A coalition of municipal bond dealers on Thursday will file a court statement seeking to establish that holders of municipal guaranteed investment contracts issued by Executive Life Insurance Co. should receive the same treatment as all other policyholders.
The dealers -- First Boston Corp.; Morgan Stanley & Co.; Howard, Weill, Labouisse, Freiderichs Inc.; Rauscher Peirce Refsnes Inc.; Morgan, Keegan & Co.; and Rotan Mosle Inc. -- argue that legal and the California Insurance Code support the notion that municipal GICs are insurance policies and thus deserve the same financial compensation as life insurance policy holders and pension GIC holders.
On April 22, a California court allowed the state's insurance commissioner to differentiate between groups of Executive Life policyholders, and municipal GIC bondholders came out on the bottom of the heap. Tomorrow, the County of Los Angeles Superior Court is holding a confirmation hearing of the ruling.
Members of the group were either senior managers or co-managers of eight 1986 taxable municipal bond deals that were reinvested in Executive Life GICs. The group's memorandum to the court says Commissioner John Garamendi's "rehabilitation plan," announced last month, is inconsistent with his role as conservator and with rulings in Indiana, Maryland, and Minnesota.
Citing California Insurance Code Section 1033, the group's memorandum to the court says, "Favoring one ... class member over another in a conservatorship of an insolvent insurance company is a violation of the commissioner's duties as a trustee to the disfavored policyholder. While the commissioner has broad powers either as a conservator or liquidator, he may not create favored and disfavored subclasses of policyholders."
Part of the reasoning behind Mr. Garamendi's proposed treatment of GICs hinges on the assertion that claims for municipal GICs are not covered by the California Life Insurance Guaranty Association, and thus may be satisfied after all other policies and just before creditors. The group's memorandum says language in the state insurance code puts the GICs on a par with unallocated annuity contracts.
"By providing that [the insurance association] excludes GIC's and 'all other' unallocated annuity contracs," the memorandum states, "the code necessarily includes GICs within the category of unallocated annuity contracts," or all policy liabilities for which the assets are not specifically designated. Pension GICS also fall into this category.
The memorandum also refers to a legal opinion rendered by Executive Life's internal counsel when the GICs were issued in 1986, saying it supports the concept of "pari passu," or equal treatment of all policyholders. The "counsel confirmed to the parties to the transactions that ... the GICs would be treated equally," the memorandum says.
Several lawyers representing the bond dealers declined to name the internal counsel or comment on the filing until after tomorrow's hearing.
Despite these arguments, however, observers remain doubtful the dealers or a Texas-based bondholders' group would succeed in swaying the superior court. The problem, they say, is the political sensitivity of an argument that would mean less salvage for the individuals with life insurance policies and pension funds.
Robert D. Hogue, senior analyst at Moody's Investors Service, said the rationale is that GICs are also defined as funding agreements, which "are in a class below pension GICs because it's not retiree money.
"Retirees would seem to have a bigger stake than the municipal lenders," Mr. Hogue continued. "It's more of a social answer than a financial one. In any case, the fight is going to go on a long, long time."
The fight is over a dwindling pool of assets, Mr. Hogue noted. At the end of 1990, Executive Life's junk bond portfolio had a marked-to-market value of $2.6 billion. The GIC claims total $3.1 billion, about $1.9 billion of which are in municipal contracts. In addition, 170,000 life insurance policyholders and 75,000 annuitants have invested in the firm.
Mr. Hogue added that municipal GICs are a relatively new product in the slow-moving insurance world, so few states have incorporated them into the formal coverage, such as the California Life Insurance Guaranty Association's "covered claims" mentioned by Mr. Garamendi.
Jeffrey L. Eglow, president of JLE Asset Management, said bonds backed by municipal GICs were never legitimate securities because the projects specified in the bond indentures were never built. "First Executive was playing upon the junk bond market to build the company up," Mr. Eglow said. "The bonds weren't legitimate.
"We're telling our clients to assume the worst," he added. "If bonds do rally, investors should sell into it."
Separating pensions from municipalities is not a clear-cut issue, according to Donald B. Scalley, a pension consultant and senior vice president of Keane Securities Inc. Mr. Scalley pointed out that at the end of the municipal GIC food chain, it is actually individual policyholders who will be devoured.
"About 70% of the life insurance assets in the U.S. are held by four major companies, all of which are mutual insurers," Mr. Scalley said. "Mutual insurance companies are owned by the policyholders -- all profits are remitted in dividends -- so the losses will come out of the policyholders' pockets."
These policyholders "would be hurt just as devastatingly" as retirees in plans that bought Executive Life pension GICs, he said.
The 1986 issues underwritten by the dealers' group are: a $400 million Memphis Health, Education & Housing Facility Board offering; a $300 million multifamily housing issue sold by the Adams County, Colo., Industrial Development Authority; a $300 million Southeast Texas Housing Finance Corp. issue; a $200 million El Paso Housing Finance Corp. issue; two $150 million Louisiana Agricultural Finance Authority offerings; a $150 million Louisiana Housing Finance Authority issue; and two Nebraska Investment Finance Authority deals, each $100 million.
