Insurance and Media & Marketing

New suitor sees future in Standard: Investor says he'll leave life insurance arm in Indy

February 21, 2005

John Franco left Kentucky-based ARM Financial Group Inc. more than a year before it imploded, and he sees Standard Life Insurance as his ticket to re-enter the insurance market.

ARM Financial sank a few years ago under the weight of enormous losses, bankruptcy, shareholder lawsuits and insurance downgrades. Franco and others say he had nothing to do with the demise of the company he helped found.

"After I left, the company pursued a very different path and the rest is history," he said.

The Louisville businessman has no qualms about jumping back into insurance and dealing with Indianapolis-based Standard Management Corp., another public company that has seen plenty of red ink. In fact, he's eager to put his 25 years of industry experience to use buying Stan- dard's financial services subsidiary, Standard Life Insurance Company of Indiana.

"We're excited, and we look forward to building on what's already been built," he said.

More details have started to emerge about the sale of Standard Life and the people who want to buy it. But plenty of questions still surround the proposed agreement, which was announced Feb. 9 by Standard Management.

Standard Management plans to sell all of Standard Life to Franco's new company, Louisville-based Capital Assurance Corp., for roughly $82 million, according to a news release issued by Standard. Franco serves as Capital Assurance's CEO.

Standard officials declined to comment on the deal, but documents filed with the U.S. Securities and Exchange Commission shed a little light on it. The agreement calls for payment to include $5 million in Capital Assurance preferred stock. Capital Assurance also will assume about $21 million in Standard Management's "intercompany obligations."

The documents offer no cash amount for the deal. They state that the total will be adjusted based on Standard Life's performance, among other things.

If the deal falls through, Capital Assurance could receive $1.6 million to $3.2 million in termination fees, depending on the circumstances. Standard also might have to foot the bill for up to $2 million in Capital Assurance expenses.

Standard Management Chairman and CEO Ronald Hunter will keep his seat on Standard Life's board. The company also will continue to operate at Standard Management's headquarters on North Pennsylvania Street and lease the space for $480,000 annually.

Franco said he sees no reason to move the company and "make a change you don't need to make." The employees who already work there were one of the reasons he made an offer to buy it.

"This is a group of employees who understands their customers put the bread on their table, and they understand they need to provide good service and they do," he said.

The companies anticipate a second-quarter closing, but they still need approvals from the Indiana Department of Insurance and Standard Management shareholders.

The New Jersey-based ratings firm A.M. Best Co. also plans to review its financial strength rating for Standard Life after the two sides complete the deal.

Capital Assurance Corp. was formed for the Standard Life deal, Franco said. He declined to identify the other investors or say how many were involved because the deal has yet to close.

He did say five of the investors also are principals with Capital Prospects LLC, another Louisville-based company for which Franco serves as CEO. He also said he isn't the only former ARM Financial Group executive involved in the Standard Life deal, but that none of them had anything to do with that company's problems.

There were many.

ARM, which stood for Analytical Risk Management, specialized in retirement savings and investment products like annuities and guaranteed investment contracts.

Franco helped found the company in 1993 with Martin Ruby. The two then served as co-CEOs and co-chairmen until February 1998, when Franco retired.

"When I was there, the company was strong and healthy," he said. "My vision was responsible for the growth and health we had."

He declined to elaborate on why he left.

Elaine Kusel said Franco left because the company had started out with a focus of continuously balancing risk. Other leaders wanted to chase more explosive growth.

Kusel, a New York-based lawyer, represents shareholders in the lone remaining class-action lawsuit related to ARM Financial. The lawsuit alleges that company leaders switched to a riskier growth strategy without telling the investing public.

Problems began to crop up more than a year after Franco left. In 1999, ARM and its partner in the guaranteed investment contracts, General American Insurance Co., began to stumble. ARM reported a $173.9 million second quarter loss.

In August of that year, the New York Stock Exchange announced that trading for ARM stock would be suspended immediately. That month, Best downgraded ARM Financial's two insurance companies-Integrity Life Insurance Co. and National Integrity Life Insurance Co.-from an Arating to B-.

A few months later, the company declared bankruptcy and sold the insurance companies. ARM Financial eventually liquidated. Kusel estimates that institutional shareholders suffered more than $43 million in damages.

The lawsuit names Morgan Stanley Dean Witter & Co. and several former ARM executives as defendants. Franco is not among the defendants.

Kusel noted Franco provided a deposition for the plaintiffs and said he had nothing to do with the company's deterioration.

"We think his testimony is very helpful for us," she said.

Standard Management first announced last spring that it planned to sell its life insurance subsidiary in order to turn its focus to health services. The company has since endured a string of quarterly losses as it attempts to build its new segment.

Those efforts hit a snag last month, when deals to buy two health services companies fell apart. Hunter had said when the deals were announced that the companies would add $45 million in revenue to its U.S. Health Services subsidiary.

The money would be helpful. Standard reported losses ranging from $1.8 million to $2.7 million through the first three quarters of 2004. Company leaders have declared in SEC documents that the sale of Standard Life could provide two or three years of operating cash.

None of these problems mattered to Franco when he researched the deal. He declined to comment on the parent company's health because he evaluated only Standard Life. In that subsidiary, he saw a wellrun business focused on the consumer.

"They have a great ability to provide exceptional service on a real-time basis," he said. "That's been their hallmark, and it's something you don't usually find in companies of that size."

When asked if he had any concerns about Standard Life's health, he replied, "We're buying it. That should tell you what you need to know."
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