First Capital Life Seized as Parent Firm Is Pressed : Insurance: The second-largest failure of a life insurer was precipitated by lenders’ attempt to force its holding company into Chapter 11.

SACRAMENTO — State Insurance Commissioner John Garamendi on Tuesday seized ailing First Capital Life Insurance Co. of San Diego after major lenders sought to force its parent company into Chapter 11 bankruptcy proceedings.

Garamendi said the state placed the company in conservatorship to protect the interest of more than 250,000 First Capital policy and annuity holders. It is the second-largest failure of a life insurer ever and comes on the heels of the seizure last month of the biggest, Executive Life Insurance Co.

The state took control of First Capital after a group of lenders headed by Citibank petitioned late Monday to force its parent, Los Angeles-based First Capital Holdings Corp., into bankruptcy for defaulting on a $275-million loan. By placing First Capital into conservatorship, regulators actively run the firm. First Capital will still pay customers death and annuity benefits in full, along with accident and health claims. But the state is prohibiting policy redemptions and loans on policies.

The effect of Garamendi’s action is to shield the insurance company against claims filed by banks and other creditors. At a press conference, he described his move as placing First Capital “into a protective envelope, if you will, walling it off from all of its creditors for the protection of its policyholders who have a higher status than the general creditors.”

First Capital Holdings was a high-flying insurance operation headed until March by Robert Weingarten, one of the industry’s highest-paid executives who last year took home $1.35 million. The firm’s problems stem largely from investments in risky, high-yield junk bonds.

Shearson Lehman Bros., an American Express subsidiary, owns 28% of First Capital, and regulators have been pressuring the brokerage firm to provide more financial support to the insurance units. Negotiations are continuing on that issue.

Last week, Garamendi slapped restrictions on First Capital Life after customers flooded the firm with requests to cash in their policies--a situation analogous to a run on a bank. On Monday, Virginia insurance authorities seize its sister unit, Fidelity Bankers Life Insurance, a Richmond, Va.-based insurance firm slightly smaller than First Capital Life.

First Capital has assets of $4.46 billion, 190,000 life insurance policyholders and 62,000 annuitants, the state said. Fidelity Bankers has assets of $4.07 billion, 120,000 policyholders and 105,000 annuitants. Both operate in 49 states.

Garamendi previously said he believes that First Capital policyholders will receive all of their benefits. At the news conference, he said he would not have placed the firm into conservatorship had the creditors not sought to force it into bankruptcy. He added that a liquidation of the company is not planned.

The banks’ petition, which says First Capital “has virtually no income,” lists $120 million as due on the loan, with another $11.6 million due under a related letter of credit. Separately, First Capital has $7.5 million due today in payments on $115 million in junk-bond debt.

Citibank is the lead bank on a so-called syndicated loan made to First Capital, a type of loan that involves a group of banks teaming up to extend credit to one borrower. Other banks in the group include Mitsui Manufacturers Bank in Los Angeles and National Westminster Bank in New York.

A source familiar with the loan said Citibank’s share of the $275-million loan agreement is $200 million. The bankruptcy petition says the loan is secured by common stock in First Capital and its units, which is now virtually worthless, along with some notes. Sources familiar with the May, 1990, loan agreement said First Capital first missed a payment due April 15.

Citibank’s petition seeks to force First Capital into Chapter 11 of the U.S. Bankruptcy Code. Under Chapter 11, a company continues to operate under protection of the bankruptcy court while its finances are reorganized. In addition to the parent firm, the petition lists First Capital Life and Fidelity Bankers Insurance.

In a statement, First Capital Life Chief Executive Fred A. Buck said that the firm believes that the conservatorship “is in the best interest of the policyholders and that First Capital Life retains its underlying financial strength.”

Bates reported from Los Angeles and Weintraub reported from Sacramento.

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