LOS ANGELES -- Watchdog group Voter Revolt released an internal memo Thursday showing insurance regulators investigating Executive Life Insurance Co. concluded there was no financial danger just four months before the firm was seized.
'Just as in the savings and loan debacle, the insurance regulators who were supposedto protect the public from this kind of disaster failed to do so,' Harvey Rosenfield, chairman of Voter Revolt, said during a news conference.
'Instead, they bowed to the fat-cat barons of the industry they were supposed to regulate,' Rosenfield said, noting that Executive Life's problems have been well known for the past 18 months.
California regulators took control of Executive Life Insurance, a unit of First Executive Corp., a week ago in the largest such regulatory seizure of a life insurer. New York state regulators took over Executive Life of New York earlier this week.
At the news conference, Rosenfield released the confidential memorandum, written to all state insurance commissioners and issued by a task force of the National Association of Insurance Commissioners formed to investigate Executive Life.
The document, dated Dec. 27, 1990, said that Executive Life's companies were in 'no imminent financial danger' and could meet current and projected cash flow requirements.
'The companies are capable of meeting all current and projected obligations,' said the task force in the memo. 'However, unnecessary and precipitous regulatory action could have unintended results, which would increase the risk of long-term financial distress.'
The Executive Life companies had been battered by steep declines in their huge junk-bond holdings and large numbers of policy surrenders long before they were seized. Rating agencies A.M. Best and Standard & Poor's Corp. had downgraded the companies' claims-paying abilities early last year and First Executive lost more than $1.1 billion during 1989 and 1990.
'The message these people (the task force) were sending to other regulators was to do nothing about Executive Life,' Rosenfield said. 'This is a cover-up that was fostered by a pro-industry mentality.'
In California, Executive Life has 170,000 life insurance policies in force with a face value of $38 billion, 75,000 annuitants comprising $2. 5 billion in reserves and more than $3 billion in guaranteed investment contracts.
After the seizure, John Garamendi, the state insurance commissioner, placed a moratorium on policy loans and surrenders. He has not guaranteed the investments made by policyholders will be covered but said an industry-backed guarantee fund may be the solution to that problem.
Rosenfield, author of California's landmark insurance rate-cutting measure Proposition 103, was particularly critical of Garamendi's predecessor, Roxani Gillespie, and of former deputy commissioner Ray Bacon for failing to take action against Executive Life.
'Gillespie had the specific responsibility for oversight of Executive Life,' said Rosenfield, who has also blasted Gillespie repeatedly for stalling implementation of the Proposition 103 rate cuts. 'I believe she failed deliberately to take any action.'
Rosenfield also said Gillespie, a former insurance executive who was appointed to the post in 1986, gave no support to legislative efforts last year to enact a 20 percent cap on insurers' junk-bond holdings. More than 60 percent of Executive Life's $9 billion of assets are in the high-risk bonds.
Reports emerged this week that First Executive spent $225,000 last year to succesfully lobby California lawmakers against the junk-bond cap.
Bacon, also a former insurance executive, claimed late last year that Executive Life had 'weathered the storm' and was out of danger.
Garamendi succeeded Gillespie in January after being elected in November as the state's first elected insurance commissioner.
Rosenfieldsaid he released the memo in order to bring pressure on officials to punish the executives at First Executive and Executive Life. 'These folks are escaping responsibility because consumers are paying for their damage,' he said.
Rosenfield has also written to Rep. John Dingell, D-Mich., chairman of a key congressional oversight panel, proposing that: all state insurance commissioners be elected; a federal watchdog agency be created to investigate insurance regulators; and a federal guaranteee fund be established to protect against insovlencies.
