State seizes Western United Life to protect policyholders
Metropolitan Mortgage & Securities Corp. has lost a $29 million tax fight with the Internal Revenue Service, dragging its large insurance affiliate into receivership.
The 40,000 policyholders of Western United Life have nothing to worry about, according to Washington state Insurance Commissioner Mike Kreidler.
But the decision strips Metropolitan’s ability to operate the insurance company in any way that would aid its bankruptcy reorganization effort at the expense of Western.
“This was done to protect the policyholders,” said Kreidler spokesman Bill Ripple.
Added to the mounting financial problems of Metropolitan, which filed for bankruptcy last month, the IRS matter convinced the insurance commissioner’s office to seize control of Western.
The decision does not affect two other Metropolitan-related insurance companies, Idaho-based Old Standard and Arizona-based Old West.
Western Vice President Scott Cordell called the receivership of Western the best way to cleanly separate the insurance company from the problems plaguing Metropolitan.
He said Western would continue paying policyholder claims while restructuring the business beyond Metropolitan’s reach.
Unlike most companies in receivership, Western remains solvent. Company executives will continue to run the business, although Kreidler’s office will oversee all transactions. Even before Tuesday’s receivership Western was operating under the close supervision of state regulators.
In Spokane, Western owns such high-profile properties as the Met Theater.
With $1.72 billion in assets and $1.58 billion in liabilities, Western appears to be a company on solid financial footing.
Yet the company suffers the same credibility gap as Metropolitan. Its financial statements for the past few years are considered questionable in the wake of Ernst & Young LLP’s January resignation as independent auditor. The accounting problems have prompted calls for an investigation by the U.S. Securities and Exchange Commission and the Washington Attorney General’s Office.
As a consequence, respected insurance ratings agency A.M. Best gives Western a marginal “C” rating, a problem Cordell attributes to the insurance company’s ties with Metropolitan.
In bankruptcy, Metropolitan hopes to reorganize and emerge as the holding company of Western and the other insurance affiliates.
What pushed Western into receivership was an unexpected income tax liability.
Metropolitan created a tax shelter in 1998. In this shelter, Metropolitan claimed a $29 million income tax benefit on investment losses for 1999. About $18.4 million of that tax benefit rode on Western’s books.
Metropolitan declined to comment on the details of its 1999 investment.
Instead, the company referred all questions surrounding the receivership to Kreidler’s office, which also didn’t disclose the troubled investment.
Western’s Cordell said he wasn’t privy to the arrangement, and called the tax matter a transaction handled by Metropolitan and its former auditor, PricewaterhouseCoopers.
The IRS takes a dim view of tax shelters designed to avoid or evade federal income taxes. In 2001, the agency began a campaign that gave taxpayers a so-called 120-day “window of opportunity” to voluntarily disclose questionable shelters. Companies were able to do so without fear of stiff penalties.
Metropolitan disclosed its shelter and insisted that its tax accounting was accurate.
The IRS disagreed.
Recently the IRS won that argument, according to Ripple.
To comply, Western will pay the IRS $18.4 million, he said.
The remaining $11.2 million tax liability, owed by Metropolitan, will likely become a high-priority IRS claim in bankruptcy court.
Metropolitan’s bankruptcy creditors include thousands of people who bought unsecured bonds called debentures.
Western also considers itself a creditor of parent Metropolitan.
The insurance company claims Metropolitan owes it about $70 million in unpaid loans secured by real estate.
The two companies, along with sister companies in Idaho, conducted business with each other. Such close financial dealings worried insurance regulators.
Western is not part of Metropolitan’s bankruptcy even though more than 80 percent of Metropolitan’s assets are held within Western.
The receivership action freezes any lawsuits against the insurance company, including arguments that at least a portion of Western’s assets should be returned to Metropolitan to offset deep investor losses.
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