A Sizzler Finally Fizzles

By Janice Castro

The warnings began more than a year ago. Executive Life Insurance, with 245,000 clients holding $40.5 billion of life insurance and annuities, was teetering toward insolvency. When California state insurance commissioner John Garamendi stepped before TV news cameras in Los Angeles last week, the pieces fell into place like tumblers in a lock.

As Garamendi announced that his agents were seizing control of Executive Life, attorneys for his department were securing an order in superior court enabling him to place the insurer in a state-controlled conservatorship. Across town, at the modern glass-and-steel headquarters tower of the insurer's parent company, First Executive, Garamendi's agents informed chief executive Fred Carr that he no longer headed the Executive Life subsidiary. Addressing himself "to the schoolteachers and hardhats, secretaries and doctors" who are the insurer's customers, Garamendi pledged, "We are going to do everything in our power to see that your money is there when you need it."

Executive Life's failure -- the industry's largest yet -- comes when many insurers are burdened with large investments in mortgages and junk bonds that have gone south. But aggressive Executive Life is far worse off than most.

Carr, 60, is a Los Angeles native who pumped gas part time until he was 32, and he has tried hard to make up for lost time. As an insurance entrepreneur he disdained the slow, steady process of writing policies and building reserves through careful investments to cover eventual payouts. Instead he built the company with sizzle and flash, turning in the 1980s to the high- yield junk bonds sold by Drexel Burnham's Michael Milken. Of Executive Life's $10.1 billion in assets, $6.4 billion is junk. Says Henri Bersoux, a spokesman for the American Council of Life Insurance: "No other company of that size or larger has invested so much of its assets in high-yield bonds." As the junk-bond market fizzled in 1989, First Executive reported a stunning $859 million write-down in its portfolio.

The insurance industry equivalent of a run on the bank took place two weeks ago. First Executive reported a $465.9 million fourth-quarter loss just as its auditors questioned its ability to keep doing business. That week 260 clients a day cashed out their policies, nearly four times the average during the first three months of this year. At the same time, New York State regulators barred Executive Life from writing new policies and ordered it to raise its reserves $125 million.

In announcing his takeover last week, Garamendi assured policyholders that medical claims and death benefits will continue to be paid while the state manages the company. He added that a consortium led by a division of Credit Lyonnais, the large French bank, is exploring an acquisition of the California insurer. If the deal goes through, most of the firm's policyholders will rest much easier. But the story isn't over. First Executive also owns Executive Life of New York -- and the California action has set off a renewed rush on it.

With reporting by Bernard Baumohl/New York and Sylvester Monroe/Los Angeles