Washington Post Staff Writer
Thursday, October 2, 2003
Ullico Inc. said yesterday that its union shareholders invested an additional $50 million in the company to shore up the finances of the scandal-plagued insurer.
Ullico sells insurance and asset management services to unions and their members. In May, its board deposed Chairman Robert A. Georgine and 15 other board members, who were accused of reaping combined profits of more than $6 million from improper trading of Ullico stock.
Those accusations have led to congressional hearings and ample press attention. But D.C.-based Ullico has also experienced deep financial problems only partly related to the alleged executive malfeasance.
Ullico's new management team, led by Chairman Terence M. O'Sullivan, has spent the past four months trying to develop an accurate accounting of its results from last year. The bottom line: Ullico lost $74 million after taxes in 2002, compared with an earlier, unaudited estimate of a $57 million loss.
The company delayed filing audited financial statements for months because its accountant, PricewaterhouseCoopers LLP, refused to approve Ullico's financial statements without expressing doubt about Ullico's ability to remain a "going concern." Ullico addressed the accountants' worries by lining up the $50 million capital infusion and agreeing to sell a recently completed office building that was to be Ullico's headquarters, at 1625 I St. NW, for $160 million.
Ullico's largest regulated subsidiary, Union Labor Life Insurance Co., has had operating losses for the past two years, according to documents the company filed recently with the Maryland Insurance Administration. Last year Union Labor Life had operating losses of $22.2 million. Its capital and surplus -- a key measure of an insurance company's financial health -- fell from $51.8 million at the end of 2001 to $17.95 million at the close of 2002.
On Sept. 17, Ullico submitted a plan to the Maryland Insurance Administration to increase Union Labor Life's capital and surplus to at least $47.6 million by the end of this year. The plan included the $50 million stock sale announced yesterday, as well as rate increases, asset sales and cost reductions to return the company to profitability and increase its reserves.
"The capital raising and the pending sale of the office building have gone a long way to dealing with the capital-adequacy issues," said Lester C. Schott, associate commissioner for examination and audit at the Maryland Insurance Administration, the insurance company's primary regulator. But the company isn't entirely in the clear, he added. It must also cut costs and reevaluate some of its business.
"Operational issues will take longer to correct. They have provided us with a corrective action plan, but you can't flip a switch and see the effects of those changes immediately."
Regardless of the steps still to come, the capital infusion appears to be a sign that unions are confident about the prospects for the company they own.
"It's certainly an important show of support for Ullico," said AFL-CIO spokeswoman Lane Windham. The AFL-CIO and 21 of its affiliates bought the newly issued shares of Ullico on Tuesday.
To some degree, the company's poor financial situation was a result of the same market forces that hurt most investors in the past three years. Ullico had showed big gains when its $7 million investment in telecommunications firm Global Crossing Ltd. ballooned to $1.5 billion in market value -- and took an equally big hit when the telecommunications industry collapsed in 2001. Other investments simultaneously lost value as benefits paid to its insured members outpaced premiums.
Company officials said the Ullico's losses in the last two years were partly attributable to high legal fees from the controversy.
"There was a period of time prior to May 8 [when the new management team took over] when there were questions about how much faith the labor movement had in Ullico," said James Kennedy, a senior vice president at Ullico. "Now there shouldn't be any question at all."
The firm expects to report smaller losses this year, said Damon Silvers, counsel to the chairman, estimating that it will post a loss after taxes of just under $20 million for 2003. Most of the loss, he said, will come from activities in the first half of the year.
Ullico anticipates breaking even in the first quarter of 2004 and posting a small profit for the full year.