WASHINGTON — The pensions of thousands of retirees scattered across the United States are precariously dependent on the financial health of First Executive Corp., a Los Angeles insurance holding company with nearly half its investments in junk bonds.
Former workers at Pacific Lumber in Northern California, Cannon Mills in North Carolina, Revlon in New York and Standard Gravure in Kentucky receive their monthly benefit checks through annuity contracts with First Executive's California subsidiary, Executive Life Insurance Co.
The federal government, which guarantees retirement plans for 40 million workers, says flatly that it has no responsibility for protecting pensions after companies cancel their traditional pension programs and switch to insurance annuities. This makes increasing numbers of retirees dependent on 44 separate state guarantee funds, which pledge to tap other companies to pay off policyholders of failed life insurance firms.
Californians, however, lack even the basic protection of a state fund. If a life insurance company collapses, there is no financial safety net for the retirees getting annuity checks. The other states without guarantee funds are Alaska, Colorado, Louisiana, New Jersey and Wyoming; the District of Columbia also lacks such a fund. (California does operate a guarantee fund for the customers of property-casualty companies, which insure homes, businesses and autos.)
State and company officials, eager to reassure retirees and other policyholders, are quick to point out that First Executive and Executive Life are operating normally.
"The company is in very robust financial health," said Allan L. Chapman, senior vice president of Executive Life. "Even suggesting we won't perform on obligations is far-fetched."
The California Department of Insurance has an examiner on site at Executive Life. "It's pretty much business as usual," said department spokeswoman Carey Fletcher. "It's extremely premature and not even appropriate to discuss liquidation."
However, the collapse of Drexel Burnham Lambert, the premier firm in the junk bond field, and the persistent turmoil in the junk bond market have focused new attention on First Executive, which has 45% of its total assets in the high-yield bonds. This is an extraordinary concentration for the normally staid insurance business, which had just 3.6% of its assets in junk bonds at the end of 1988.
First Executive announced in January that it will take a $515-million charge against fourth-quarter earnings to account for the declining value of its junk bond portfolio. And the company, which has acknowledged that junk bond market conditions "may get worse before they get better," is expected to post a $300-million loss for the year.
Some big names in the insurance business--Cigna, Equitable, John Hancock, Prudential and Aetna--have large holdings of junk bonds. (Junk bonds are high-risk, high-yield debt securities that are rated below "investment grade" by services such as Standard & Poor's and Moody's.) But these represent a relatively small share of the companies' total assets. First Executive has by far the biggest exposure.
All of the pension checks from First Executive have arrived on time. But there is an unmistakable sense of nervousness, especially among workers aware that the certainty of federal guarantees has been swapped for the clouded future of an individual private firm.
Lester Reynolds, a 34-year veteran at Pacific Lumber, told a Senate hearing recently: "I have a brother-in-law in Montana who lost part of his pension due to a buyout two years before he retired. I have a second cousin in Virginia who lost his pension due to a buyout and had to work until he was 65 and then live off Social Security. I don't want this to happen to me or anyone at the Pacific Lumber Co. or any other working person in this country."
Executive Life annuities have replaced pension plans at Pacific Lumber, Revlon, McCrory Corp., Bulova Watch, Grove Manufacturing, Cannon Holding Corp., Walter Kidde, Jade Corp., National Forge, H. H. Robertson, Standard Gravure, Strachan Shipping and Peralta Hospital in Oakland, according to reports gathered by the Senate Labor Committee. More than 50,000 people participate in the plans, according to preliminary estimates.
The U.S. Senate Labor Committee and the California Assembly's Finance and Insurance Committee have asked First Executive for a complete list of its annuity customers.
Since 1981, employers have canceled more than 2,000 pension plans, removed $20 billion in surplus assets and replaced the plans with annuities covering 2.3 million people, both retirees and active workers. The cancellation and selection of an insurance carrier was considered a routine matter, with the government asking only that the insurance company be licensed in at least one state.