5-Year Wait Pays Off for Policyholders

It looked pretty bleak for First Capital Life Insurance policyholders when the big San Diego insurer went under late in 1991.

But for those who held onto their policies under a state rescue plan, the gamble has paid off.

About 150,000 policyholders will qualify Friday to share $80 million from a profit-sharing pool established when Pacific Life Insurance Co. of Newport Beach took over First Capital’s remaining assets under the state program.

Pacific Life officials pleaded with the company’s policyholders to continue paying premiums during the state-mandated five-year rehabilitation period. In return, Pacific said it would pay loyal customers 90% of any profit from investing First Capital’s assets and funds from the premium payments.

“We think we did a pretty good job of it,” said Pacific Life Chairman Thomas Sutton.

It still requires regulatory approvals, but the $80 million should be paid out by the end of the year. The payment, equal to a 2.2% increase in the value of each policyholder’s account, averages $533 per policy.

Additionally, the First Capital policyholders received almost 6% annual interest on their accounts during the past five years.

State insurance regulators say they are delighted with the results of the rescue program. The First Capital case is the first of three involving California-based life insurers to be completed.

Regulators say it is too soon to tell whether the other cases--involving Los Angeles-based Executive Life Insurance Co. of California and Pacific Standard Life Insurance Co. of Davis--will result in any gains for the defunct companies’ policyholders.

At First Capital, most policies were written as annuities--typically, policies that are set up to provide the holders a fixed monthly income during retirement.

The company invested policyholders’ premiums heavily in high risk junk bonds and commercial loans during the booming 1980s and went under when the economy softened at the start of the 1990s.

*

First Capital, which had $4.1 billion in assets, was taken over by the state, making it the second-largest life insurance failure in California. Executive Life of California, seized in early 1991, was the largest.

Because most of First Capital’s policies were the type that built value over years of steady premium payments, the state insurance department solicited rescue proposals from other insurers interested in taking over the policies.

The winning proposal by Pacific Life--then Pacific Mutual Life Insurance--promised to pay policyholders a minimum of 4% interest over a five-year rehab period and to pay those who kept their policies in force 90% of any profits Pacific’s money managers generated by investing the former First Capital assets.

To encourage policyholders to stay on board, the plan set up a penalty system that withheld a portion of the policy value from those who terminated their accounts before they matured.

Yves Pinkowitz, president of the company Pacific Life set up to manage the First Capital accounts, says there were relatively few early withdrawals.

Pacific is trying hard to retain the policyholders now that the state-mandated penalty period for early withdrawal is ending. The former First Capital policies now account for about a third of Pacific Life’s policies and the loss of a significant number of them would hurt.

“But we expect to keep a good share of those people,” Pinkowitz said. “This was a case where there was no [government] bailout of any kind, yet at the end of the day the policyholders will share in an $80-million payout and on top of that will have gotten almost 6% interest.

“That’s pretty rare. It’s a good story for the people who hold those policies.”