‘Little People Floundering’ From Executive Life Losses

More than 10 years after the failure of California’s Executive Life Insurance Co., many of its policyholders, some of them elderly and disabled, are struggling to get by on monthly annuity payments that are 30% to 50% less than what they had been promised by the once highly rated insurer.

The 1991 insolvency, then the nation’s largest insurance failure, served as a catalyst for stricter controls on insurance company investments. But the regulations came too late for Executive Life’s thousands of policyholders, some of whom lost homes or were forced out of retirement because of the loss of income when policy values were slashed.

Policyholders blame those losses on the terms of the 1992 sale of Executive Life’s “junk” bond portfolio to a French investor group for $3.25 billion. They contend that the portfolio was worth much more because the junk, or high-yield, bond market was rapidly recovering.

The deal “left all the little people floundering,” said Dru Ann Jacobsen, whose 74-year-old mother lost her home after her annuity payments were cut to $1,800 a month from the $3,000 she had been guaranteed for life.

Authorities say the investor group was a front for French bank Credit Lyonnais, which circumvented state and federal laws to buy the bonds. In what has been called “the deal of the century,” authorities say the bank and its partners made a profit of at least $2billion after the value of the junk bond portfolio rose.

The Executive Life deal triggered a wave of litigation, with no quick end in sight. Discovery began months ago in a suit by the state insurance commissioner, but no trial date has been set.

In a hearing last week on the merits of a state attorney general’s suit seeking $6 billion in damages, U.S. District Judge A. Howard Matz gave the impression he was inclined to agree with arguments that the insurance commissioner has exclusive standing to represent policyholders in such actions.

Also last week, a U.S. 9th Circuit Court of Appeals panel cited the insurance commissioner’s standing and ruled out one of two suits policyholders had filed in the case.

The 9th Circuit has yet to rule on a second policyholders’ suit that names the French investors and former Insurance Commissioner John Garamendi, who seized Executive Life and oversaw the sale of its assets. In that suit, policyholders argue that the California insurance commissioner’s office cannot be trusted to represent their interests because of Garamendi’s alleged bungling of the Executive Life sale.

Meanwhile, the successor to Executive Life could face criminal prosecution. Federal prosecutors in Los Angeles recommended a year ago that Credit Lyonnais be prosecuted in the deal. That decision is pending at the Justice Department.

The Executive Life debacle has become a morass of insurance and banking laws and complex international investment deals. Lost in all the legal battles is the fact that thousands of policyholders are out billions of dollars. A central point of dispute is whether their losses are the result of the crash of the junk bond market or the terms of the assets sale.

Lawyers for Credit Lyonnais blame the policyholders’ losses on Executive Life’s investment in risky junk bonds, which plummeted in value in the late 1980s and early 1990s.

Garamendi shares that view. He said he struck the best deal he could in the sale of the company’s assets. Half of Executive Life’s junk bonds were in default, and the bond sale proceeds infused the successor insurance company with badly needed cash, said Garamendi, who is running for insurance commissioner again after a failed 1994 bid for governor and a stint in the private sector.

“This was the junk of the junk bonds,” he said. “This was the trash. To say the market had recovered is one thing--even though it had not recovered at the time. But to say these bonds would follow the market is fallacious.”

Garamendi said he pursued the sale to what he believed was a group of French investors to minimize the risk of additional losses. The Insurance Department, he said, did not have the expertise or the cash necessary to hold the bonds and sell them over time in the hopes of realizing a better return.

“It’s a whole lot of foolishness to believe the Insurance Department should have kept those junk bonds,” Garamendi said.

But that is exactly what policyholders believe.

“Had they not sold to the French, had they backed off and put it out to bid again, the policyholders would have gotten 100% on their dollars,” said Tom Schaefer, a San Diego lawyer who represents policyholders. “In a recovered bond market, there would be no reason to restructure the policies downward.”

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Allegations Point at Credit Lyonnais

Policyholders were so sure the sale was a bad deal that a group of them went to court at the time to try to stop it. Then, six years after the sale, a whistle-blower’s disclosure reopened the controversy.

The whistle-blower alleged that the French investor group was a front for Credit Lyonnais, which was then controlled by the French government.

That brought the scrutiny of state and federal prosecutors. California law prohibits foreign governments from owning insurance companies, and federal law at the time banned banks from being in the insurance business.

The U.S. attorney’s office in Los Angeles investigated and recommended last April that Credit Lyonnais be charged with fraud and conspiracy. Justice Department officials have met with lawyers for the French bank, who contend that Credit Lyonnais should not face prosecution for its efforts to rescue an insurance company that made questionable investments.

Of 333,000 policies in effect at the time Executive Life was sold, 5,600 were structured settlement annuities that still are held by disabled victims of accidents and malpractice and for whom the monthly payments are a primary source of income, said Maureen Marr, an advocate for the group.

Ann Dixon, Jacobsen’s mother, is one of them. She followed her lawyer’s advice and converted a $2.5-million settlement for injuries from a car collision into the annuity that was supposed to pay her $3,000 a month. She did not believe she was making a risky investment.

“The lawyers elected to put it into this ‘Triple A Executive Life,’” Jacobsen said. “They said, ‘This is the safest thing we can put it in.... It’s rated high, excellent, A-No. 1.”

But after Executive Life was sold, Dixon’s monthly payments were slashed to $1,800.

