Nearing the end of an auction process that began in August, Insurance Commissioner John Garamendi recommended Thursday that failed Executive Life Insurance Co. be sold to a French investor group for $3.55 billion.
Garamendi said the offer from Altus Finance and Mutuelle Assurances Artisanale de France provided the most cash to policyholders and the most security by jettisoning the company's portfolio of high-risk junk bonds.
"I am happy to announce we have avoided the debilitating losses," said Garamendi, who has made Executive Life's rescue a keystone of his administration. "Most policyholders will get back 100% of their funds, and the remaining 3% will receive over 89 cents on the dollar."
Altus, a unit of French banking giant Credit Lyonnaise, and MAAF, a small Paris-based insurance company, beat out seven other bidders for Executive Life. The decision comes a week after Garamendi rejected an industry-backed bid he had conditionally recommended two weeks ago.
The French group was one of the first to express interest in the insurer and made an initial $3-billion bid four months ago. It subsequently enhanced its bid several times.
The attempt to rehabilitate Executive Life began last April after insurance regulators seized the Los Angeles-based insurer. The failure, which stemmed from huge junk bond losses and a rash of policyholder cash-ins, is one of the biggest insurance failures in history.
Garamendi will submit his recommendation to Superior Court Judge Kurt Lewin, who will begin hearings Monday. Garamendi said he expects the sale to be executed before the year ends.
Policyholders, who once feared the loss of everything they invested, "should be elated" about the decision, Garamendi said.
"I encourage policyholders to stay with this new company," he said. "It will be an ongoing, viable company. It will also be the best-capitalized, safest insurance company in America."
John Hartigan, an Altus/MAAF spokesman and partner at the Los Angeles law firm of Morgan, Lewis & Bockius, said: "Today's real winners are Executive Life's policyholders who will become part of one of the safest, most secure insurance companies in the industry."
Some policyholders said they were encouraged at the promised end of what has been a nerve-racking drama. "Certainly today is a step in the right direction," said Maureen Marr, coordinator for the Action Network for Victims of Executive Life, a policyholder support group with about 2,000 members.
The French offer has two main elements: Altus will buy Executive Life's junk bonds--valued on the insurer's books at $5.4 billion--for $3.25 billion; MAAF will pump an additional $300 million into the new company and manage the business.
That should result in initial payments to policyholders of about 89 cents on the dollar, Garamendi said. Policyholders will have additional chances to benefit through profit-sharing provisions written into the bid.
Although Garamendi praised the other finalist--a consortium that included San Francisco investment bankers Hellman & Friedman, Zell/Chilmark of Chicago and New York-based Fund American Cos.--he said Altus' offer gave policyholders greater certainty, better access to their funds and a bit more cash.
Warren Hellman, general partner of Hellman & Friedman, said he was disappointed but praised the commissioner for his fairness.
"I thought we lost fairly, as difficult as that is for me to admit," he told the Associated Press. "I thought our final bid was a very good bid. I think the Altus bid was an even better bid."
The Hellman group had proposed a deal that would pay policyholders about 86 cents on the dollar upfront, but provide somewhat more generous profit-sharing opportunities. Hellman planned to leave the junk bond portfolio in the company, a move considered risky by some.
Six other groups also had submitted buyout plans, but most were quickly rejected as inadequate. One other serious suitor was the National Organization of Life and Health Insurance Guaranty Assns., which represents 47 state-operated guaranty associations and which had proposed an 89-cent payout to policyholders.
However, Garamendi rejected the bid last week after determining that the group had failed to clear financial and legal hurdles confronting the industry's first attempt to take over a failed life insurer.
NOLHGA appears to have backed off from a plan to fight its rejection. The group said in a prepared statement that it will wait to see how a related lawsuit is settled before it decides what to do.
Despite the decision Thursday, uncertainties remain for Executive Life's policyholders. The most important is a decision--expected today--on what happens to holders of $1.85 billion in municipal bonds backed by Executive Life.
The current deal assumes that these investors will be treated as general creditors of the company. But they have argued in court that they are policyholders.