Quackenbush no longer darling of the insurance industry.

GRASS VALLEY, Calif.--(BUSINESS WIRE)--Feb. 13, 1997--

Draws fire from carriers over sweetheart deal to sell (conserved)

Golden Eagle Insurance Co.

Commissioner's Golden Eagle Deal Unravels As Insurance Industry

Execs Cry "Foul"

A soap opera-esque saga that has roiled the normally staid insurance industry took a few more dramatic turns last week, according to an exclusive copyrighted story in this week's issue of The Workers' Comp Executive, an industry newsletter.

The outcome could impact virtually all California employers who purchase workers' comp insurance, according to WCE publisher J Dale Debber.

According to the article, California Insurance Commissioner Chuck Quackenbush has acceded to the demands of several other insurance carriers and agreed to auction off the remains of San Diego-based Golden Eagle Insurance Co. to the highest bidder. Legal actions were threatened if the Department didn't back pedal fast from its precipitous award of the seized carrier's business to a select partnership of carriers.

"Quackenbush, long accused of being too cozy with the insurance industry, has now incurred its wrath," said Debber.

Golden Eagle, the state's third-largest workers' comp insurer, was seized by regulators on Friday, Jan. 31, along with Mesa Re, the reinsurer also owned by San Diego entrepreneur John Mabee.

On Monday, Feb. 3, just a few business hours after the Friday takeover, Quackenbush announced that a new carrier -- San Diego Casualty Insurance Co. -- was being formed to take control of the book of business.

The new owners were to be a combination of the Zurich Centre Group Cos., New York City-based subsidiary of the Swiss insurer, to provide reinsurance and to directly take the property and casualty business; and Calabasas, Calif.-based Superior National Insurance Co. to get the workers' comp business.

IP Partners, an organization of investors including the Bass brothers, who have invested in many insurance deals, said they would put $35 million into Superior National, who in turn said they would go to public markets for additional capital.

But by Tuesday, the dull roar of surprise turned into the realization for many carriers that they had been finessed out of the deal, according to the article.

One of the carriers who pointed out to the Department in no uncertain terms that what the Department was doing was illegal was Woodland Hills, Calif.-based Zenith Insurance Co. Zenith prevailed in a similar situation several years ago when it acquired the business of Cal-Farm when that company failed.

Other carriers were angry with the Commissioner as well. "The Department has made a legal mess and litigation will come of it," said another industry executive.

In another stunning development reported by the WCE, the California Insurance Guarantee Association (CIGA), the industry's "safety net," refused to accede to the Commissioner's request to go along with the plan.

According to Deputy Conservator Karl Rubenstein: "The deal with Zurich and Superior called for them (CIGA) to assume 120 percent more in liabilities than we gave them in assets. If we gave them $1 billion in assets, they would be responsible for $1.2 million in losses."

Effectively, CIGA told the Department that since Golden Eagle had not been declared insolvent, it had no statutory authority to participate in anything. This threw another wrench into the Department's plan.

"Clearly the statute says there is no CIGA involvement until there is a liquidation," said another industry CEO. "What the Department was trying to do was to railroad through a deal before the rest of us got a chance at it."

Also called into question is the Commissioner's apparent secret preparations for the seizure, while seeming to negotiate a settlement with Golden Eagle's owner, John C. Mabee. Industry insiders say such a deal as was put together with Zurich and Superior is impossible to do in such a short time.

"If it is true that the deal was negotiated in advance of the takeover, while the Department was saying it was going to work things out, then charges of dealing in bad faith are sure to be brought against the Commissioner," said Debber.

"What did the Commissioner know and when did he know it are the key questions," said Debber.

A key factor cited by the Commissioner was $66 million in unsecured loans to Mabee from Mesa Re. According to the Department's news release announcing the takeover, discovery of these loans was a major trigger for the action. But when the Department knew about the loans is open to question.

"They saw these loans in three separate audits," asserted Mabee. He explained that he personally contributed $107 million to Golden Eagle's surplus, part of which was borrowed from Wells Fargo Bank and part of which came from the loans from Mesa Re.

Loans borrowed from one entity, such as an insurance holding company, or in this case an individual, and then contributed to surplus are commonplace in the industry and have been done by other carriers and approved by the Department, Debber explained.

Sometimes these loans can be secured by stock in the holding company. In this way the money can be contributed as surplus to the carrier and not be carried as a loan on the insurer's books, but rather on the books of the holding company, which doesn't affect the carrier's statutory balances.

The Department filed with the court a lengthy declaration signed by Rubenstein, which was "scathing" in its appraisal of GEIC and Mesa Re, according to the article. "If any part of what was contained in this document is true, then there may be bigger problems at Golden Eagle than the debated $138.5 million in under reserving," said Debber.

Likely bidders for the seized Golden Eagle business include Zenith Insurance Group and Fremont General, according to the article. Others may include American International Group and Liberty Mutual Insurance Group.

"Whoever gets this business will be a matter for the courts to decide, and the bidding has the potential to be spirited," said Debber. "It's an ever-changing story, in which clarifications are not always being issued by elected officials to make themselves clear, but sometimes to put themselves in the clear."

The Workers' Comp Executive, published in Grass Valley, monitors marketplace, legislative, regulatory and other workers' compensation industry developments nationwide, and is the journal of record of the industry in California. Annual subscriptions are $395. A free e-mail summary edition is available by sending e-mail to [e-mail] . The publication can be reached at 916/470-7500. -0-

Note to Editors: Original article by J Dale Debber, publisher, Workers' Comp Executive, copyright 1997. Original available by e-mail or fax request to bonafide media. See contact information below. Please credit the Workers' Comp Executive.

CONTACT: The Workers' Comp Executive, Grass Valley

J Dale Debber, 916/470-7500