How much is a used, somewhat banged-up insurance company worth? That's what insurance regulators in Washington, Idaho and Arizona are going...

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How much is a used, somewhat banged-up insurance company worth?

That’s what insurance regulators in Washington, Idaho and Arizona are going to find out.

A year after taking control of Metropolitan Mortgage & Securities’ three insurance-company subsidiaries, the agencies are shopping the companies around. They say at least a half-dozen potential buyers are interested.

Sale proceeds will go to partially repay the creditors of bankrupt Met Mortgage and its sister company, Summit Securities — primarily the thousands of small investors who hold hundreds of millions of dollars’ worth of their unsecured notes.

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How much the three insurance companies — Western United Life Assurance, Old Standard Life Insurance and Old Standard subsidiary Old West Annuity and Life — could fetch in a sale will depend on several factors, analysts say:

• Whether they’re sold as a group or individually;

Met and its insurance companies

The early years

1953: Metropolitan Mortgage & Securities founded by the Sandifur family of Spokane.

1972: Met Mortgage acquires Western United Life Assurance.

1988: Inspired by Western’s success, Met Mortgage forms Old Standard Life Insurance in Idaho; it commences business in August 1990.

1995 Old Standard transferred to Met Mortgage’s sister company, Summit Securities, in May; buys Old West Annuity and Life Insurance in December.

The later years

2001-2002: The Met group shifts its investment strategy from residential mortgages to riskier commercial real-estate loans.

Oct. 20, 2003: Met’s brokerage arm settles allegations of deceptive sales practices, effectively cutting Met off from a key source of liquidity.

Jan. 20, 2004: Ernst & Young resigns as auditor for the Met group, citing misrepresentations by senior management.

Feb. 4, 2004: Met and Summit file for Chapter 11 bankruptcy protection.

March 2, 2004: Insurance regulators in Washington, Idaho and Arizona take control of Western, Old Standard and Old West, citing need to protect policyholders.

March 25, 2005: Regulators announce the three insurance companies will be sold.

Source: Seattle Times reports

• Whether they’re bought by an investor group and operated independently, or bought by a larger company and absorbed;

• The nature and quality of their assets; and

• Any lingering taint attached to their names.

Met and Summit are mostly finished selling some other assets — their extensive portfolios of mortgage loans and real estate. According to their revised bankruptcy plan filed April 1, Met expects to clear about $42 million from those sales; Summit, about $22 million.

For the noteholders, that works out to 15 and 13 cents on the dollar, respectively.

Selling the insurers, along with settling pending lawsuits against the parent companies’ former management, could add another 10 cents to the payout, Met and Summit estimate.

Proceeds from selling Western would go to Met creditors, while Summit’s creditors would get the proceeds from Old Standard and Old West.

Focus on elderly

The primary business of the three insurers, now run out of common offices in Spokane Valley, is selling variable-rate annuities to seniors. That makes them more attractive than if they were selling plain life insurance, said Greg Simcik, an insurance-industry analyst for Standard & Poor’s.

“The annuity side tends to be viewed as a more valuable proposition than traditional life,” Simcik said.

On the other hand, analyst Elizabeth Malone of Hartford, Conn.-based investment firm Advest, said the regulators are somewhat like homeowners who’ve been transferred and need to sell their rundown property fast.

“You’re a motivated seller, so you’re not necessarily in a position to get the best price,” Malone said.

Stability important

In addition, she said, the regulators can’t simply pick the highest bid; they have an obligation to make sure the new owner is experienced and financially stable.

“Regulators have to keep the interests of the policyholders foremost, not the bondholders,” she said.

“Someone buying the business might be able to say ‘We’ll run this for the benefit of the policyholders, but you’ll have to pay us [in the form of a discount] to take it off your hands.’ ”

If the companies were profitable, their earnings could serve as a starting point for assessing a fair market value. However, according to their annual regulatory reports, Western had a $6.3 million operating loss last year, while Old Standard lost $3.6 million.

Instead, buyers likely will start with the companies’ “book value” — essentially, the amount by which their assets exceed liabilities.

As of Dec. 31, Western’s book value was $63.3 million and Old Standard’s was $28.7 million. (Old West’s value is included within Old Standard.)

Normally, an insurer would sell for more than its book value — an amount called a multiple. For example, Malone said, a healthy, profitable, publicly traded annuity company likely would sell for around 1.5 to 2 times book value, maybe even a bit more.

But Western and Old Standard are hardly best-case scenarios. For one thing, their legacy from Metropolitan includes some assets of uncertain value.

“Shock absorbers”

As a bankruptcy examiner found, Metropolitan management used the insurers as shock absorbers for the group as a whole — forcing them to finance some of Met’s dodgier deals and giving them in return mortgages and real estate that, in many cases, were wildly overvalued.

Last year, as regulators and new management pored over the insurers’ books, reappraised their real-estate holdings and corrected accounting errors, they sliced more than $34 million off the companies’ combined book value.

Given that blemished record, Malone said, it’s entirely possible the insurance companies could sell for less than book value.

Consolidation trend

S&P’s Simcik was more optimistic. Assuming their books are now clean, Western, Old Standard and Old West could appeal to one or more of the larger firms consolidating the life-and-annuity industry, he said.

“If you strip out the big blockbusters, most of the deals in this industry tend to be smaller — blocks of assets and small subsidiaries,” he said.

Similar deals have gone for 1.3 to 1.5 times book value, he said.

Regulators have given qualified bidders until May 27 to examine the insurers’ books and operations and submit offers. They hope to announce a buyer or buyers before the end of June.

Drew DeSilver: 206-464-3145 or