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SCOTTSDALE, Ariz.-Most insurers live with occasional losses on bad investments, but not many have had the kind of problems that International Casualty & Surety Ltd. has experienced yet continue to operate.
The New Zealand insurer-a small player in international marine, aviation and reinsurance markets-got its start in 1992 as an affiliate of First Assurance & Casualty Co. Ltd., an allegedly fraudulent insurer operated from Oklahoma that collapsed a year later.
Initially capitalized with First Assurance assets, IC&S ever since has regularly overhauled its capital base, trading in and out of obscure over-the-counter stocks and corporate notes, its financial statements show.
Some of these investments have fared disastrously: IC&S' largest investment until last year, for example, was in an affiliate of a company shut down by Texas insurance regulators for itself being capitalized with worthless assets. These included millions of dollars of "government bonds" issued by the fictional Dominion of Mel-chizedek.
Other assets in a 1995 IC&S financial statement included stock in a company headed by First Assurance's former auditor, a man whose Texas accounting license was revoked last year because of his work for First Assurance and another client, government records show.
These and other of IC&S' 1995 assets in fact are either worthless or have only a fraction of their claimed value, according to a court filing by a former U.S. insurance regulator who examined the investments.
Meanwhile, IC&S is facing other problems, including a dispute over $2 million in reinsurance claims from a South Korean ceding insurer and a lawsuit filed last year by First Assurance's court-appointed bankruptcy trustee.
The suit charges that First Assurance assets were fraudulently transferred to IC&S in 1992 and levels civil racketeering charges against IC&S director Samuel B. Love and several other former First Assurance operators.
Mr. Love denies the lawsuit's charges, disputes the validity of the South Korean reinsurance claim and defends IC&S.
He conceded that some of IC&S' investments have turned out badly. But "if you hang around the business world long enough, you're going to make some bad deals," he said. "You just hope your good ones offset your bad ones."
"If I thought we had some problems, I would admit it," he added. But "we have survived, we've made money and we've gotten stronger."
Mr. Love also points out that the insurer has recently bolstered its balance sheet with new assets, including stock in a small Utah company that hopes to open a chain of skin care clinics.
The New Zealand insurer was set up by First Assurance owner Jesse Maynard and others in late 1992, as First Assurance was facing mounting claims from businesses damaged in that year's Los Angeles riots.
The following year, after California regulators had barred it from the state, First Assurance filed for bankruptcy in Oklahoma City, where riot victims have since been pursuing more than $6 million in unpaid claims (BI, March 7, 1994).
The Oklahoma bankruptcy trustee has charged that IC&S was set up as a First Assurance successor company, and in a 1994 interview Mr. Maynard confirmed that he planned to roll over First Assurance's California business into IC&S. The New Zealand insurer obtained a large part of its roughly $11 million New Zealand ($5.7 million) in initial capital from First Assurance, Mr. Maynard said.
These assets included cash transferred from First Assurance and stock and note investments that had also appeared on First Assurance's balance sheet, documents show. California regulators reviewing First Assurance later disallowed some of these same investments as having doubtful liquidity and value.
By 1993, Mr. Maynard and other original IC&S directors had resigned and been replaced by Mr. Love as sole director.
Mr. Love heads IC&S' Scottsdale, Ariz.-based management company, Premier Administrators Inc., which formerly managed First Assurance. First Assurance promotional material also described Mr. Love as its financial officer, though Mr. Love denies this.
In 1995, IC&S wrote $7.8 million New Zealand ($5.1 million) in premiums, up from $4.8 million New Zealand ($3.1 million) in 1994. Premier Administrators collected $1.4 million New Zealand ($924,539) in management fees in 1995.
When he took over IC&S, Mr. Love says it was an "empty shell" that no longer held any former First Assurance assets. That shell has since been filled, though, with a shifting variety of little-known stocks, some of which are not publicly traded and one of which Mr. Love concedes has turned out to have little or no value.
At year-end 1994, for example, IC&S reported total assets of $10.7 million New Zealand ($6.9 million).
