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SAN DIEGO-Liberty Mutual Insurance Co. will step in as interim reinsurer of Golden Eagle Insurance Co., while a growing number of insurers consider bidding to take over the business permanently.

The California Insurance Department-which seized Golden Eagle Jan. 31 and quickly announced a rehabilitation plan backed by Zurich Centre Group and others-last month changed course and opened up bidding for the insurer's business.

Nearly a dozen insurers and reinsurers have expressed interest so far, regulators report. Bids are due by April 4, and the winning bid is subject to court approval.

Meanwhile, the tangled Golden Eagle affair is taking another contentious turn: Golden Eagle owner John C. Mabee, who feuded with regulators for months before the takeover, is apparently trying to sell the company himself or to line up investment partners.

Mr. Mabee, ousted as chairman and chief executive officer in the takeover, took out a classified ad in the "business opportunities" section of the Wall Street Journal Feb. 13, noting "an urgent need for a strong investor to provide the resources needed to continue to move (Golden Eagle) forward.

"If you are a substantial insurance or reinsurance company, industrial company or financial firm and have an interest in a super business. . . please contact John C. Mabee," the ad said.

Several days later, Mr. Mabee wrote to a number of insurance company executives directly, offering to sell his stock in Golden Eagle to support a bid for the company.

"As chairman, CEO and sole shareholder of Golden Eagle Insurance Co., I would like to invite you to bid on purchasing my

company," says one such letter obtained by Business Insurance.

"Why would you want to deal with me?" the letter asks. "I know the value of the company! I also own all the stock, which if purchased would allow my buyer to control being the successful bidder without continued litigation and interruption of ongoing business."

Karl L. Rubinstein, a Los Angeles lawyer acting as deputy conservator for Golden Eagle, said that Mr. Mabee is free to sell his stock but is wrong to suggest that owning the stock will improve a bidder's chances of success. Any owner of the stock will have to go though the same bid process as other interested insurers, and the successful bid will be determined by the Insurance Department and the court.

Mr. Rubinstein added that any bid that includes Mr. Mabee as a partner is not a likely winner: "He has a right to go out and try to find allies, but it's my guess that he will never be allowed to own an insurance company again, based on what we are finding."

California regulators charge that Golden Eagle management manipulated financial data to conceal problems from regulators and that the insurer's stability was threatened by $69.8 million in unsecured loans to Mr. Mabee through Mesa Reinsurance Co. Ltd., a Mabee-owned offshore company acting as Golden Eagle's principal reinsurer.

Mr. Rubinstein last month wrote to Mr. Mabee demanding repayment of the loans, and Insurance Commissioner Chuck Quackenbush said the department will sue Mr. Mabee if he fails to repay the money.

In an interview, Mr. Mabee confirmed the letters offering to sell his Golden Eagle stock, but declined to comment on his plans. He also declined to comment on most of the Insurance Department allegations, and his lawyers could not be reached.

In previous interviews, Mr. Mabee's lawyers have denied data manipulation and mismanagement at Golden Eagle and said that Mr. Mabee contributed more money to the insurer than he took out through Mesa Re.

Golden Eagle, owned by Mr. Mabee since 1983, is California's third-largest workers compensation insurer, writing about $400 million in workers comp premiums and $300 million in other property/casualty lines in 1996. While the insurer reported surplus of $232.1 million at year-end 1995, an Insurance Department examination concluded that higher-than-reported losses and expenses actually left it with surplus of only $81.6 million.

The Jan. 31 seizure of the company capped a long-running struggle between Mr. Mabee and the Insurance Department, which last year ordered Golden Eagle to boost its reserves by $138.5 million.

Within days of the takeover, Mr. Quackenbush announced a rehabilitation plan shifting Golden Eagle's business to a newly created company that would be backed by Zurich Centre, Superior National Insurance Co. and Insurance Partners L.P. (BI, Feb. 10). Other insurers protested that they weren't given a chance to participate, and Mr. Mabee labeled the plan a "back room deal."

The Department then decided to open the bidding and on Feb. 21 released a formal request for proposals. The request outlines the rehabilitation plan-similar to the previously announced Zurich Centre deal-and sets requirements for bidders.

