Executive Life Winner to Be Picked : Insurance: Commissioner John Garamendi will make a recommendation today. A French group appears to have the edge because its proposal is considered less risky.
State Insurance Commissioner John Garamendi will choose today between the two remaining bidders for Executive Life Insurance Co., and most observers are betting that the winner will be a French investor group that showed the first interest in the failed insurer.
Garamendi must choose between an offer made by the French partners--Altus Finance and Mutuelle Assurances Artisanale de France--and a proposal from a group headed by San Francisco investment bankers Hellman & Friedman.
Sources close to the proceedings said the Altus bid, with its offer to pay customers 90% of their account value, is considered the most likely winner of Executive Life, which was seized by regulators in April.
“It seems to be fairly obvious,” said a representative of one of the other bidding groups. “Altus has pretty much got this thing sewn up.”
Garamendi’s recommendation will be submitted to Superior Court Judge Kurt Lewin, who has been overseeing the company’s conservation. Lewin’s decision is expected to be heavily influenced by Garamendi’s choice.
The bidding process for Executive Life, which collapsed under the weight of junk bond losses, began in August when Altus made a $3-billion offer. Seven other bidders later emerged, and Altus enhanced its bid several times. Garamendi originally favored an industry-backed bid but withdrew his support when the trade group failed to met some financial and legal concerns.
Although the few impartial experts who have followed the negotiations say that the Altus and Hellman & Friedman bids are almost identical in what they offer policyholders, most believe that the French offer will be chosen because it is considered less risky.
However, others said the decision was too close to call and revolved basically around the treatment of Executive Life’s junk bonds. Altus proposes immediately buying the junk bonds and removing them from the company; Hellman & Friedman would retain the bonds and liquidate them over time.
“You can’t say which deal is better,” said Joseph Belth, a respected industry expert who publishes a newsletter called the Insurance Forum. “One is bonds-in, the other is bonds-out. It’s like comparing apples and pomegranates.”
Robert Arvanitis, senior vice president at Conning & Co., agreed. “It comes down to what you think the junk bonds are worth at the end of the day,” he said. “Over time, I think it is a pretty close call.”
The Altus plan proposes to sell Executive Life’s junk bond portfolio for $3.25 billion and pump $300 million in cash into the insurer. The insurer, which would be renamed Aurora National Life Assurance, would be owned by MAFF and operated by an interim management team led by Kenneth O’Brien, a retired executive vice president of New York Life. O’Brien would lead the search for his permanent replacement if Altus wins the company.
Under the Altus proposal, policyholders would be credited with about 90 cents on the dollar up-front. They could earn more if certain operations of the company proved profitable.
About 97% of the company’s customers would get back 100% of their investment, regulators stress, because life insurance guaranty funds operating in 47 states will usually compensate policyholders for losses of up to $100,000 in cash values and up to $300,000 on death benefits. Most of Executive Life’s policies are below these thresholds.
The Altus deal would protect policyholders from potential problems in the junk bond market. Altus would bear the risk and reap the potential rewards on Executive Life’s giant portfolio of high-rate, high-risk junk bonds.
“This just closes the door on any more policyholder uncertainty,” said another source involved in the deal. “If the junk bond market goes up, that may cost them (policyholders), but it seems to be the more popular choice.”
A sampling of 297 policyholders represented by the Action Network for Victims of Executive Life showed that 274 were in favor of a bonds-out deal such as Altus’ bid, said Maureen Marr, the group’s coordinator. Only 10 policyholders said they preferred bonds-in, such as Hellman & Friedman’s, if they could share in the upside potential. Thirteen had no opinion.
The bid by Hellman & Friedman, whose partners are Zell/Chilmark of Chicago and Fund American Cos., offers a lower initial payout to policyholders--about 86 cents on the dollar--but promises more generous profit sharing than the Altus bid.
The proposal, which would keep Executive Life’s junk bonds within the company, would share 100% of the first $100 million in profits on that portfolio and 50% of the second $100 million, or 15% of the total profits over the five-year restructuring period--whichever is greater.
Comparing the Bids State Insurance Commissioner John Garamendi will recommend today whether Altus Finance or Hellman & Friedman have made the best bid to acquire failed Executive Life Insurance Co. Here are the highlights of the two offers: Initial policyholder payout Altus/MAAF 90.1% Hellman & Friedman 86% Policy interest rates Altus/MAAF Treasury minus 0.75% Hellman & Friedman Treasury minus 0.75% Policy loans Altus/MAAF Available on most contracts Hellman & Friedman Available on most contracts Junk bonds Altus/MAAF Purchased by Altus for $3.25 billion and taken out of the company Hellman & Friedman Retained by company Cash Altus/MAAF $300 million Hellman & Friedman $300 million, plus $700 million in financial guarantees Withdrawals Altus/MAAF Earnings on certain policies can be withdrawn without penalty Hellman & Friedman Earnings on certain policies can be withdrawn without penalty Policy fees Altus/MAAF $75 on annual premium whole life policies $50 for single premium deferred annuities and single premium whole life. Hellman & Friedman $75 on annual premium whole life policies $50 for single premium deferred annuities.No charge for single premium life. Profit participations Altus/MAAF After certain profit levels have been achieved,plus some sharing of surrender and mortality fee profits Hellman & Friedman 100% of the first $100 million and 50% of the second $100 million or 15% of all profits, whichever is greater, plus some sharing of surrender profits. Source: Altus Finance, Hellman & Friedman
