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SACRAMENTO, Calif.-American International Group Inc. has won the bidding war for Golden Eagle Insurance Co., marking the second time AIG has picked up a financially troubled California insurer in recent years.

AIG beat out bids from rival Liberty Mutual Insurance Co., which has been serving as interim reinsurer of Golden Eagle while in rehabilitation, and nearly a dozen other insurers and reinsurers that expressed interest in the troubled company after California regulators put it on the auction block in February (BI, March 3, Feb. 10).

According to AIG's winning bid and rehabilitation plan, Golden Eagle's existing business, including related assets and liabilities, will be transferred to newly created San Diego Casualty Insurance Co., which will write new and renewal business.

Other Golden Eagle assets

and non-insurance liabilities will be transferred to a liquidating trust. Former Golden Eagle owner John C. Mabee will be entitled to anything left in the trust when the plan is wrapped up.

Under the deal, AIG will reinsure 100% of Golden Eagle's liabilities.

The California Insurance Department said AIG was selected because it best met the criteria set out in the request for proposal. Under the Insurance Department's request for proposal, bidders were required to contribute enough capital to allow San Diego Casualty to write at a maximum 3-to-1 net premium-to-surplus ratio.

Bidders were rated 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 Eagles' employees and policyholders.

AIG officials, who declined to comment beyond the company's press release, did not identify the new company's management team.

However, the release said the new company, which will remain in San Diego, will employ all of the Golden Eagle employees "necessary to conduct the business going forward."

Golden Eagle is the second financially troubled insurer AIG group has picked up in California in recent years. In 1994, AIG rescued 20th Century Insurance Co., which was teetering under the weight of claims from the Northridge earthquake (BI, Oct. 3, 1994).

Since AIG's $200 million capital infusion at the end of 1994, 20th Century's statutory policyholder surplus has grown to $436.4 million at year-end 1996.

When AIG took over the company in 1994, its policyholder surplus had dropped to $82.6 million because of earthquake losses.

Most financial analysts are viewing AIG's move as a wise business strategy.

"Every major insurer would like to believe they have the ability to pick up and restructure troubled companies for a profit," said John Wicher, managing director of Russell Miller Inc., a San Francisco-based investment banking firm specializing in the insurance industry.

But AIG is unique in its ability to identify problem assets, implement appropriate changes and turn them around, he said.

"It's really impressive what AIG can do," Mr. Wicher said.

AIG realizes that "with troubled transactions come a long list of opportunities," agreed John L. Ward, chairman of Cincinnati-based Ward Financial Group Inc.

"In many situations troubled acquisitions are the best acquisitions. AIG is not the first company to recognize this," he said, pointing to Zurich Insurance Group's 1995 deal with Home Insurance Co. and CNA Insurance Co.'s 1994 takeover of Continental Insurance Co.

Golden Eagle was an especially attractive target because California regulators put its reserves at an "ultraconservative level," according to Mr. Ward.

"It's likely some of those reserves may be redundant at this point," he said. "So you take over this company, implement tough, solid claims-handling practices and there's a good chance those reserves are going to fall in the future."

Insurers that assume the liabilities of their troubled counterparts also may enhance their relations with regulators, Mr. Ward suggested.

"When regulators get involved, they can be an excellent ally, and they have a lot of power that can work to the benefit of the new investor," he said.

And "good relations with regulators can go a long way in future discussions of rate increases and rollbacks," he pointed out.

Barbara Stewart, president of Stewart Economics Inc. in Atlanta, likened AIG's strategy to that of Berkshire Hathaway Group, which typically "picks up good businesses and then lets them continue to operate with its capital backing."

"It's really just capital looking for good opportunities," she said. "There's a lot of capital in the insurance business looking for places to be used."

Furthermore, "I wouldn't characterize either one of these insurers as troubled," Ms. Stewart said of Golden Eagle and 20th Century. "These are both excellent investments because they are sound, good businesses that were just inadequately capitalized."

Golden Eagle 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.

The Insurance Department seized Golden Eagle on Jan. 31 due to questionable business practices that it charged put policyholders, employees and clients of the company at risk.

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.

The department also charged that Mr. Mabee and other members of his management team had taken out nearly $120 million in unsecured loans from the company. The amount was increased from an earlier estimate of $69 million after department auditors reviewed the company's financials, explained Karl Rubinstein, deputy conservator.

"Our analysis by my accountants reflects that Mr. Mabee and people acting in concert with him have taken more than $120 million out of the company since 1984," Mr. Rubinstein said.

Department auditors also revised its reserve deficiency estimate for year-end 1996 to $272 million, he added.

Commissioner Chuck Quackenbush has filed a lawsuit against Mr. Mabee to recover the loans.

But Mr. Mabee has filed a motion challenging the choice of judge, delaying hearing on the case, according to Mr. Rubinstein.

San Francisco Superior Court Judge William Cahill had been assigned to the case.

Mr. Rubinstein expects to work out details of AIG's bid in less than two weeks. Then the deal will be subject to court approval, which will take about 30 more days, he said