its partners in the $3.25-billion junk bond deal. The group contends that the junk bond portfolio today is worth nearly $1.5 billion more than Garamendi netted and that some of that extra value should be recovered and directed to policyholders and investors.
But the judge, in rejecting the muni-GIC group’s efforts to rescind the bond deal and to block the acquisition of Executive Life, said the plan is “supported by the vast majority” of policyholders and investors. Lewin said the “broad support for the modified plan, at the conclusion of a vigorously litigated proceeding, is independent evidence that the modified plan is fair and equitable.”
Garamendi, in praising Lewin’s decision, said that if the plan is not derailed by an appeal, it will provide 92% of the company’s 337,000 policyholders with a complete recovery of their investment. Most of the money put in Executive Life by the other 8% of policyholders--mainly those with policies valued at more than $100,000--will be recovered as well, he said.
Those policyholders would receive nearly 81 cents on the dollar if they cash out immediately after Executive Life is rehabilitated, and are promised 86 cents on the dollar if they keep their policies with the newly constituted company.
But Patricia Shapiro, an actuary who filed a brief on behalf of individual policyholders in the court case, said the benefits promised by Garamendi are overstated. For one thing, she said, the industry guaranty fund being counted on to fully cover policies worth up to $100,000 may not be able to provide the full amount.
She said funds also will not be available to cover bigger policyholders--including many retirees and accident victims dependent on Executive Life-guaranteed annuities--to the extent promised by Garamendi.
Shapiro said their coverage will amount to 81% or more of what has been set aside in a special reserve account, not of the amount many policyholders believe their policies are worth. Garamendi’s promise, she said, “is a sleight of hand.”
Since its seizure, Executive Life has been in suspended animation. A skeleton staff has kept the company barely running. Death benefits have continued to be paid on insurance policies, but other routine activities--such as granting loans against the value of policies--have been on hold until a rehabilitation plan takes effect.
