Business: Mutual’s Mess

Month ago California’s Insurance Commissioner Samuel L. Carpenter Jr. and officials of Pacific Mutual Life Insurance Co. of California went into the Los Angeles court of Superior Judge Douglas L. Edmonds. In a 45-minute proceeding the company was, at the request of Commissioner Carpenter, declared insolvent and its assets placed in his care until reorganization could be worked out. In the same breath, a new company called Pacific Mutual Life Insurance Co. (i.e., without the “of California”) was formed to take over its predecessor’s business under a management headed by old Pacific Mutual’s President Alexander Nesbitt Kemp. No sooner had Messrs, Carpenter and Kemp announced details of their reorganization plan than wrathful stock and policyholders, created the biggest hue & cry California business had heard in some time.

If Manhattan’s Metropolitan Life Insurance Co., largest private financial institution in the world, should, on 45 minutes notice suddenly be found to have liabilities substantially exceeding its assets, Eastern U. S. citizens would get some idea of the fantastic consternation Pacific Mutual’s crash caused on the West Coast. Last year the 68-year-old company had policies amounting to $636,000,000, assets of $215,000,000, ranked No. 19 in the U. S. insurance lineup. To West Coast insurance, old Pacific Mutual was virtually what Amadeo Peter Gianninrs Bank of America is to West Coast banking (see p. 51). Outside California it was licensed to do business in some 40 States, the District of Columbia and Hawaii.

In spite of its name, Pacific Mutual was actually mutual (that is, wholly owned by its policyholders) in only one division. In this mutual division, insurance examiners fortnight ago found a surplus of $4,792,000. But the nonparticipating end of the business showed a whopping deficit of $22,350,000. Main reason for the deficiency was that the personal accident & health department had been losing money for years, was more than $23,000,000 in the red. Main reasons for the accident department’s showing were low premiums and high monthly benefits in its noncancelable disability policies, under which a man incapacitated for work must be paid so much per month as long as he is in that condition.

Apparent object of the Kemp-Carpenter reorganization plan was to get Pacific Mutual out from under its disability obligations. All other types of policies were immediately reinsured by the new company at the original rates, but the holders of noncancelable disability policies were told they had only two alternatives: 1) to file a claim with the California Insurance Commissioner or 2) to reinsure their policies in the new company at the original rates and accept benefit reductions ranging up to 80%. However claims now being paid under these policies would not be affected by the change.

Hopping mad, noncancelable policyholders and a group of stockholders rushed into the court of Superior Judge Henry M. Willis, to whomthe case had been transferred. Making no secret of their suspicions, policyholders charged that, as late as the first of this year, false financial statements had been issued showing Pacific Mutual $10,000,000 in the black when there was actually a deficit of more than twice that amount, that Amadeo Peter Giannini’s Occidental Life Insurance Co. had offered to buy the company for $10,000,000, and keep all policies in force, although Commissioner Carpenter had valued it at only $3,000,000.

Most ominous accusation came from Senator William Gibbs McAdoo’s law partner, Colonel William Haynie Neblett, a policyholder. He charged that directors of old Pacific Mutual had dictated Governor Frank Finley Merriam’s appointment of Commissioner Carpenter for the specific purpose of handling the reorganization, that the reorganization was part of a conspiracy by officers of old Pacific Mutual now in the new company to get control of Pacific Mutual assets.

Commissioner Carpenter, however, made a good impression on impartial observers when he issued findings made in collaboration with insurance examiners from six States whose citizens are heavily involved in Pacific Mutual. Said the report: ”While the difficulties in which the company finds itself are due principally to inadequate rates on noncancelable accident and health policies, a considerable portion could have been alleviated by the executive officers of the company by following the advice of the company actuaries as early as 1926.”

That statement split Commissioner Carpenter and Pacific Mutual’s old management. Promptly to bat went four officers and directors of old Pacific Mutual, including 73-year-old George Ira Cochran, president of the company for 30 years until last autumn when he was moved to the chairman’s seat to make room for President Kemp. In a complaint to set aside the reorganization, they accused Commissioner Carpenter of inexperience, charged that he had sprung the reorganization on them without due warning. Next move of Commissioner Carpenter was to file a $511,650 suit for misuse of Pacific Mutual funds against Complainant Cochran and seven of his onetime officers. Meanwhile, Pacific Mutual’s inextricably complicated affairs were further tangled by the appearance of more public authorities. Investigators from the Los Angeles District Attorney’s office prowled through company files and the Los Angeles Grand Jury’s criminal complaints committee began attending all hearings. Last week special counsel for the Treasury Department’s Bureau of Internal Revenue marched into court, asked that all papers and motions in the case be handed to his office. Shortly thereafter, Federal attorneys announced Government tax claims against Pacific Mutual amounting to some $500,000, assigned observers to attend all hearings.

Last week Judge Willis used the squabble over Judge Edmonds’ qualifications as an excuse to cut through the Pacific Mutual snarl. Taking the case back to its legal beginning, the court asked Commissioner Carpenter to submit a reorganization plan to him exactly as he had previously done to Judge Edmonds.