Executive Life Bailout Firm Is Selected : Insurance: Commissioner Garamendi gives conditional approval to a billion-dollar bid by an industry group over seven other offers.

By SUSAN MOFFAT

Oct. 25, 1991 12 AM PT

TIMES STAFF WRITER

State Insurance Commissioner John Garamendi on Thursday announced his conditional choice of an insurance industry group to take over failed insurer Executive Life, a major step toward completing one of the largest-ever bailouts of a U.S. insurance company.

The complicated billion-dollar bid by the National Organization of Life and Health Guarantee Assns., recommended by Garamendi over seven other bids, could spell relief for hundreds of thousands of Executive Life policyholders who had depended on their policies for retirement income or other needs.

Garamendi seized Los Angeles-based Executive Life in April--in what was then the largest-ever failure of an American insurance company--after a plunge in the value of its risky junk bond portfolio led to a rush by nervous policyholders to cash in their policies. For months, many policyholders have faced the prospect of seriously diminished futures as a result.

The NOLHGA bid, an unprecedented attempt by the insurance industry group to take over a failed company, would spread the cost of supporting Executive Life among policyholders of all life insurance companies and taxpayers in at least 47 states. While it offers less cash than competing bids, “it is backed up by the strength of the entire U.S. insurance industry,” Garamendi said at a news conference in Los Angeles.

Policyholders expressed concern that the NOLHGA takeover plan would not immediately purge Executive Life of the junk bonds that got it into trouble. But Garamendi said NOLHGA’s bid offered the best financial return and security to policyholders.

He added, however, that it must strengthen its bid with increased guarantees within the next 10 days to win his unqualified recommendation.

IF NOHLGA fails to “solidify its proposal,” Garamendi said, “we are prepared to move expeditiously to recommend another bidder.” If that happens, Garamendi said, within four days he would choose either the Altus investor group from France or a group led by a San Francisco investment bank Hellman & Friedman, two bids that he said favorably impressed him. Either group could increase its bid.

Superior Court Judge Kurt Lewin is scheduled to begin hearings today on the bids and will make the final decision. Garamendi’s recommendation will weigh heavily in that decision. There is no deadline for Lewin’s decision.

But because of its conditional nature, Garamendi’s recommendation still leaves the fate of policyholders and competing bidders in limbo.

Some industry sources saw the conditional selection as an attempt to boost bids from competing groups. They called the choice an astute political move by Garamendi, the state’s first elected insurance commissioner, because it appears likely to increase the amount of money most policyholders receive, just as his efforts to win auto insurance rebates have been aimed at benefiting large numbers of consumers.

“It’s a good way to make (other groups) raise their bids,” said Robert Arvinitis, an insurance analyst with Conning & Co. in Hartford, Conn.

Also, because NOLHGA is a nonprofit group, if it wins, its victory will prevent future charges that any bidder won windfall profits in the takeover.

Garamendi said NOLHGA would pay Executive Life’s policyholders 89 cents for every dollar they had invested in policies, compared to 86 cents and 85 cents for the Altus and Hellman & Friedman groups, respectively.

Both Altus and Hellman & Friedman said their bids were actually worth more than what Garamendi said Thursday, and said they would work with his office to understand the discrepancy.

The NOLHGA bid offers only $5 million in cash and about $1 billion in “legally binding commitments” from its member guaranty associations. Garamendi said that “if the insurance industry is standing behind the bid it is not necessary to bring in cash.”

The NOLHGA plan is likely to save the insurance industry a lot of money because it would reduce insurance company payments to state guaranty funds. Such funds would be needed to support any bailout deal by private companies.

For that reason and others, industry sources said, NOLHGA still has a good chance of owning the company, and is not merely a tool being used by Garamendi to pump up other bids.

A spokesman for the American Council of Life Insurance said his organization, which represents many large insurers, was delighted with Garamendi’s choice. “There is risk. But it’s being borne by industry at large,” he said.

Eden Sarfaty, president of NOLHGA, said he was confident his group’s bid would win in the end. “I absolutely believe the commissioner has said what he said in good faith, both from the standpoint of preferring our plan and wanting further qualification (from us),” he said. But both Altus and the Hellman & Friedman group said they still hoped their bids would emerge as winners.

Warren Hellman, a leader of the Hellman & Friedman group, which also includes Fund American Enterprises, Zell/Chilmark Fund of Chicago and General Motors’ pension funds, said his group will continue to work on improving its bid.

“What (Garamendi) did is extremely logical,” Hellman said. “Some people say he’s using (NOLHGA) as a very effective stalking horse to improve Altus’ and our bids. Or he hopes (NOLHGA) will be able to perfect (its) bid. The outcome will be the same one way or the other. He’s raised the (high jump) bar.”

John Hartigan, a lawyer for the Altus group, which also includes French insurer Mutuelle Assurance Artisanale de France, or MAAF, said he still thinks its bid is the best. “When the dust settles, we believe the Altus bid will be accepted. We think the NOLHGA proposal is not legally or financially performable.”

Many policyholders were surprised by Garamendi’s choice, as conventional industry wisdom held Altus and Hellman & Friedman as the front-runners as late as yesterday.

“We were all a little stunned,” by Garamendi’s announcement, said Sue Watson, whose brain-damaged daughter depends on an Executive Life annuity for her large medical expenses. Watson and 2,000 other policyholders represented by the Action Network for Victims of Executive Life, or ANVEL, said earlier that they had hoped for a takeover plan that would purge the company of its junk bond portfolio to increase their security.

The NOLHGA plan, however, like the Hellman & Friedman plan, would sell off the junk bonds gradually. Maureen Marr, who represents the policyholder group, said she would have to see more concrete guarantees before she trusted the NOLHGA bid.

Garamendi is demanding that NOLHGA demonstrate that it has the legal and financial means to back up its bid.

While the organization’s bid has the advantage of being backed by the insurance industry, it also reflects the fragmented nature of the industry, which is primarily regulated by a welter of different state laws.

Because NOLHGA’s bid depends on cooperation among guaranty organizations in 47 states, Garamendi said it must prove that it has legal authority to levy payments from those organizations to back up Executive Life policies. So far, Sarfaty says all the state guaranty funds except Alaska’s have agreed to support the Executive Life bailout plan.

Garamendi is also seeking guarantees that payments to Executive Life policyholders will not be endangered by lawsuits or future legislation affecting each of those state guaranty organizations.

Other bidders to take over Executive Life included Broad Inc., a Los Angeles-based insurance holding company; an investor group including Hollywood music mogul David Geffen, Texas investor Richard Rainwater and money manager Bechtel Investments, and the creditor’s committee of First Executive Corp., Executive Life’s parent. Two other bids have been submitted by holders of municipal bonds backed by Executive Life-backed guaranteed investment contracts.

The NOLHGA bid would pay 90 cents on every dollar owed to the vast majority of policyholders whose contracts are worth less than $100,000. The remaining 10% owed on each policy would be paid to policyholders by state guaranty funds.

For holders of policies worth more than $100,000, the portion of their policies over that figure would be paid at 90%.

Holders of bonds backed by municipal guaranteed investment contracts, known as muni-GICs, were not included in the plan. This group of investors has filed a lawsuit against Executive Life, and could throw a wrench into the bidding process.

An Internal Revenue Service lien on Executive Life’s assets is another sticking point that any bid must overcome.