Is Likely Buyer of Executive Life Up to Task? : Insurance: Analysts question the match because Mutuelle Assurance Artisinale de France is much smaller than the failed U.S. firm it hopes to acquire.
Mutuelle Assurance Artisinale de France, the firm favored to take over failed Executive Life Insurance Co., is a small, marginally profitable insurer known mostly for discount auto coverage and headed by a man with only one year of experience in insurance.
The insurance business of MAAF, which has teamed with Altus Finance in a bid for the failed Los Angeles company, is less than half the size of the $10-billion Executive Life. MAAF also has limited experience in the life insurance sector.
This David and Goliath matchup has prompted some analysts to question its viability. The bid has raised the eyebrows of European insurance industry observers, some of whom believe that MAAF is out of its league in seeking to acquire and operate failed Executive Life.
“Maybe this is a stroke of genius, but I’m skeptical,” said Jean-Christian Huard, analyst for Patrick du Bouzet SA, a Paris stock brokerage. “It would be more logical for MAAF to first buy someone in its neighborhood than someone 6,000 kilometers away.”
Analysts said there was no strategic logic in such an expansion, considering that MAAF’s share of the French domestic market was slight and that it has sparse foreign experience. Even within the 12-nation European Community, MAAF’s foreign exposure is limited to Spain, where it established a subsidiary in 1989 and last year did less than $1 million in business.
“The North American market might be interesting now, but it shouldn’t interest such a small player in France with no significant overseas experience,” another Paris analyst said. “I was very, very surprised.”
Top MAAF officials declined requests for interviews. But in a prepared statement, the company described the venture in terms of its development in the American market. The statement said conditions in the U.S. market have made insurance acquisition prices “reasonable”--particularly relative to the high prices in Europe--offering MAAF “a unique opportunity to enter the U.S. market and to explore whether further expansion there is warranted.”
But analysts suggest that MAAF, which heads a consortium of mostly French investors, and its chairman, Jean-Claude Seys, may have little interest in running Executive Life on a long-term basis. Rather, they speculate, the group is more likely eyeing a quick financial turnaround that would put them in a position to resell the company at a profit to another insurance company, perhaps European or Japanese, with more substantial capabilities to expand into the U.S. market.
Such an outcome, however, would appear to violate the spirit of the conditions set by California Insurance Commissioner John Garamendi for potential rescuers of Executive Life. He said earlier that a primary goal of Executive Life’s rehabilitation is to restore operations and provide safety and security for policyholders into the next century.
Executive Life was seized by state insurance regulators in April after the company suffered large losses from its junk bond investments and thousands of customers sought to cash in policies. The failure is the second-largest ever of a U.S. life insurer.
Last Thursday, Garamendi ended a four-month bidding war between eight investment groups by recommending approval of a $3.55-billion bailout plan that would put the remnants of Executive Life under MAAF’s control.
Superior Court Judge Kurt Lewin, who is presiding over Executive Life’s conservatorship, began hearings last Monday on the sale of the insurer. Most of the testimony last week focused on the French bid.
Under that plan, Altus Finance, the aggressive subsidiary of French banking giant Credit Lyonnais, would spend $3.25 billion for Executive Life’s junk bond portfolio. MAAF and its partners would then buy the remaining company, to be renamed Aurora National Life Assurance Co., for $300 million.
MAAF would take a 30% stake in Aurora, making it the largest shareholder, said Jody Powell, former press secretary to President Jimmy Carter and now a representative of the French group. The remaining 70% equity stake would be split among five French and Swiss investment companies.
In the French group’s last proposal to Garamendi, only a few details are provided about MAAF. It is described as “Paris-based,” a “venerable mutual insurance company with a long and steady history,” one of the “leading mutual insurance companies in France” and a company that “offers a full range of insurance services, including life, health, auto and retirement policies.”
In fact, MAAF, was founded in 1950 in Niort, a small city close to France’s central Atlantic coast, and it remains headquartered there, though it has additional administrative offices in Paris.
Of the five purely mutual French insurance companies, it is ranked second in premium income. Of all insurance companies, it was ranked 15th in 1990, capturing a slim 2% of the $66-billion French insurance market.
The company was started as a discount auto insurance specialist for self-employed craftsmen, and although it has expanded into other lines in recent years and broadened its customer-shareholder base, car insurance still accounts for the lion’s share of its business.
In 1990, MAAF collected about $1.2 billion in non-life insurance premiums, with two-thirds of that business concentrated in auto insurance, where it had 6.5% of the French auto insurance market. Its other non-life business includes coverage of health, legal and small business risks, as well as boating and hunting accidents.
Life insurance is a relatively new activity for the company. In 1979, it began selling contracts developed and managed by another mutual company, but it didn’t start its own life insurance business until 1987, when it formed MAAF Vie. Last year, MAAF Vie did about $130 million in business, most of it in government-authorized retirement savings contracts that offer savers certain tax incentives, similar to Individual Retirement Accounts in the United States.
