Shearson Officials, Garamendi Discuss First Capital’s Bind

NEW YORK â€”  Seeking to bolster the finances of First Capital Holdings Corp. to protect policy and annuity holders, California Insurance Commissioner John Garamendi met here Monday with executives of Shearson Lehman Bros. Inc.

Shearson, a unit of American Express Co., holds a 28% stake in the troubled insurer, which has been struggling under the weight of a huge portfolio of high-risk, high-yield junk bonds.

Shearson and its predecessor, E. F. Hutton & Co., sold hundreds of millions of dollars worth of First Capital policies and annuities to their clients. They could face lawsuits and other claims from angry customers if the insurer fails.

One scenario being discussed, according to a source close to the talks, is for Shearson to guarantee about $2.3 billion in First Capital annuity policies. The guarantee would extend to the policies’ principal but not the accrued interest, the source said.

Spokesmen for Shearson and Garamendi confirmed that the meeting took place but declined further comment. A spokesman for First Capital said the company was aware of the talks but did know their substance.

The company previously retained Salomon Bros. to help it raise capital and is looking into selling its universal life insurance business.

Like First Executive Corp., First Capital, based in Los Angeles, grew rapidly during the 1980s. It was both an investor in and an issuer of junk bonds.

Garamendi seized First Executive’s main unit, Executive Life Insurance Co. of California, last month.

First Capital’s principal unit, First Capital Life Insurance Co. of California, is rated D-- an indication that it is in poor financial shape--by Weiss Research Inc., a financial services rating firm in West Palm Beach, Fla.

“They have weak capitalization and a weak investment strategy,� Weiss spokeswoman Sue Ann Bailey said.

First Capital’s position was further hurt by an accounting change that had the effect of roughly doubling the percentage of junk bonds in its $8-billion investment portfolio--to about 40% from 20%.

At the meeting on Monday were Garamendi, Shearson Chairman Howard L. Clark Jr. and aides of the two. Garamendi met earlier with James D. Robinson III, American Express Co.’s chairman.

“American Express may join in a bailout to preserve its own reputation,� said Ron Vannuki, managing director of Drake Capital Securities in Santa Monica.

In addition to protecting policyholders, American Express may also be trying to salvage Shearson’s reported $160-million investment in First Capital. At First Capital’s market price, Shearson’s stock is worth about $26 million.

In March, First Capital Holdings restated its earnings to reflect woes in its investment portfolio. The company said it set aside $45.3 million to cover losses on corporate bonds--situations in which the issuers either defaulted or announced their intention to default.

The company posted a $24.7-million fourth-quarter loss as a result, and it revealed that the value of its fixed-income portfolio--largely made up of junk bonds--is worth $565 million less than it paid for the investments.

On Monday, the company’s stock priced closed down 25 cents to $2.

Times staff writer Kathy M. Kristof in Los Angeles contributed to this article.