One of the largest of these, valued at $3.1 million New Zealand ($2 million), was common stock of Lifeguard Financial Systems Ltd., a unit of New Zealand-based Lifeguard Reinsurance Ltd.
Lifeguard Re and several related companies were run until last fall by Houston businessman Leon Excalibur Hooten III, who died of a heart attack in Scottsdale in October 1996.
Texas securities regulators had raided Mr. Hooten's office in June and the Texas Insurance Department ordered him to shut down in September after finding that he had collected more than $150,000 in premiums from several policyholders for allegedly worthless Lifeguard Re bonds.
The Texas department also found that Lifeguard Re had claimed to own millions of dollars of worthless assets, including a $15 million certificate of deposit at a bank allegedly based in the non-existent Dominion of Melchizedek; $10 million in Melchizedek government bonds; and $20 million in bonds issued by "St. Charles University" and signed by Mr. Hooten himself as president of the purported university.
Mr. Hooten told a state securities regulator that he was president of Melchizedek in 1994. He also admitted that he had filed for personal bankruptcy in early 1995 listing net personal assets of $10,310, according to court records.
Melchizedek, which has figured in previous insurance swindles, has been variously located by different people in Antarctica, the South Pacific and on an island off the Colombian coast. Jeffrey H. Reynolds III was sentenced earlier this year to more than four years in prison on federal fraud charges stemming from his operation of California Pacific Bankers & Insurance Ltd., supposedly based in Melchizedek.
By year-end 1995, IC&S had disposed of all its 1994 investments except its Lifeguard stock, which remained on the balance sheet at roughly the same valuation. Of total assets of $11.7 million New Zealand ($7.6 million), the insurer also reported owning $2.5 million New Zealand ($1.6 million) in publicly traded common stock and non-public preferred shares of Phoenix Resources Technologies Inc.
Phoenix, formerly known as Hughes Resources Inc., has the same Scottsdale address as Premier Administrators and is headed by James R. Ray, former auditor for First Assurance, Securities and Exchange Commission filings show.
Mr. Ray was a Texas-licensed certified public accountant when he prepared First Assurance's financial statements for 1992. Last year, however, the Texas State Board of Public Accountancy revoked his license after finding numerous violations of accounting rules in his audits of First Assurance and another company. Mr. Ray is appealing the revocation.
SEC filings also show that Phoenix's assistant corporate secretary and legal consultant is Mar Continued on next page
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vin Lewis, who is also claims manager for IC&S and was formerly claims administrator for First Assurance. Mr. Lewis, whose Texas law license has been suspended several times since 1990-was indicted in 1993 with insurance swindler Arthur A. Blumeyer III and others for allegedly using the defunct Bel-Aire Insurance Co. and a string of bogus offshore insurers to defraud policyholders of millions of dollars. He was acquitted after a jury trial in 1994 (BI, Feb. 14, 1994). Mr. Lewis denied acting as legal consultant to Phoenix.
Phoenix, formerly a wood products company and now an oil and gas producer, reported a $3.5 million net loss for its Oct. 31, 1995, fiscal year and its auditor expressed "substantial doubt about its ability to continue as a going concern."
The company reported a profit for the nine months ending July 31, 1996, most of it a one-time gain from the sale of discontinued operations, SEC filings show.
Mr. Love doesn't deny that several IC&S investments have been less than stellar performers.
The Lifeguard stock, for instance, turned out to be a total loss, Mr. Love conceded, adding that Premier Administrators also canceled a reinsurance management deal with Lifeguard Re last July.
He maintained, though, that he didn't suspect any of the Lifeguard misrepresentations cited by Texas regulators. He said he relied on Lifeguard's financial statement, which only described the company's assets as "bonds and CDs" without further identifying them or mentioning Melchizedek.
"There's no reason Lifeguard should have been a loss except for the darn fraud, or alleged fraud, involving Leon Hooten," Mr. Love said.
Meanwhile, IC&S has also sold its Phoenix common stock at a loss, receiving only about a third of what it paid, Mr. Love said. The insurer continues to hold Phoenix preferred shares, he said.
The Lifeguard debacle has caused Mr. Love to enter a new stock deal to "recapitalize" IC&S, he said.