MAAF Vie, which accounts for less than 10% of MAAF’s total insurance business, is the legal entity that would take control of Executive Life under the French group’s proposal.
Although MAAF has assets “in excess of $6 billion,” only about half is in insurance. At the end of 1990, MAAF Vie reported assets of $880 million, and MAAF’s seven other insurance units had assets of $2.2 billion. The remaining $3 billion in claimed assets stems from MAAF’s interests in a host of banking, finance and real estate investment companies.
Premium income rose moderately in its major non-life insurance business, but claims rose faster. The company in 1990 reported an operating deficit of $16.6 million, as its net surplus, after gains on investments were added in, fell sharply to $3.2 million from $8.5 million in 1989.
MAAF Vie did worse. Its policy income rose 10%, but it suffered net losses of $21.6 million, reflecting provisions for unrealized losses on securities investments.
“I couldn’t call this a wealthy company,” said a Paris insurance industry analyst who asked not to be named. “In fact, this company is a small player in France that’s just wealthy enough to protect its position on the domestic market.”
Though it promises to execute a very conservative investment policy with Aurora’s assets, MAAF’s own investments, the analyst said, “were less than conservative compared to American standards but consistent with European practices.”
For example, MAAF Vie, at year-end 1990, reported that almost 8% of its investment portfolio consisted of stocks. American insurance companies usually don’t put more than 3% of their investments in the stock market, which is much more volatile than investment-grade bonds. MAAF Vie reported that it had about 53% of its investments in fixed-rate bonds and 10% in variable-rate bonds, with the rest spread in real estate, mutual funds and corporate IOUs.
If MAAF is short on depth and breadth of experience in life insurance, so is its top executive, Jean-Claude Seys, who, the bid proposal notes, “has taken the lead on behalf of MAAF and the investor group for the acquisition and restructuring” of Executive Life.
Seys, 53, has spent most of his career in banking and came to his first insurance job only last year, when he was named to head MAAF, which had been experiencing management difficulties. Before that he served as president for three years at Banque Louis Dreyfus, a Paris merchant bank, and before that he was deputy managing director at Credit Agricole, a large network of rural development banks, where he was employed 18 years.
“He’s a banker, not an insurance man,” said Xavier Rousseau, analyst with Paris broker Sellier Nat West S.A. “An insurance man would never take a risk like this.”
A former associate at Banque Louis Dreyfus described Seys as “a very modern, dynamic person, always looking for new business opportunities, new approaches.” A former employee at Credit Agricole described him as a “remarkable man who’s very, very intelligent--a good leader who knows how to motivate people.”
In a question-and-answer interview published last week in Argus, a French insurance trade magazine, Seys said: “Executive Life for us is nothing but a financial opportunity. Our ambition over the next three years is limited to managing Aurora’s existing obligations.” He added that he had a “perfectly clear view of the investment’s profitability.”
Industry analyst Huard said one scenario that makes the acquisition logical would be if MAAF and its partners focused on turning around the business and then unloading it on another insurance company with the means to exploit the American market.
“In three to four years, they could make the company profitable and then be able to resell it, making a big capital gain,” he said.
Bob Arvanitis, senior vice president with Conning & Co., a Hartford, Conn.-based investment company specializing in the insurance sector, said MAAF would be essentially “buying an option” in Executive Life.
The option would allow it to build up the experience and management that would permit it to pursue future development in the United States. Or, he said, it could liquidate a portion of the company over the next few years and sell off what remained--policies whose maturities stretched 20 years into the future--to another foreign company seeking to break into the U.S. market.
“You can run the company down for three, four, five years and then turn around and sell it to an outsider, to the Japanese,” he said. “It’s a nice property and a nice platform, whoever uses it.”
Richard Baum, chief deputy commissioner for the California Insurance Department, said the French group was not obliged to give--nor did it--any statement about its long-term intentions. But he said he had “no reason to believe” that the French group intended to turn around and put the company on the block. And if MAAF did that, he said, state insurance regulators would always be in position to block the transfer if it found the new acquirer unfit.
He noted that the French group has proposed a board with “significant insurance players on it,” which he said indicated that “it plans to operate the company.”
There are only two people on the proposed board with direct insurance company management experience--Seys and Kenneth R. O’Brien, who recently retired as executive vice president of New York Life Insurance Co. Under the proposal, O’Brien would serve as interim chief executive until a permanent CEO was selected by a search committee headed by O’Brien, but excluding Seys.
Baum said his department is continuing to look at MAAF’s financial statements.
“There was no reason to believe there is any problem with MAAF,” he said.
He said the criteria for the bidding was that the bidding group had to demonstrate that it had the ability and resources to run an insurance company. “No one’s claiming that MAAF isn’t an insurance company,” Baum said.
