Trying To Avoid A Sequel To The Executive Life Story

It hasn't been easy. John Garamendi's first act as California's insurance commissioner on Jan. 7 was to freeze auto and property insurance rates. Then, on Apr. 11, he seized Executive Life Insurance Co., the junk-bond-laden Los Angeles company, in the country's largest insurance collapse. Now, the former college wrestling champion is going mano a mano with American Express Co. in a high-stakes match over the fate of First Capital Holdings Corp. The Los Angeles company owns First Capital Life Insurance Co., whose $3.3 billion junk-bond portfolio is second only to Executive Life's. Unless the two sides come to terms, regulators could seize First Capital, creating a nightmare for policyholders and a black eye for Shearson Lehman Brothers Inc. and parent AmEx.

Garamendi wants AmEx, whose Shearson unit owns 28% of First Capital's stock, to cough up capital to keep the insurer afloat. The cash value held by policyholders of First Capital's two insurance units comes to $8.24 billion, while the investments are worth only $7.48 billion. The shortfall of $760 million is cushioned by only $357 million of capital and reserves. An infusion would reassure customers, who have begun to cash in their policies, and provide a cushion against further junk losses.

JUST TALK. AmEx has other ideas. Already bruised by some bad Shearson investments, it proposed guaranteeing $2 billion in assets that back its own customers' policies--or buying some policies outright. These plans would leave some First Capital customers out. Garamendi insists that AmEx inject funds to aid all policyholders. Three weeks of talks between Garamendi and Howard L. Clark Jr., Shearson Lehman Brothers Holdings chief executive, have floundered.

If First Capital is seized, Shearson might have to mark down its 28% stake, which it still carries on its books at $144 million. Shearson may also be pressured by litigation from policyholders to make up any losses they may suffer, a further strain on its capital base.

Garamendi is on the hot seat as well. First Capital's 40% investment in junk is already worrying some of the insurer's policyholders. "Everyone is so skittish now with the publicity about Executive Life that it can create a run at First Capital," says Frederick S. Townsend, president of Townsend & Schupp, a Hartford insurance research firm. And Garamendi's well-publicized efforts to shore up First Capital are making a bad situation worse, his critics charge.

The 46-year-old former rancher is considered a likely future Democratic gubernatorial candidate. By moving now, critics say, he can blame the lack of oversight of First Capital on his Republican predecessor and take credit for any bailout. That, of course, hinges on whether AmEx caves in to his argument that First Capital is Shearson's responsibility. After all, Shearson brokers have accounted for more than 75% of the policies sold through First Capital's California division. And four of the six seats on the insurer's board are held by directors with ties to Shearson, including ex-Shearson boss Peter A. Cohen. "They really control the board," says Gerry R. Ginsberg, First Capital's president.

Shearson denies that it controls First Capital. But it surely had a hand in four stunning moves by First Capital on Mar. 15: To reflect a wave of junk-bond defaults, the company restated earnings for the fourth quarter from a profit of $10.2 million to a loss of $24.7 million; it hired Salomon Brothers Inc. to explore the sale of its junk portfolio; it announced plans to sell its universal-life business for $150 million to repay debt and bolster capital. The most dramatic move of the day: Founder Robert I. Weingarten resigned.

BUILT ON JUNK. Weingarten, a former publishing executive, started the company in 1983. In 1985, he bought Fidelity Bankers Life Insurance Co. in Richmond, Va., and in 1987 a small insurer from E. F. Hutton Group. He built an insurer with assets of $9.7 billion by investing premium income in junk bonds and offering high rates. After Shearson acquired Hutton in 1988, it bought into First Capital since Hutton brokers had been selling First Capital policies.

The real problem at First Capital is its junk portfolio. By Dec. 31, the junk bonds, which are carried on First Capital's books at $3.3 billion, fell 25%, to $2.4 billion in market value. So far, First Capital hasn't recognized those losses. But others have. Tennessee, for one, no longer permits First Capital to write policies because of its unrealized junk losses. Ginsberg, the insurer's president, says recent junk defaults and policy surrenders are "nothing terribly unmanageable. We have plenty of liquidity."

Garamendi is also seeking money from Citicorp, the lead bank on a $275 million loan to First Capital last year. But his real target is AmEx. If it doesn't budge, he threatens to "take any action necessary to protect the interests of policyholders." Those words precisely echo the ones he used just two days before he took over Executive Life.

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