Beleaguered Insurer Taken Over by State : Business: Regulators hope to save junk bond-laden Executive Life. It is the largest such seizure in the nation.

State regulators seized Executive Life Insurance Co. of California in an effort to stabilize the financially troubled firm, which has been inundated in the last week by thousands of consumers seeking to cash in their policies.

The action is the largest regulatory takeover of a life insurer in the nation’s history and comes after a week of widespread speculation that the major subsidiary of Los Angeles-based First Executive Corp. was doomed.

California Insurance Commissioner John Garamendi said Executive Life was placed in a court-sanctioned conservatorship Thursday because it was in a hazardous condition caused by deterioration of its huge portfolio of junk bonds. He also noted that the company had received thousands of policy surrender requests--tantamount to a run on the institution--further weakening its condition.

“We take this action to save it for the hundreds of thousands of people who entrusted their savings--many their entire life savings--in this company,” Garamendi said.

The takeover, which was not challenged by the company, comes as concern is increasing about the stability of the nation’s insurance industry. Like banks and savings and loans, some of the nation’s large insurers have been hurt by losses from junk bond, real estate and other risky investments.

Executive Life was the latest financial casualty of the massive securities scandal revolving around Drexel Burnham Lambert Inc. and convicted financier Michael Milken. Garamendi blamed Executive’s woeful state on the company’s souring $6.4-billion portfolio of junk bonds, which were largely purchased from Milken.

Garamendi said he has assembled a team of bankers, insurers, attorneys and accountants who will attempt to rehabilitate Executive Life. Additionally, he has had “extensive discussions with a consortium of European companies and investors who have presented a definitive program” to save the troubled insurer, he said.

The consortium is led by Altus Finance, a French financial services company connected with Credit Lyonnais. Garamendi refused to provide further details about the deal.

However, until the rehabilitation is complete, consumers who hold about 170,000 life insurance contracts and 75,000 annuities are barred from cashing in their policies or borrowing on them. More than 300 companies have also purchased Executive Life guaranteed investment contracts worth more than $3 billion to finance company-sponsored retirement plans.

The moratorium on surrenders and policy loans will stay in effect until the rehabilitation is complete, Garamendi said. Those who applied to surrender policies during the last few weeks will probably also fall under the ban, an insurance department spokesman said.

During the last week, the volume of surrender requests has quadrupled at Executive Life. The company has been receiving 260 surrender requests a day for the last week, compared to 60 to 70 such requests a day during the first quarter of 1991.

The increase in surrender requests followed the announcement last week that First Executive lost $466 million in the fourth quarter and that New York regulators had ordered its unit in that state to stop writing new policies. The company has lost $1.14 billion in the last two years.

Executive Life, with assets of $10.1 billion, is also banned from writing new policies. Regulators will continue to make payments on death benefits and medical claims and to pay retirees who rely on monthly checks from the insurer, Garamendi said.

However, the insurance department expects to restructure Executive Life’s contracts to reduce interest rates promised to policyholders. Garamendi added that one of his top goals was to avoid having to liquidate Executive Life.

“Liquidation would be lengthy, expensive and . . . could cost policyholders much of what they worked so hard to save,” he said.

If liquidation is eventually needed, Garamendi said, he believes Executive Life’s policyholders would be covered by the California Life Insurance Guaranty Assn. But he stopped short of promising such coverage, saying that “the guarantee fund will address that.”

There have been questions about whether the ailing company’s policyholders would be protected by California’s fledgling guarantee fund, since the fund excludes coverage for companies that were insolvent or impaired as of January, when the fund was launched.

In legal papers filed in Los Angeles Superior Court to establish the conservatorship, Garamendi said that the company “has not at this point been found to be insolvent or impaired.” However, a confidence crisis was creating severe demands on the company’s assets, he said.

First Executive, once a high-flying company, soared from obscurity to national prominence by promising high rates of return to policyholders. Those returns were made possible by Milken’s junk bonds, which paid investors double-digit rates of return.

After Milken was indicted, the junk bond market began to sour and First Executive began to post staggering losses. The value of its junk bond portfolio fell to $2.6 billion less than the value carried on the company’s books by the end of last year.

Fred Carr, chairman of First Executive, had a “close symbiotic relationship” with Milken, Garamendi said. Carr bought a large number of the bonds that Milken issued, while many of the companies that Milken financed insured their pension plans through Executive Life and other First Executive subsidiaries. Carr is under investigation by a variety of government agencies, but has not been indicted.

“Unfortunately, the fallout from the junk bond era continues to rain on innocent American investors,” Garamendi said. “One casualty is the Executive Life Insurance Co.”

The fate of First Executive and its insurance subsidiaries in other states was unclear Thursday. Several states have already restricted its operations, but none have taken as strong an action as California.

Garamendi said that he was working closely with New York regulators, who oversee First Executive’s second-biggest subsidiary, Executive Life Insurance Co. of New York. A spokesman for the New York insurance department said that a department audit of Executive Life of New York should be completed some time next week.

Industry experts expect the parent company, First Executive, to file bankruptcy, since the bulk of its income has come from Executive Life. Carr and other company officers refused comment.

Until Thursday, Baldwin United Corp.--which once had $3.7 billion in assets and 165,000 policyholders--was the biggest life insurer to ever be seized by regulators. Baldwin United was later sold piecemeal to other insurers.

Although industry insiders expected Executive Life’s seizure, many fear that reverberations of such a large failure will be felt for years. Policyholders, who have become increasingly shaken by Executive’s tenuous financial condition, have said they are now increasingly skeptical of the industry.