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'Little People Floundering' From Executive Life Losses

While the legal process drags on, many policyholders must contend with sharply reduced annuity payments.


More than 10 years after the failure of California's Executive Life Insurance Co., many of its policyholders, some of them elderly and disabled, are struggling to get by on monthly annuity payments that are 30% to 50% less than what they had been promised by the once highly rated insurer.

The 1991 insolvency, then the nation's largest insurance failure, served as a catalyst for stricter controls on insurance company investments. But the regulations came too late for Executive Life's thousands of policyholders, some of whom lost homes or were forced out of retirement because of the loss of income when policy values were slashed.

Policyholders blame those losses on the terms of the 1992 sale of Executive Life's "junk" bond portfolio to a French investor group for $3.25 billion. They contend that the portfolio was worth much more because the junk, or high-yield, bond market was rapidly recovering.

The deal "left all the little people floundering," said Dru Ann Jacobsen, whose 74-year-old mother lost her home after her annuity payments were cut to $1,800 a month from the $3,000 she had been guaranteed for life.

Authorities say the investor group was a front for French bank Credit Lyonnais, which circumvented state and federal laws to buy the bonds. In what has been called "the deal of the century," authorities say the bank and its partners made a profit of at least $2billion after the value of the junk bond portfolio rose.

The Executive Life deal triggered a wave of litigation, with no quick end in sight. Discovery began months ago in a suit by the state insurance commissioner, but no trial date has been set.

In a hearing last week on the merits of a state attorney general's suit seeking $6 billion in damages, U.S. District Judge A. Howard Matz gave the impression he was inclined to agree with arguments that the insurance commissioner has exclusive standing to represent policyholders in such actions.

Also last week, a U.S. 9th Circuit Court of Appeals panel cited the insurance commissioner's standing and ruled out one of two suits policyholders had filed in the case.

The 9th Circuit has yet to rule on a second policyholders' suit that names the French investors and former Insurance Commissioner John Garamendi, who seized Executive Life and oversaw the sale of its assets. In that suit, policyholders argue that the California insurance commissioner's office cannot be trusted to represent their interests because of Garamendi's alleged bungling of the Executive Life sale.

Meanwhile, the successor to Executive Life could face criminal prosecution. Federal prosecutors in Los Angeles recommended a year ago that Credit Lyonnais be prosecuted in the deal. That decision is pending at the Justice Department.

The Executive Life debacle has become a morass of insurance and banking laws and complex international investment deals. Lost in all the legal battles is the fact that thousands of policyholders are out billions of dollars. A central point of dispute is whether their losses are the result of the crash of the junk bond market or the terms of the assets sale.

Lawyers for Credit Lyonnais blame the policyholders' losses on Executive Life's investment in risky junk bonds, which plummeted in value in the late 1980s and early 1990s.

Garamendi shares that view. He said he struck the best deal he could in the sale of the company's assets. Half of Executive Life's junk bonds were in default, and the bond sale proceeds infused the successor insurance company with badly needed cash, said Garamendi, who is running for insurance commissioner again after a failed 1994 bid for governor and a stint in the private sector.

"This was the junk of the junk bonds," he said. "This was the trash. To say the market had recovered is one thing--even though it had not recovered at the time. But to say these bonds would follow the market is fallacious."

Garamendi said he pursued the sale to what he believed was a group of French investors to minimize the risk of additional losses. The Insurance Department, he said, did not have the expertise or the cash necessary to hold the bonds and sell them over time in the hopes of realizing a better return.

"It's a whole lot of foolishness to believe the Insurance Department should have kept those junk bonds," Garamendi said.

But that is exactly what policyholders believe.

"Had they not sold to the French, had they backed off and put it out to bid again, the policyholders would have gotten 100% on their dollars," said Tom Schaefer, a San Diego lawyer who represents policyholders. "In a recovered bond market, there would be no reason to restructure the policies downward."


Allegations Point at Credit Lyonnais

Policyholders were so sure the sale was a bad deal that a group of them went to court at the time to try to stop it. Then, six years after the sale, a whistle-blower's disclosure reopened the controversy.

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