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Insurer's Failure Ensnares Thousands of Casualties : Executive Life: Pension payments have been slashed. A crisis of confidence threatens the industry.


WASHINGTON — William Beale and his wife, Elvera, went on a vacation in early April to the Grand Canyon and returned to discover their financial future suddenly shaky, as they found themselves among those caught up in the failure of Executive Life Insurance Co.

The couple are supposed to receive $22,000 from a retirement annuity coming due in November. But Beale, a 74-year-old resident of Leisure World in Seal Beach, says: "I haven't the slightest idea what will happen. We've been told all along you never miss with insurance."

They are not alone. Misplaced confidence in the sanctity of an insurance company has ensnared thousands of unwitting casualties. People such as the Beales bought individual policies for an economically secure old age.

On April 11, California regulators seized Executive Life in the largest failure of a life insurer in history. A sister firm, Executive Life of New York, also has been placed in conservatorship by regulators there. And this week the insurers' parent company, First Executive Corp., sought protection from creditors by filing for Chapter 11 bankruptcy.

In the aftermath, retirement payments to thousands of workers who never heard of Executive Life have been slashed by 30% beginning this month. After taking control of the company, California Insurance Commissioner John Garamendi ordered Executive Life to cut all annuity payments--including those bought by companies after terminating pension plans--to conserve the insurer's inadequate funds.

The ripple effects from the Executive Life failures--and subsequent seizures of the insurance units of First Capital Holdings Co.--threaten to create a crisis of confidence for the insurance industry, which depends on the faith of the public to market its products, and for the corporations that turned to Executive to handle their pensions.

It's not an isolated problem. The potential victims are in all 50 states and the District of Columbia, notes Sen. Richard Bryan (D-Nev.), who directed a recent Senate Commerce Committee hearing on the insurance industry problems. Executive Life of California alone has 170,000 life insurance policies and 75,000 retirement annuities with a value of $45 billion.

Many find themselves in a sort of financial limbo because their employers--an impressive roster that includes Revlon, RJR Nabisco, Merritt Peralta Hospital Center in Oakland, Smith International Inc. and Bulova Watch Co.--swapped their pension plans for Executive Life annuities.

"I guess I'll make it, but I'm sure there are a lot of people who can't," says Ralph McMichael, who retired after 43 years as a manager for Stoody Co., a welding products firm based in the City of Industry. His pension check has been reduced from $522 a month to $365.

Even some individuals hurt in accidents or by medical malpractice have had their settlement payments coming from Executive Life cut back.

In San Diego, a woman whose sole income comes from a malpractice settlement for botched medical treatment received her May check on Wednesday. It was $2,186, slashed from the normal allotment of $3,123. "I haven't digested it yet," she says. "But it will put a lot of pressure on me to change my life. I haven't thought it through."

Indeed, California regulators are compiling an ever-growing list of potential victims as they pore through the books of Executive Life, which grew rapidly during the 1980s as it was drawn to the siren song of high-yield, high-risk junk bonds. Garamendi will hear some of their stories Friday when he meets with members of the Action Network for Victims of Executive Life at the Los Angeles County Hall of Administration.

The seeds of the disaster were sown in the 1980s when many firms dipped into their pension funds, ripe with surpluses because of gains in the stock market, and pulled out the excess money for other corporate uses. In some cases, companies terminated their pension plans, replacing them with annuities--long-term contracts providing lifetime payments for the workers in question. The excess pension money was then used to help pay the massive debt resulting from a takeover of the company.

This was a standard tactic, and no one paid much attention until Executive Life got into financial trouble as the junk-bond market crashed. The company had grown rapidly on the strength of high-interest payments made possible by its risky investments.

Now, no one wants to take full responsibility for the retirees whose pensions are in jeopardy. The government agency that protects retirees--the Pension Benefit Guaranty Corp.--already is running at a big deficit. And once a firm replaces its pension plan with an annuity, the federal protection stops.

Each employer with an Executive Life annuity is pursuing an individual course, deciding if it wants to replace the 30% cut from retirement paychecks, which began this month.

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