Mutual Mess (Cont'd)

Into a Los Angeles court one day last summer marched California's Insurance Commissioner Samuel L. Carpenter Jr. Within 45 minutes he emerged to announce the successful reorganization of Pacific Mutual Life Insurance Co., biggest life company on the West Coast with $215,000,000 in assets, $636,000,000 in life policies (TIME, Aug. 24). This looked more like a coup than a reorganization, an impression which was sharpened by the fact that none except those in the know were aware that the 68-year-old institution was in hot water. Upshot was a proper bedlam of litigation, investigation and recrimination that has been making California headlines ever since.

Promptly transferred to another court, the 45-minute reorganization was reopened, Commissioner Carpenter revising and refiling his plan, although the company remained in his hands. Last week, after six weeks of open hearings, in competition with another plan advanced by Giannini interests, the Carpenter plan was approved by Los Angeles' Superior Judge Henry M.

Willis.

Pacific Mutual's troubles originated with noncancelable health and disability policies which were an actuarial nightmare.

The old management has been accused of favoritism (bad loans to good friends), mismanagement (unwarranted dividend payments ) and plain skulduggery (fraudulent annual reports and misuse of funds in stock speculation). None of these suspicions has been officially confirmed, although the Pacific Mutual case still has the attention of the Department of Justice, the Securities & Exchange Commission and a local grand jury. But whatever the sins of the management may have been, the gravest was its stubborn adherence to a type of policy which continued to be unprofitable in spite of six successive premium increases.

Largely because of low premiums and the abnormally high rate of disability payments, the insurance examiners felt it imperative to boost Pacific's various reserve accounts by more than $23,000,000, an accounting move which made the company legally, if not commercially, insolvent.

That was what finally brought the intervention of Commissioner Carpenter.

Under the Carpenter plan a new company will take over the old company's entire insurance business, leaving the life policies undisturbed but scaling down the "non-cancelable" health and disability policies. Most of the legal excitement in the hearings was over the treatment of the "non-can" policyholders, who will get only from 20% to 90% of what they bargained for depending on the policy and premium rate. The "non-cans" think this amounts to deprivation of property without due process. Under the plan they may eventually (1951) have their claims restored to par as earnings increase.

Another thing that annoys the "non-cans" is that the old stockholders were not completely washed out. (Pacific Mutual is actually a stock company.) The Carpenter plan provides for future mutualization if the policyholders wish to bail out the old stockholders for $3,000,000.

Under the rival Giannini plan the "non-cans" would have received better treatment at the start but insurance experts testified that the Carpenter plan would be better for them in the end. Declared Judge Willis last week: "We must all concede that in such obscure matters as pertain to the actuarial aspect of the life insurance business, we know very little--so little that our own personal judgment is worthless. So we have to look to those who know." Loser though he was, Lawrence Mario Giannini, heir apparent to his father's banking throne, announced: "I sincerely hope the plan will succeed." Meantime Commissioner Carpenter prepared to journey to Hot Springs, Ark. for a convention of the National Association of Insurance Commissioners, which opens this week. There he will seek from his fellow commissioners the approval of his plan, which is necessary for Pacific Mutual to do business in their respective States.

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