NEW YORK — Walt Duemer, president of the leading marketing organization for First Executive Corp.'s life insurance policies, says he was forced to eat crow this week.
For months, he has told nervous private insurance agents to ignore the negative press that Los Angeles-based First Executive has received, to stop worrying about the firm's heavy investments in junk bonds.
"When negative publicity has come out, I've said: 'Don't believe any of that stuff,' " Duemer says. Instead, he told the agents to look at what counts: the stellar ratings given to the company's ability to pay claims by the venerable agencies Moody's and Standard & Poor's.
On Monday and Tuesday, however, following an avalanche of bad news from First Executive, the two widely watched ratings agencies lowered their ratings of the company. Duemer, president of the Exceptional Producers Group, said the agents he deals with--the largest ones that sell the policies of First Executive's big California subsidiary--have now virtually stopped writing any new life insurance business for First Executive. And Duemer said that, since the ratings change, he has been left without a plausible argument to persuade them why they should.
The wheel of fortune has turned for First Executive: The days of explosive growth have ended, and the company's problems--and stock price--have worsened so significantly just in the past two weeks that it announced Thursday that it is waiving a "standstill" agreement with a major shareholder, ICH Corp. The waiver will allow ICH to put together a group to make a bid by July to acquire First Executive. In Wall Street parlance, this may have put the company "in play." But even assuming that one or more viable bids materialize, there is concern about how well the company will hold up in the interim.
The announcement came as First Executive Chairman and Chief Executive Fred Carr and the firm's new president, Alan C. Snyder, were completing an emergency visit to the East Coast to meet with securities analysts, institutional investors and brokers in an effort to persuade them that the company still has a strong capital position and more than enough cash on hand to meet all obligations.
The company's present situation is a far cry from the heady days of the early 1980s, when First Executive took the life insurance world by storm, fueling exponential growth by offering innovative products and using high-risk, high-yield junk bonds to offer rates that competitors couldn't match.
Although there are no signs of panic, California insurance regulators and insurance industry analysts have been watching closely for any sharp upswing in the rate that customers are pulling their money out of First Executive through surrenders of life insurance policies or annuities.
Lorraine Johnson, an attorney in the California Insurance Department, says that so far there has been no indication of a run on the firm's big California life insurance unit, Executive Life of California. But she says the department is monitoring the situation closely because "there is definitely concern." Johnson adds that "certainly there are a lot of policyholders out there who are concerned about what they've read in the newspapers." (A top regulator at the New York Insurance Department, which over the years has imposed tough restrictions on the company's New York unit, says Executive Life of New York currently has plenty of reserves to meet any upswing in surrenders.)
To judge by First Executive's public statements and its financial reports, the firm does have considerable cash on hand to cover any flight by policyholders--more than $2.5 billion in cash or securities readily converted into cash.
But even if policyholders are well protected, the recent developments have led to what amounts to a crisis of confidence by the company's shareholders. Standard & Poor's lowering of its rating followed these events:
- The firm disclosed last week that it plans to take a $515-million charge against fourth-quarter earnings, related to the declining value of its junk bond portfolio. As a result, First Executive says it will report substantial losses for the quarter and full year.
- Figures put out by the company last week suggest that, just since Sept. 30, the market value of its junk bonds portfolio has declined by about $1 billion, raising the possibility that further big writedowns may be necessary, especially if more bonds held by First Executive go into default. About 45% of First Executive's total invested assets are in junk bonds. (Allan L. Chapman, vice president of First Executive, denies that additional writedowns are likely.)
- The firm announced earlier this month that the planned $460-million sale of its New York life insurance subsidiary, Executive Life of New York, had collapsed. Although the New York unit has been extremely profitable, the sale would have given a needed boost to the parent company's cash flow.
