EXECUTIVE LIFE SEIZURE : Industry Sound Despite Failure, Insurers Tell Consumers

Insurance executives, nervously assessing Thursday whether the seizure of one of the nation’s biggest life insurers would damage consumer confidence, moved quickly to provide assurances about the strength of the industry.

Executive Life Insurance Co., the California subsidiary of Los Angeles-based First Executive Corp., was placed in a court-supervised conservatorship Thursday at the request of the state Department of Insurance. At the heart of the once-booming company’s problems were massive defaults on its junk bonds, which make up about 64% of Executive Life’s $10.1 billion in assets.

“We feel that the conservatorship move by (Insurance Commissioner John Garamendi) is a valuable step to protect policyholders,” said Henri Bersoux, spokesman for the American Council of Life Insurance, a Washington-based industry group.

“Events such as this have been extremely rare in the life insurance industry,” he said. “Executive Life took a very risky course in its investment policy and that course is very different from the rest of the industry.” The industry average for junk bond holdings is about 6%, he added.

To be sure, the nation’s $1.4-trillion life insurance industry has its problems. Net income has been declining while investment losses have been rising. Insolvency could await as much as a third of the industry if the recession gets worse, industry experts have said.

Jack Bobo, executive vice president of the National Assn. of Life Underwriters, which represents the agents who sell insurance, said that “we all hoped they would be able to nurse this thing through” without a regulatory takeover.

“But we think the right steps have been taken” to protect Executive Life’s customers, he said. In a major run last year, about a quarter of First Executive’s business cashed out.

Transamerica Life Vice President James M. Jackson said the seizure should calm rumors that have been flying about First Executive and its subsidiaries. But concerns obviously remain.

“I don’t think it ever helps consumer confidence when you have a court action involving a company that sells life insurance,” said Jackson, who is also Los Angeles-based Transamerica Life’s deputy general counsel and who acts as vice chairman of the California Life Insurance Guaranty Assn., a recently created safety net for life insurance policyholders.

But Executive Life’s situation “just is not indicative of the life insurance industry in general. We’re trying to get that message out,” he said.

Life insurance actuary Jim Hunt, who is also a director of the National Insurance Consumers Organization, said he is worried that nervous policyholders will fall victim to sales pitches from overeager insurance agents and switch to a different company that is portrayed as safer than their original insurer. People who switch policies are frequently charged large “surrender fees” by the original insurer.

“Most people think the scandal in this business is Executive Life. It is not,” Hunt said.

“The huge scandal is the huge amount of money lost by people who are replacing their policies. Half of the business done in the 1980s was transfers. That’s outlandish.”

Times staff writer Kathy Kristof contributed to this story.

FIRST EXECUTIVE AT A GLANCE First Executive’s principal operating subsidiaries are Executive Life Insurance Co. and its 99%-owned Executive Life Insurance Co. of New York, First Delaware Life Insurance Co. and Lincoln Liberty Life Insurance Co.

Assets: $10.1 billion * Junk bond investment: $6.4 billion

170,000 life insurance policies, all in California, with a face value of $38 billion

75,000 annuities worth $2.5 billion

$3 billion in more than 300 guaranteed investment contracts

Number of employees: 1,070 as of 12/31/90

12-month stock price range: $3.75-$0.12

Thursday close: $0.28

Sources: Company and wire reports