Broad Inc. May Bid for Part of Executive Life : * Insurance: Its offer--and others--will be disclosed today. Regulators, however, want to sell the firm in one piece.
Broad Inc., the parent of Sun Life Insurance Co., emerged Thursday as a possible bidder for failed Executive Life Insurance Co., as Hellman & Friedman of San Francisco disclosed details of an offer that would provide policyholders 83 cents on their investment dollar.
The potential bid by Los Angeles-based Broad was disclosed just a day before the bid deadline for Executive Life. Only one formal offer has been made, but several more are expected to be filed today.
In a prepared statement, Broad said it would submit an offer, but only for a part of Executive Life, the Los Angeles-based insurer that was seized by state regulators in April after it suffered huge losses from its risky junk bond investments.
Broad said it wants to acquire about $5.5 billion of Executive Life’s restructured fixed annuity, life insurance and guaranteed investment contract reserves through a complex arrangement. It does not want the company’s real estate, mortgage loans or junk bonds.
A Broad spokeswoman declined to discuss the offer, saying the company was constrained by Securities and Exchange Commission rules that limit public comment during a pending stock offering. Broad filed a registration statement to issue preferred shares last month.
Industry analysts estimated that the deal would be worth $275 million to $300 million.
A possible obstacle to the Broad bid is state regulators’ previously announced intention to sell Executive Life in one piece. Insurance Commissioner John Garamendi said Thursday that he remained committed to a “comprehensive” sale.
It was unclear, however, whether Broad planned to team up with another investor that might buy the assets that Broad does not want.
Broad is an insurance and investment holding company headed by Eli Broad, the co-founder of home builder Kaufman & Broad. It was spun off from Kaufman & Broad about two years ago. Broad’s insurance holdings are operated by SunAmerica Corp., which has three life insurance firms with about $13 billion in assets.
Meanwhile, a group led by investment bankers Hellman & Friedman revealed details of its buyout offer for Executive Life, contending that it was superior to the $3-billion offer submitted by French investors Mutuelle Assurances Artisanale de France and Altus Finance.
Hellman & Friedman, whose partners are Zell-Chilmark Fund of Chicago and New York-based Fund American Enterprises, says it will pay Executive Life policyholders at least 83 cents on the dollar, compared to 81 cents promised by Altus.
Executive Life customers will also share any profits equally with the investment group, up to $100 million, according to Hellman & Friedman. In contrast, Altus would keep any early profits before it shares the rewards with Executive Life policyholders.
“We are making Executive Life’s policyholders our senior partners,” Warren Hellman said. “With our bid, they stand to recoup a considerable portion of the money they’ve lost.”
Hellman & Friedman plans to keep Executive Life’s massive junk bond portfolio intact, a provision that worries some policyholders. The French group plans to remove most of the junk bonds by selling them to Altus for $2.7 billion.
Hellman & Friedman contends that Altus is undervaluing the junk bond portfolio. Altus says its deal is structured to minimize risk, contending that a 30% downswing in the junk bond market would essentially wipe out all the capital being injected by Hellman & Friedman.
Regulators and policyholders said they were encouraged by the new offers; both reserved final judgment until the formal bids could be reviewed, however.
“Our discussions with (Hellman & Friedman) lead me to believe that the formal offer they plan to submit tomorrow will be a proposal that merits serious consideration,” Garamendi said in a prepared statement.
Maureen Marr, spokeswoman for Action Network for Victims of Executive Life, which represents at least 2,000 Executive Life policyholders, said: “This certainly looks better short term, but we need to see the full bid. And we will be looking for more bids tomorrow.”
Other bids could include those from: the National Organization of Life and Health Insurance Guaranty Assns., which represents state guaranty funds; a partnership of Hollywood recording executive David Geffen, Texas financier Richard Rainwater and Bechtel Investors, and a group representing owners of municipal bonds backed by Executive Life.
Although many details of the Hellman & Friedman bid will not surface until the offer is formally submitted today, the buyout group says its other main points are:
* Policyholders would be credited with 83 cents on the dollar initially and would share in the investment group’s profits. Policyholders’ profit share would be the greater of 50% of the first $200 million, or 15% of all profits earned during the initial five-year period.
* Executive Life customers would face serious financial penalties if they opted to surrender policies before the end of a five-year moratorium. However, policy loans would be permitted.
* Interest credited on new insurance premiums would be one-half percentage point above the five-year Treasury note rate. Money already invested in the company would accrue interest at a rate that is one percentage point below the five-year Treasury note rate, which is the same rate offered by Altus.
* The amount of each premium dollar to pay for death benefits would be lower than in the Altus bid. Hellman & Friedman estimates that this provision would save policyholders $115 million during the next five years.
* It would pump $300 million in cash into Executive Life and commit an additional $450 million to be used on an as-needed basis. Bank of America has offered to provide a portion of the standby capital, the group said.
* Executive Life’s junk bond portfolio would remain part of the new company, which would be renamed Sierra National Life Insurance Co.
Executive Life Bids
Details of two buyout bids for failed Executive Life Insurance Co. have been disclosed. The deadline for offers is today.
Hellman & Friedman Initial payout 83% Policyholder profit 50% of first $200 million participation or 15% of total profits, whichever is greater Interest rate* 5-year Treasury note rate plus 0.5% Rate charged on 2.5% higher than rate policy loans paid to policyholders Junk bonds Retained by company New capital $750 million
MAAF/Altus Initial payout 81% Policyholder profit 6%-25% after Altus and participation MAAF obtain certain profit levels. Interest rate* 5-year Treasury note rate minus 1% Rate charged on Highest rate policy loans allowed by law Junk bonds Most sold for $2.7 billion New capital $300 million
* Paid on new premiums for single-premium life accounts
Source: Hellman & Friedman, Altus Finance
