NEWS ANALYSIS : Winning Bid for Exec Comes at Key Moment : * Insurance: Analysts say the industry will gain some much-needed confidence after the failure of some players.

The apparent winning bid by a group of state insurance guaranty funds for Executive Life Insurance Co. reflects the industry’s efforts to slash its tab for cleaning up the mess by an estimated $800 million and earn some much-needed confidence from the public, regulators and politicians.

The bid by the National Organization of Life and Health Guaranty Assns., a group of private associations in each state formed by insurers to protect policyholders when companies become insolvent, would pay Executive Life’s policyholders 89 cents on the dollar, compared to two major rival bids offering 86 cents and 85 cents.

The group still must show California Insurance Commissioner John Garamendi that it can meet several conditions, not the least of which is that it has the legal authority to take over an insurer. Insurance executives, however, said they do not expect legal and other conditions to be a problem. But one French group that was a competing bidder questioned whether the insurance organization can pull off the bid financially and legally.

In any event, the bid by the organization, known as NOLHGA, comes at a critical time for the life insurance industry, which has seen an erosion of confidence in the wake of the failures this year of Executive Life, New Jersey-based Mutual Benefit Life and two insurance units of Los Angeles-based First Capital Holdings. The bid is seen as a way for the industry to show that it will step forward to help pick up the pieces left by insolvent insurers.

“It is important for the industry in a clear way to indicate that even in a troubled company, policy owners will get most of their money, if not all of their money,� said Pacific Mutual Life Insurance Chief Executive Thomas C. Sutton, who was active in advising NOLHGA on its bid.

Added Garamendi at a press conference Thursday: “This is the industry’s window of opportunity (to) show the industry will always be there to back up a failed insurer.�

Just as important, however, is that the bid will allow the insurance companies to structure a much cheaper method of dealing with the problem.

Regardless of which bid won, the industry, through state guaranty funds, would shoulder any shortfall to policyholders. Guaranty funds are safety nets, financed through special assessments when needed, that typically cover policy values up to $100,000 and death benefits up to $300,000. About 95% of Executive Life’s policies are covered by guaranty funds.

Harry G. Hohn, chief executive of New York Life Insurance Co., said the insurance industry’s tab under the NOLHGA bid is projected at about $400 million, although it could run from nothing to as high as $800 million.

The $400 million, he said, compares to a projected cost of $1.1 billion to $1.2 billion had one of the major competing bids won. New York Life’s share of a $400-million industrywide assessment, for example, would be about $35 million, compared to more than $100 million on an assessment that topped $1 billion.

Should Executive Life’s huge portfolio of risky junk bonds perform better than expected, Hohn said, the cost will be considerably less.

“We think that if we can manage the bonds well and run the company well, that in the long run the assessment--if we get lucky--could be zero,� said Hohn, who has been active in the industry’s efforts to deal with the Executive Life problem.

Insurance executives close to the situation said the NOLHGA bid was appealing to the industry because it allows the industry to better control the clean-up job.

“We can be sure the thing is managed in the best interests of Executive’s policy owners,� said James R. Gillen, senior vice president and general counsel for Prudential Insurance Co. of America.

The industry gave a boost to the NOLHGA offer late Wednesday through a last-minute endorsement by the influential American Council of Life Insurance, which represents more than 600 life insurance companies. The council said that the bid best protects the interests of policyholders, adding that “there would be no windfall profits for private investors.�

Raising the issue of potential windfall profits highlights what has been one of the political risks for Garamendi, California’s first elected insurance commissioner, in selecting a bidder.

Had the deal proved a bonanza for a private investor, Garamendi would have been open to criticism that he failed to negotiate the best possible deal. Similar criticisms have been made of thrift regulators, for example, who in some cases sold failed institutions to savvy investors who ended up making huge profits.

Another political risk was that one of the top competing bidders, a group led by Altus Finance, was being advised by former Drexel Burnham Lambert executive Leon Black.

Black is a onetime colleague of former Drexel junk-bond pioneer Michael Milken, who is now serving a 10-year federal prison sentence for violating securities laws. An Altus victory could have left Garamendi open to criticism that he was letting some of the same Drexel people who helped Executive Life load up on junk bonds benefit from the insurer’s failure.

Q & A

A two-month auction for failed Executive Life Insurance Co. resulted Thursday in Insurance Commissioner John Garamendi’s tentative recommendation that the National Organization of Life and Health Guaranty Assns. take over the company. Here are answers to questions about NOLHGA and its bid.

Question: What is the National Organization of Life and Health Guaranty Assns.?

Answer: The National Organization of Life and Health Guaranty Assns., or NOLHGA, is made up of 47 state-operated funds that help cover policyholder losses when an insurer fails. NOLHGA usually coordinates efforts between funds when more than one state fund is involved.

Q: Why was NOLHGA’s bid chosen over seven other offers for Executive Life Insurance Co.?

A: NOLHGA was the high bidder. It offered to pay policyholders and annuitants 89 cents for each dollar invested. Garamendi said the bid was 3 to 4 cents higher than the two next best bids. Garamendi said he also favored the bid because it had the full support of the insurance industry, “the best guarantee you can get.�

Q: Does this mean that policyholders and annuitants will lose money?

A. Most won’t. Separately from its bid, NOLHGA’s members--the state-run guaranty funds--will provide enough money to fully cover the first $100,000 of a contract’s value. It is estimated that 95% of Executive Life’s policyholders and annuitants will be completely protected under this plan.

Q: Can policyholders or annuitants cash in their contracts?

A. Yes, but NOLHGA plans to impose a substantial penalty to discourage people from cashing them in. For the next five years, those who cash in contracts will have to pay a “surrender charge� equal to 60% of the contract’s cash value. But policyholders and annuitants may withdraw up to 10% of the contract value each year without penalty.

Q: Is the bidding process over?

A: Not yet. Garamendi’s recommendation of NOLHGA’s bid was contingent on NOLHGA’s ability to demonstrate that it has the financial strength and legal authority to run Executive Life. Garamendi gave NOLHGA 10 days to show how it will protect policyholders and annuitants against losses in Executive Life’s $3-billion junk bond portfolio, among other things. If NOLHGA can’t meet Garamendi’s conditions, he will recommend another bidder to take over Executive Life. Even if NOLHGA satisfies Garamendi’s conditions, it is possible that the losing bidders may step forward with new, higher bids.

Q. What happens if NOLHGA’s bid clears those hurdles?

A: It still must be approved by Los Angeles Superior Court Judge Kurt Lewin, who is overseeing the disposition of Executive Life. If Lewin approves it, NOLHGA would take over Executive Life within 60 to 90 days, Garamendi said.