Under the plan, Golden Eagle's existing business, including related assets and liabilities, will be transferred to the newly created San Diego Casualty Insurance Co., which will also write ongoing new and renewal business. Other Golden Eagle assets and non-insurance liabilities will be transferred to a liquidating trust. Mr. Mabee would be entitled to anything left in the trust when the plan is wrapped up, but Mr. Rubinstein said he expected that to be little.

Bidders would have to contribute enough capital to San Diego Casualty to allow it to write at a maximum 3-to-1 net premium-to-surplus ratio. Bids should include participation by an A-rated reinsurer with at least $200 million in surplus or a demonstration that San Diego Casualty itself will become an A-rated company with at least that much surplus.

Bidders can also cap their assumption of liabilities on Golden Eagle's existing book at a percentage-say, 120% or 130%-of transferred assets. Regulators say they will ask the California Insurance Guaranty Assn. to pick up any losses above the cap.

The Insurance Department will rate the bids on several items, including the amount of capital contributed to San Diego Casualty, the extent of the cap on existing liabilities and the continuity offered Golden Eagle's employees and policyholders.

Several companies have expressed interest in the business, regulators report. Along with the Zurich Centre group, they include American International Group Inc.; CII Financial Inc.; Cypress Insurance Co., a Berkshire Hathaway unit; Employers Reinsurance Corp. and Enterprise Advisors; Fremont Compensation Insurance Group; Great American Insurance Cos.; Industrial Indemnity Co.; Liberty Mutual; Swiss Re America; Underwriters Reinsurance Co.; and Zenith National Insurance Corp.

Officials of Employers Re, Fremont, Liberty Mutual, Underwriters Re and Zenith confirmed they are looking at the business. Officials of the other insurers either declined to comment or could not be reached.

Meanwhile, Liberty Mutual has agreed to act as an interim 100% reinsurer of all new and renewal business written by Golden Eagle from March 1 until the rehabilitation plan is in place. The coverage includes a cut-through clause making Liberty Mutual directly liable to policyholders if Golden Eagle is placed in liquidation.

Mr. Rubinstein said the agreement is intended to reassure Golden Eagle's producers and doesn't reflect fear that Golden Eagle might collapse before a rehabilitation plan is approved.

"The reason we want interim reinsurance is to demonstrate to our producers that we are capable of continuing business as usual," he said.

A major portion of Golden Eagle's reinsurance had been ceded to Mr. Mabee's Mesa Re, which was also placed in conservation.

Asked if the reinsurance improved Liberty Mutual's chances of winning the ongoing Golden Eagle business, he replied, "Everybody has got the same opportunity to bid, and the best bid will win. I think it obviously demonstrates the level of their seriousness."

Separately, Mr. Rubinstein provided new details of the department's allegations of mismanagement at Golden Eagle in court papers filed last week. The filing charges that:

Mesa Re, based in the Turks & Caicos Islands, fraudulently wrote off as a bad debt expense $130,000 paid to Big Bear Profit Sharing Plan, another entity affiliated with Mr. Mabee.

Sun Life Assurance Co. Ltd. of Canada and Vesta Fire Insurance Corp., two Golden Eagle reinsurers, retroceded all of their risk under three treaties to Mesa Re for $1,000 per treaty. Mesa Re thus assumed millions of dollars of liabilities for total premium of only $3,000, according to Mr. Rubinstein, who said he couldn't explain the agreements.

Mr. Mabee and Golden Eagle's chief financial officer developed plans to manipulate workers comp reserve levels and move large construction-related liability losses from the late 1980s and early 1990s to more recent years, all to improve Golden Eagle's apparent financial picture.

Mr. Mabee tried to cover up the alleged manipulations, and Golden Eagle representatives offered conflicting stories to explain the situation. Mr. Mabee has attributed faulty financial data to clerical errors, while a Golden Eagle lawyer blamed disgruntled current and former employees.

In an interview, Mr. Mabee said Mesa Re's Big Bear write-off occurred because Big Bear had loaned money to a Golden Eagle agent to cover a shortfall in the agent's premium trust account. The loan "went sour" and was repaid by Mesa, said Mr. Mabee, who added he never benefited personally and was only trying to protect Golden Eagle from suffering the loss.

"It's all explainable, but it makes a good-sounding charge," Mr. Mabee said. He declined to comment on the other allegations.

The Golden Eagle conservation action has been moved from San Diego to San Francisco County Superior Court.

Mr. Mabee has also demanded a hearing on the legality of the Jan. 31 seizure, and is expected to argue that it should be overturned.