Regulators Seize Insurance Giant that Was Big Milken Junk-Bond Customer
LOS ANGELES (AP) _ State regulators seized the main subsidiary of First Executive Corp., an insurance giant that was one of fallen financier Michael Milken’s biggest customers and one of the largest junk-bond buyers ever.
Executive Life Insurance Co. was seized Thursday, said California Insurance Commissioner John Garamendi.
Next to the Resolution Trust Corp., Executive Life may be the largest holder of junk bonds in the world, Garmendi said. The Resolution Trust Corp. is a federal agency set up to sell assets of Savings and Loans that failed when the junk-bond market collapsed.
About $6.4 billion of Executive Life’s $10.1 billion in assets was invested in junk bonds, said Garamendi.
Executive Life was placed in a conservatorship to protect thousands of investors as well as many pension plans, while a team of bankers, attorneys and accountants attempt to stabilize the troubled firm, he said.
In addition, Garamendi said a consortium of European companies and investors had proposed a detailed plan to take over and operate Executive Life, adding: ″We hope to ensure a maximum return.″
Garamendi blamed Executive Life’s troubles on ″the excesses of the ’80s. The go-go attitude that created the junk bond phenomenon and the ensuing scandal - the company was very much a part of it.″
First Executive spokesman William Adams was reported to be out of his office on Thursday. A woman in Adams’ office said no statement was expected immediately.
Earlier this month, First Executive reported a loss of $465.9 million for the fourth quarter and said California regulators shut off the cash flow from its troubled insurance units.
In the last week, customers have flooded the company with calls seeking to cash in their policies, worsening its troubled financial condition even more, Garamendi said.
Until the rehabilitation is complete, customers who hold about 170,000 life insurance contracts and 75,000 annuities are barred from cashing in their policies or borrowing on them, except in cases of extreme hardship, the commissioner said. The company does business in 45 states.
Death benefits, medical payments and monthly annuities should continue while the company remains under state control, Garamendi said.
Three years ago, First Executive was the largest life insurance company in California in terms of assets.
It attracted customers during the booming ’80s with low rates made possible by high returns on junk bonds. Then the junk bond market collapsed.
Trade and financial analysts say Executive Life’s massive junk bond holdings were an ″aberration″ within the life insurance industry.
″The vast majority follow a conservative investment practice,″ said Henri Bersoux, spokesman for the American Council of Life Insurance. The council represents more than 600 companies.
First Executive’s chairman, Fred Carr, was the top customer of Milken, the former Drexel Burnham Lambert Inc. official who built an empire on the high- risk, high-yield bonds. Milken is serving a 10-year prison term after pleading guilty to six felony charges of securities violations.
The company did not contest the takeover during a brief Superior Court hearing. Carr remained in control of the parent company, but was removed as chief executive at the California and New York subsidiaries, Garamendi said.
The commissioner said he expected New York regulators would soon take similar action against First Executive’s other big subsidiary, Executive Life of New York.
Kevin Foley, deputy superintendent of the New York Insurance Department, said no additional action will be taken against Executive Life until a financial review is completed next week.
The New York agency last week barred Executive Life from selling new policies. It also ordered it to add $125 million to the New York subsidiary’s reserves.