Move includes $580 million in debentures; Amex delists stock
The financial challenges facing Metropolitan Mortgage & Securities Co. Inc. deepened Monday as payments on more company securities were suspended, state officials took control of insurance subsidiaries, and the American Stock Exchange began the process of delisting its stock.
Metropolitan and its Idaho sister company, Summit Securities, announced late Friday that they suspended payment on almost all debt, including $580 million worth of debentures held by 35,000 investors, many in the Inland Northwest.
“We’re simply doing what we can to conserve cash while we sort out the financial issues the company is facing,” said Metropolitan spokeswoman Mary Keller.
Keller said a bankruptcy filing was “not imminent,” but that there is no estimated time frame on when payments might resume.
Washington state’s insurance commissioner announced Monday that it has taken over administrative supervision of one of Metropolitan’s insurance company subsidiaries. The state joins similar moves in Idaho and Arizona, where other insurance subsidiaries are based.
A special deputy will have authority to request any information from Western United Life Assurance Co. and to approve all transactions, said Bill Ripple, a spokesman for Washington Insurance Commissioner Mike Kreidler.
“The life insurance company is sound,” Ripple said. “We want to ensure it stays that way.”
Kreidler issued a consent order for supervision of Western United after the company’s board of directors agreed to the move on Dec. 22.
The order bans Western United from selling or transferring any of its assets without approval from the insurance commissioner’s office. It’s signed by seven of Western United’s board members, but not Metropolitan Chief Executive C. Paul Sandifur Jr., or William Snider. Both are listed as “resigned.”
Metropolitan said Sandifur resigned his posts at the life insurance company to provide it more autonomy.
Ripple said the administrative supervision would last “until we’re sure the company is going to maintain its financial obligation under Washington state law. We’ll be in there as long as is necessary to ensure policyholders are protected in the state of Washington.”
It was common for Metropolitan to tap Western United for money, said Deborah Bortner, director of the securities division for the state Department of Financial Institutions. The transfers would typically happen late in the year and went on for at least a decade, she said.
State securities officials encouraged such transfers because they helped ensure that Metropolitan could pay its stockholders and debenture holders. Debentures are unsecured debt, a higher-risk investment that is essentially a corporate promise to pay someone back.
Bortner said investors shouldn’t panic.
“A lot depends on what happens in the next few months,” she said. “My own personal view is that I would let it play out. It’s not going to do any good to sue them.”
On the positive side, Bortner said, Metropolitan has more hard assets - such as real estate and equipment - than most companies in similar straits.
One Metropolitan investor, Kathy Francis, bought a $2,500 debenture on behalf of her son, Ryan, six years ago. Dividends that have accrued since then have brought the value of the debenture up to almost $4,000, she said.
Her son, Francis noted, has paid federal income tax on the dividends as they have accrued even though he will not receive cash until the debenture matures next November.
“It was all paper until maturity,” she said, adding that the phantom income has also counted against him in calculations for student aid.
Francis said she has always considered Metropolitan’s significant real estate holdings more than adequate security for the debentures.
“I’ve never been too worried,” she said.
Metropolitan and Summit’s insurance subsidiaries in Idaho and Arizona also have been placed under administrative supervision by the insurance commissioners in those states.
In Arizona, the bulk of the policies written by Old West Annuity and Life Insurance Co. and Western United are annuities.
Erin Klug, spokeswoman for the state’s Department of Insurance, said Monday that Western United had 1,556 policies in force at the end of 2002, all but 49 of them annuities. Total premiums were $38.1 million.
Old West had sold 485 annuities in the state, with total premiums of $10.2 million. Arizona will supervise the operations of Old West until department officials are convinced Metropolitan and Summit can meet their obligations.
Both companies can continue to write new policies and renew old ones while under supervision, said Klug, who added that policyholders should see no change in the way the companies do business.
Idaho will supervise operations of Old Standard Life Insurance Co.
“The administrative supervision (of the insurance commissioner) does not reflect on the solvency of Western United Life,” said John Van Engelen, president, CEO and chairman of Western United Holding Co. in a news release.
Metropolitan’s troubles began this fall when the National Association of Securities Dealers, the private-sector enforcer of federal securities laws, alleged that the company’s investment arm used fraudulent, deceptive and unethical sales practices.
The allegations centered on a two-year window, from January 2001 to March 2003, when representatives of Metropolitan Investment Services were advertising investments in Metropolitan with the promise of good returns and low risk.
The NASD accused the firm of selling high-risk stocks and bonds to unwitting investors.
Metropolitan neither denied nor admitted wrongdoing, as part of a negotiated settlement. However, the company was censured, fined $500,000 and forced to pay $2.8 million in restitution to certain investors. MIS had to set up a $1 million escrow account to refund other investors who may have been misled.
MIS was also forced to stop selling stocks and bonds of Metropolitan and Summit. The two companies exclusively used MIS to sell hundreds of millions of dollars worth of these investments to finance other investment opportunities and to repay maturing debt.
The American Stock Exchange halted trading on Metropolitan’s preferred stock on Dec. 15 and has begun the process of delisting the stock, a company news release said.
Delisting proceedings have also begun for the shares of Summit and Western United Holding, which is appealing the AMEX action.
No shares in any of the three companies have traded since Dec. 12. Prices have plunged in recent months.
Metropolitan said in a news release that it will not file its annual report with the U.S. Securities and Exchange Commission until Feb. 1 at the earliest. The company said its auditor, Ernst and Young, was not able to complete its audit by Monday, as originally scheduled, because the company may have lost more than the $25 million reported in the nine months ended June 30. A review of that report is ongoing.
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