Health Care and Insurance

Vote sets up big switch for Standard: Company awaits insurance department's approval of sale

May 23, 2005

With two key shareholder votes in his favor, Standard Management Corp. Chairman and CEO Ron Hunter made major strides last week in remaking the Indianapolis holding company.

Common-stock shareholders overwhelmingly approved the sale of Standard Life Insurance Co. and Dixie National Life Insurance Co. to Louisville-based Capital Assurance Corp. May 18. Later that day, the company announced most of the holders of its trust-preferred securities agreed to a plan that preserves more than $20 million in cash for Standard in the sale of its life insurance subsidiaries.

That cash is important as Standard remakes itself as a health services company.

"We are reinventing ourselves at Standard Management," Hunter wrote in an e-mail response to questions about the shareholder vote. "The vote indicates overwhelming support in the marketplace for our transition, in order to give the shareholders the kind of returns they deserve."

Now the company has just two more items on its checklist: It must shepherd the proposed deal through a regulatory review, and it also must figure out a way to turn a profit in health services.

Standard Management first announced last year that it planned to leave the financial services business to concentrate on its U.S. Health Services Corp. subsidiary. In February, it announced the sale to Capital Assurance, which was formed to acquire the life insurers.

The agreement calls for Standard Management to receive roughly $57 million in cash, $5 million in Capital Assurance preferred stock and some debt relief in return for the insurance companies.

Standard expects to net about $28 million from the deal, money it plans to spend in health services. That total would have been chopped to less than $7 million had the trust-preferred securities holders not agreed to the payoff.

Before Wednesday's vote, the deal received endorsements from Marylandbased Institutional Shareholder Services and San Francisco's Glass Lewis & Co.

A new direction

Standard Management stayed focused solely on financial services from its initial public offering in 1993 until 2002, according to a proxy statement filed with the U.S. Securities and Exchange Commission.

The company then added its U.S. Health Services subsidiary at the urging of board member Dr. Martial Knieser, who told board members about a chance to acquire a business that provides directto-consumer retail and mail-order pharmaceutical products, the proxy states.

Standard started building this new business, and board members grew optimistic about its chances for growth. They started to believe growth in that sector was something they could control, unlike the insurance business, "which was heavily dependent on the performance of the investment portfolio and the effects of an unstable bond market," among other variables, the proxy states.

A deal is born

Board members also started to realize they were maintaining two distinct businesses with different needs and regulatory restrictions. They began to think health services offered the better opportunity for future growth.

They haven't seen that in the numbers. The subsidiary has consistently lost money for Standard Management. Last year, it reported a $10.3 million loss, up from the $7.1 million setback recorded in 2003. But company officials have chalked up those losses to the cost of growing the new business.

In 2003, they decided they wanted to focus on its potential.

Selling off its financial services operations allows for that, according to Jason McCandless, a lead analyst for Glass Lewis who wrote a report earlier this month recommending that shareholders vote for the deal.

The sale "affords Standard the ability to focus management's efforts on executing upon its growth plans and provides a fair amount of capital to support such efforts," McCandless wrote.

He also noted that Standard conducted a lengthy auction of its financial services business and talked with several interested parties, a process that "likely yielded the best value for the company."

Still, not everyone's convinced the new direction's the best one.

"We have not seen great results from the current management managing a business they've seemingly been in most of their careers," said Florida resident and Standard shareholder William A. Granberry. "And they're proposing to sell that business and use that money to expand what is essentially a new segment of business.

"We're just apprehensive about this."

Growing pains

Standard Management's push into health services suffered a double setback in January, when it announced that deals to buy two companies had fallen through.

The addition of Michigan-based SVS Vision Holding Co. and Florida-based iCare Medical Supply Inc. would have added $45 million in revenue to U.S. Health Services, Hunter said last summer.

The company has announced no health services acquisitions since then, although it has reported some positive developments on a smaller scale. In February, the company said New York-based Westminster Securities Corp. will act as its health care investment banker.

Standard announced in April that it had formed a joint venture with AccuPax Inc. to provide pharmaceutical programs to Native American communities. The announcement offered no terms or revenue projections.

Poor financials

Standard and Capital Assurance started preliminary talks in February 2004, roughly a year before they announced the deal.

While deal negotiations picked up, Standard Management's financial condition headed downhill. The company reported quarterly losses throughout 2004.

Last July, the New Jersey-based rating firm A.M. Best Co. downgraded Standard Life's financial strength from a secure rating of B+ to a vulnerable category of B.

Bad news continued into 2005. Standard Life showed a $12 million increase in surrender benefits, money taken in by the company when customers end their policies prematurely. First-quarter numbers filed with the Indiana Department of Insurance also show a net loss of $1.3 million for the insurer.

On May 13, five days before the shareholder vote, a shareholder bloc emerged in opposition. The group amassed 7.9 percent of the company's outstanding shares, or 628,012, nearly enough to neutralize the 692,302 shares owned by Standard's directors and executive officers.

Granberry, a member of the bloc, said then that the deal "just doesn't seem terribly logical to us."

The next steps

None of this fazed John Franco, Capital Assurance's chairman and CEO.

Franco said he thought Standard's shareholders would pass the deal by a high margin, and the dissenting group would have little impact.

"If it's a transaction that's logical to the two parties, you would expect the shareholders would see that logic," he said.

Franco also noted that Standard Life's surrender income jumped after the rating downgrade last summer, and it has since returned to normal levels.

The state insurance department is next in line to review the deal. The department scheduled a May 20 public hearing on it. After that, regulators have 30 days to issue an order approving or rejecting the proposed sale.

Shareholder opposition appears to be fading. Granberry said they have no further recourse.

"The vote has been taken; as far as I'm concerned it's over," he said. "We're not going to try to do anything more except accept the will of the shareholders."

If the deal goes through, Standard Life and the health services business will share the same headquarters under different management.

Franco has said he has no intention of moving Standard Life to Louisville, where he works. He has said he thinks the insurer has "a great ability to provide exceptional service on a real-time basis.

"We can't wait until we get the deal completed," Franco said last week. "We're excited to be part of this."

As for Standard Management, investors seem content to wait. The company's shares rose only a penny, to $1.88 each, in below-average trading the day shareholders voted to approve the deal.
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