Executive Life’s Woes Will Affect Policyholders

The seizure Thursday of Executive Life Insurance Co. of California by state regulators raises a wide array of questions about how the action will affect the company and its policyholders. Here are the answers to some of those queries:

What happened Thursday and what does it mean?

Regulators put Executive Life Insurance Co. of California into conservatorship, which gives state officials authority over the day-to-day activities of the company. It does not, however, change the company’s ownership. Executive Life, technically, remains owned by shareholders of First Executive Corp. of Los Angeles. However, conservatorship is generally the first step in changing an insurer’s ownership. Typically, regulators take a second step and have the insurer placed into “receivership,” which transfers ownership to the state of California. Receivership, although not a given, is usually needed to rehabilitate the company or sell its assets.

What happens to Executive Life policyholders?

Right now, very little. Policies remain in force, and the department of insurance said it intends to continue making monthly payments to retirees and recipients of medical and death benefits. However, regulators said they intend to “restructure” these policies, which would probably require reducing interest rates promised to policyholders. Regulators have also placed a moratorium on policy surrenders and loans, so consumers will have less access to their money.

How long is the moratorium on surrenders and loans expected to last? Is there any way to get policyholder money out of Executive Life?

State Insurance Commissioner John Garamendi said the ban on surrenders and loans would remain in place until regulators were able to “rehabilitate” the company. He would not say how long that might take, except to stress that he was attempting to do this in the most expeditious manner possible. However, Garamendi did say that those with “special hardship” cases might be able to get their money.

Are Executive Life’s policyholders protected by the California Life Insurance Guaranty Assn.?

No one knows for sure. Garamendi said he believes they are, but he stopped short of making promises, saying, “the guarantee fund will address that.” A lot will depend on the results of financial audits that are currently taking place.

Meanwhile, certain types of policies--including guaranteed investment contracts--are definitely not covered, according to legislation creating the fund. These policyholders have to rely on regulators to save the ailing insurer, or sell its assets to another firm that’s able to handle the obligations.

What caused Executive’s financial problems?

Mainly junk bonds. First Executive Corp. and its insurance subsidiaries, including Executive Life, invested big in high-yield, high-risk junk bonds. When the market for these securities soured, and Executive began to accrue huge paper losses, and many junk-bond issuers also stopped paying on their debts. That ate into Executive’s capital and surplus--the financial cushion meant to protect policyholders. Moreover, nervous customers rushed to cash in their policies, the insurance company equivalent of a bank run.

Are other insurers safe?

By and large, yes. Although these are difficult times in the life insurance industry, there are many healthy and profitable companies that have few risky assets. It is wise, however, to check your insurer’s health with any one of several corporate rating services. These include A. M. Best & Co., Moody’s Investors Service, Standard & Poor’s, Duff & Phelps and Weiss Research.