SAN FRANCISCO-American International Group Inc. is vowing to "take all steps necessary to overturn" a San Francisco Superior Court judge's decision to award the sale of Golden Eagle Insurance Co. to Liberty Mutual Insurance Co. and already has filed an appeal.

AIG, which in April had won Golden Eagle in a sealed bidding contest organized by the California Insurance Department, lost to Liberty Mutual in a May 30 order by Superior Court Judge William Cahill. He awarded Golden Eagle to Liberty Mutual, noting in his order that "this court finds that the terms for sale to Liberty Mutual are superior to those proposed by AIG, and that sale to Liberty Mutual is in the best interests of Golden Eagle's policyholders and creditors."

Commissioner Chuck Quackenbush, who is being criticized by AIG and its attorney for not honoring the bidding process, said the decision was out of his hands.

"All of the proceedings were under the control of Judge Cahill. It was his decision," he said during a telephone press conference that followed last week's announcement.

The judge noted that the court ultimately had the authority to transfer ownership. "Since Golden Eagle was in conservatorship, any sale of Golden Eagle assets in excess of $20,000 had to be approved by the Superior Court," Judge Cahill ruled.

AIG has filed a notice of appeal in the California Court of Appeal, the first step in AIG's planned challenge to Judge Cahill's decision. AIG also will file objections to Golden Eagle's rehabilitation plan at a scheduled July 8 hearing, according to Roxani Gillespie, AIG's outside counsel with Buchalter, Nemer, Fields & Younger in San Francisco.

The acquisition of Golden Eagle would make Liberty Mutual the second-largest underwriter of workers compensation insurance in California, surpassing AIG, which holds the No. 4 spot.

Based on 1996 direct written premiums, Golden Eagle was the third-largest comp insurer, while Liberty Mutual was the fifth-largest (see chart, page 1). The State Compensation Insurance Fund is the largest underwriter of workers compensation in California.

AIG's bid for Golden Eagle was challenged in May by Liberty Mutual, which presented a sweetened offer to the court overseeing the insurer's rehabilitation. The new offer included a $20 million payment and a settlement that would drop charges against Golden Eagle's deposed owner and chairman, John Mabee (BI, May 26; April 14). AIG subsequently amended its bid to match Liberty Mutual's.

Originally, both Liberty Mutual and AIG had closely followed the department's request for proposal outlining a rehabilitation plan for Golden Eagle, according to Karl Rubinstein, deputy conservator and interim president of the San Diego-based insurer.

However, the new Liberty Mutual bid added the settlement agreement in which Mr. Mabee relinquishes all rights to his company and is banned from ever conducting any type of insurance business in California again.

In addition, Liberty Mutual will pay $20 million in cash up front to a liquidating trust and reinsure up to 135% of Golden Eagle's liabilities up to $420 million beyond the company's estimated $1.2 billion in assets, according to Gary L. Countryman, chairman and chief executive officer of Boston-based Liberty Mutual Group.

The California Insurance Guaranty Fund will be available to pay any claims exceeding that cap, according to Mr. Rubinstein.

By comparison, AIG's original rehabilitation plan had called for it to put $200 million into a new company to write new and renewal business. It then would have reinsured 100% of the company's business.

In addition, Golden Eagle's $1.2 billion in assets would have been transferred into a runoff operation supported by American Home Assurance Co., an AIG unit, to run off the insurer's older claims, which were believed to have been underreserved.

AIG also would have supplied additional capital depending on the amount and quality of assets Golden Eagle turned over.

Ms. Gillespie pointed out that "nobody gave us a reason for Liberty Mutual's selection. There was no analysis of the bids" in the court's opinion.

Judge Cahill's opinion suggests that Liberty initially may lost to AIG because the RFP did not provide for evaluation of bids that exceeded the department's specifications.

"By the terms of the RFP, no 'over-bids' were to be accepted and, in fact, Liberty Mutual tried to over-bid but was rejected by the commissioner," the opinion states.

AIG officials and Ms. Gillespie criticized the Insurance Department for not enforcing its bidding process.

The department should have defended its statutory bidding process and its contractual obligation with AIG as the winning bidder rather than knuckle under to Judge Cahill, said Robert M. Sandler, executive vp of AIG.

"AIG has been working for months to ensure that Golden Eagle's policyholders, employees and independent producers were not hurt by the DOI's rehabilitation proceedings," he said.

"If the DOI will not stand by its own commitments and deal in good faith with responsible bidders, Californians will pay a stiff price because responsible bidders will not help save troubled companies and protect policyholders," said Ms. Gillespie, AIG's attorney and also a former California insurance commissioner.

"This is not the finest hour for state regulation," said David J. Walsh, general counsel for AIG's domestic brokerage group. Mr. Walsh was previously Alaska's director of insurance and is a former president of the National Assn. of Insurance Commissioners.

"The department changed its position with no notice to AIG. Policyholders, the industry and legislators have to be able to rely upon a commissioner's word," Mr. Walsh continued.

"How can the department reverse its position with no prior notice and without any explanation? AIG had faith in the process and invested substantial resources based on the commissioner's contractual commitments," he said.

Golden Eagle was seized Jan. 31 after Insurance Department auditors determined it was underreserved by some $138.5 million. The department also charged that Mr. Mabee, among other things, had obtained $69 million in unsecured loans from Mesa Reinsurance Co., Golden Eagle's Turks & Caicos-based reinsurance affiliate.

Under terms of the agreement with Liberty Mutual, Mr. Mabee and his wife, Betty Mabee, will execute personal guarantees to repay the loans taken from Mesa Re. In addition, Mr. Mabee will provide for Golden Eagle to receive the benefit of $30 million in assets as security for policyholder and creditor claims and all of the other assets of Mesa Re, including future loan payments by Mr. Mabee.

Mr. Mabee also has agreed to drop all challenges to the commissioner's conservation of Golden Eagle, and, in turn, Mr. Quackenbush has agreed to drop the department's suit against Mr. Mabee.

If Liberty Mutual takes over Golden Eagle, it will operate under the direction of local management and maintain its headquarters in San Diego, according to Mr. Countryman. No name change is planned.

Fred Marziano, a senior vp in Liberty Mutual's home office, is in charge of assembling the new management team.

Even though Liberty Mutual is a direct writer, distribution of Golden Eagle's products to customers would continue through Golden Eagle's network of independent agents and brokers, Mr. Countryman assured.

"Our objective as we move forward is to help Golden Eagle realize its enormous potential here in California," he said. "We bring our exceptional financial strength, our 85 years of experience in workers compensation and other property and casualty insurance, and our belief in Golden Eagle."

"For our part, we will benefit from Golden Eagle's substantial market position, its California-focused expertise and its highly valued distribution relationships in California's insurance market," Mr. Countryman added.

The bitter contest for Golden Eagle and Fremont Compensation Insurance Co.'s recent announcement that it will acquire Industrial Indemnity Co. show how competitive California's workers compensation market has become since the 1995 introduction of open rating, observers say.

"What's driving this consolidation is the fight for market share," said Art Christoffersen, senior vp in the Los Angeles office of J&H Marsh & McLennan Inc.

"It's hard to grow business with the competition as hot as it is," he said. "As a result, insurers need to 'buy' market share."

Mr. Christoffersen compared the situation to the California Gold Rush at the turn of the century.

"A lot of Easterners came to California looking for gold. Maybe that's what the folks from Boston are doing" by acquiring Golden Eagle, he said.

While it would seem that such consolidation could eventually stifle the newfound competition, California Insurance Commissioner Chuck Quackenbush said he thinks the interest these insurers are taking in the state's workers compensation market will benefit buyers.