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Injury Settlement Was Chance to Keep House

She said the loss compounded the hardship she had endured since the 1979 accident in which her van was struck head-on by a drunk driver. She was driving home with daughter Darian, then 19, after a trip to buy tap shoes for a class they had hoped to take together.

Both women were badly injured. Dixon’s hips and pelvis were shattered, and her right leg was so badly crushed it had to be amputated at the hip. Doctors wanted to take her left leg as well.

“I just couldn’t face that,” Dixon said. “At least it’s there. I just can’t put any weight on it. So I’m in a wheelchair.”

Her marriage broke up in the wake of the accident, and her finances were a shambles.

The settlement of an injury lawsuit provided Dixon with the hope that she could remain in the Malibu ranch home she had lived in for 30 years.

“It wasn’t a mansion on the beach,” she said. “But it was a beautiful house with a beautiful view.”

For a while, Dixon managed. But after her annuity payments were cut by $1,200 a month, the bills mounted. Dixon refinanced her home several times, rolling her debt into the mortgage. Then it became difficult for her to make the mortgage payments.

“We just kept refinancing and refinancing and hoping we could pull it off,” Jacobsen said. “But finally it got too much. It was taking the whole [annuity] payment. She didn’t have anything left for anything else.”

Dixon sold her house almost two years ago and moved into a two-bedroom mobile home near Jacobsen and her family.

Jacobsen has helped care for her mother since the accident, lifting her in and out of the wheelchair countless times, a loving but back-breaking task. If the annuity were paid in full, Jacobsen said, the family would buy a van with a chair lift and hire an aide to help care for Dixon.

“Now that she’s getting older, she needs more help, and we can’t do it,” Jacobsen said. “I don’t think they expected her to live this long.”

In addition to structured-settlement policyholders such as Dixon, the Executive Life debacle resulted in losses to holders of life insurance policies and guaranteed investment contracts, investments similar to certificates of deposit.

Although state insurance guaranty funds made up part of the losses, coverage in California was capped at $100,000 per annuity and $300,000 per life insurance policy, said Gary Fontana, a San Francisco lawyer who was hired by the insurance commissioner’s office to handle its suit.

The structured-settlement policyholders “tended to have the bigger policies,” said Marr, the group’s advocate. “And the bigger your policy, the more you got hurt.”

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Thousands Lost Money Needed for Medical Care

Vince and Sue Watson believe that their severely disabled daughter, Katie, 21, has lost more than $1million in annuity payments, not including interest.

The Watsons hope the U.S. 9th Circuit Court of Appeals reinstates the second policyholders’ suit, viewing it as their best chance to recover their losses, which would pay for their daughter’s stay in a full-care facility should she outlive them.

“Our case has been so fragmented over so many years that a lot of people don’t realize that over $4.6 billion was lost by people like Katie, who are sick or crippled,” Vince Watson said. “There are thousands of people who lost money that was needed for medical care, for financing their retirement, or that they had invested to secure their families’ future.”

Katie Watson’s disabilities stem from lapses in her hospital care when, at 21 months old, she was admitted with a mild case of pneumonia.

“What happened at the hospital was a tragedy of errors--the wrong medicine, oxygen ordered but not given, blood gases not monitored, a whole series of things,” Vince Watson said.

The ordeal left Katie Watson severely brain damaged, unable to walk or feed herself and in need of full-time, round-the-clock care.

The Watsons sued the hospital and used their settlement for the down payment on a home they had built with special lifts, wheelchair ramps and other amenities for their daughter’s care.

The settlement of a separate suit on Katie Watson’s behalf was intended to fully cover the cost of her care for life and was invested in an Executive Life annuity. The monthly payments were to increase 5% each year to keep up with inflation.

Instead, the payments, which were $13,000 a month, were cut to $5,000. Fearing they could not make the mortgage payments and pay for their daughter’s care, the Watsons, both of whom work, immediately put the home on the market.

But in a depressed market, they found no buyers for the unique home. The bank foreclosed, and the Watsons, who have six other children, moved out.

Katie Watson’s monthly payments, with the 5% increases, have grown to $10,000 today, still far short of what had been promised.

“If anything happened to Susie and I, there’s still not enough money coming in on a monthly basis to get Katie in a full-care facility,” Vince Watson said. “We’re still kind of holding our breath about whether ... if anything happened, Katie would be taken care of.”

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(BEGIN TEXT OF INFOBOX)

Executive Life Timeline

April 1991: Days after parent First Executive Corp. posts a $466-million loss, California Insurance Commissioner John Garamendi seizes First Executive, which files for bankruptcy.

May 1991: Garamendi puts Executive Life up for sale and reports receipt of $3-billion bid from French investment group.

November 1991: Garamendi announces conditional selection of French group’s revised $3.55-billion bid, including $3.25 billion to acquire the company’s junk bonds.

September 1993: Deal closes after legal battles.

February 1999: California Insurance Commissioner Chuck Quackenbush sues bank Credit Lyonnais and a group of insurance and finance companies, alleging they hid information in acquisition of Executive Life to skirt state and federal laws.

January 2001: Sources say federal investigation could lead to suspension of Credit Lyonnais’ U.S. banking license.

April 2001: Federal investigators in Los Angeles urge Justice Department to indict Credit Lyonnais on fraud charges.

June 2001: California Atty. Gen. Bill Lockyer sues Credit Lyonnais and partners for allegedly conspiring to defraud policyholders.

April 2002: U.S. 9th Circuit Court of Appeals refuses to allow one of two policyholder lawsuits to proceed.

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Source: Times research