In November, IC&S acquired 1.8 million shares of Wasatch Pharmaceutical Inc. in exchange for an interest in oil and gas leases held by Mountaineer Gas Transmission Inc., a Nevada corporation formed last April and headed by Mr. Lewis and Mr. Love.
Wasatch, described in its SEC filings as a "development stage company," owns a "proprietary technology" for the treatment of acne and other skin disorders and hopes to open a chain of skin care clinics, the filings say.
In a Sept. 30, 1996, quarterly filing, though, Wasatch reported only minimal revenue from two unprofitable prototype clinics and disclosed that lack of assets and working capital raised doubts about its ability to continue as a going concern.
Wasatch reported total revenues of $89,386 for the first nine months of 1996, along with total assets of $41,903 and a stockholders' equity deficit of $1.1 million.
David K. Giles, Wasatch's chief financial officer, said Wasatch may try to convert the Mountaineer assets to cash to finance the clinic expansion.
Wasatch's over the counter stock was priced at $2.75 bid and $4.63 offered in mid-December, according to one of the company's market makers. The stock's volume had ranged from 100 shares to 3,700 shares a week over the previous several weeks, the market maker said.
Meanwhile, IC&S faces potential claim and litigation problems.
The insurer's 1995 statements reports as a "contingency" about $3 million New Zealand ($2 million) in reinsurance claims from a South Korean ceding insurer-identified as Korea Foreign Insurance Co. by a broker involved in the placement-for a series of disastrous 1994 crop losses in South Korea.
IC&S' statement says it was improperly bound on the treaty, received no premium and does not acknowledge any liability.
However, Frank Sherman-an intermediary with Seawise Insurance Consultants Ltd. in Sudbury, United Kingdom, who was involved in the placement-said IC&S was bound under a valid agreement with a Belgian underwriting manager and that the insurer did receive premium on the risk.
Mr. Sherman said Seawise is now preparing final accounts on this and other IC&S business and will submit them to the New Zealand insurer shortly.
IC&S, Mr. Love and Mr. Lewis are also named in an amended lawsuit filed last April by First Assurance's bankruptcy trustee in U.S. District Court in San Diego. Two earlier complaints were dismissed.
The latest complaint charges that First Assurance fraudulently transferred about $500,000 to IC&S to get the insurer started. In addition, IC&S is effectively a First Assurance successor company and should be held liable for First Assurance losses, the suit alleges.
Mr. Love and Mr. Lewis were also part of a conspiracy to operate First Assurance as an "engine of fraud," capitalizing the insurer with worthless assets, looting it of premiums and leaving millions of dollars of unpaid claims, the trustee's suit charges.
IC&S, Mr. Love and Mr. Lewis have filed a motion to dismiss the complaint.
The lead defendant in the lawsuit, Paine Webber Inc.-which managed accounts for First Assurance-has agreed to settle the suit for about $7 million, according to lawyers involved in the litigation. An attorney for Paine Webber declined to comment.
IC&S, meanwhile, has filed a defamation suit in New Zealand against Robert Brace, a Santa Barbara, Calif., lawyer representing the First Assurance trustee.
Mr. Brace has denied defaming the insurer. To support his case, Mr. Brace last October filed an affidavit of a U.S. regulator asserting that most of IC&S' year-end 1995 assets, including the Lifeguard and Phoenix shares, were either worthless or substantially overvalued. The affidavit was sworn by William Smythe, former executive director of the National Assn. of Insurance Commissioners Securities Valuation Office.
Mr. Love dismissed the affidavit as "one man's opinion.*.*.*.I've got my own documentation that the assets were valued at exactly as much or more" than the amounts reported in the 1995 statement.
He conceded that the Lifeguard and Phoenix stock proved to be worth far less than reported. But, he explained, "that balance sheet was as of 12/31, not the day after and as of 12/31 those numbers were all good."
Despite IC&S' troubles, Mr. Love sounds confident about its ability to survive.
"I think we're much stronger this year than we were last year," he said.
IC&S doesn't assume big risks and has a solid reinsurance program, and that combination means "we'll be around next year and the year after and the year after."