Seizure Brings Down a Mogul’s Golden Empire
Among those who have come to know John C. Mabee--whether as businessman, horse breeder or leader of San Diego high society--one opinion stands out.
“He’s a hard-ass,” says a horse-racing acquaintance, “a defiant, ornery cuss who should never be in a regulated business.”
In fact, it was Mabee’s very involvement in a regulated business--insurance--and his increasingly personal conflict with the state’s insurance commissioner that have produced what for him could be a staggering financial disaster.
On Jan. 31, Insurance Commissioner Chuck Quackenbush seized Mabee’s wholly owned San Diego-based company, Golden Eagle Insurance, ousted Mabee and his top lieutenants, and placed the insurer up for sale.
Behind the seizure were charges that Mabee had improperly drained $66 million from the company by taking a series of unsecured loans, none of which has been repaid. Regulators also charged that Golden Eagle’s top officers had falsified records to mask the company’s dire financial condition.
Quackenbush said he moved quickly to forestall the possible collapse of Golden Eagle, which would have left 100,000 policyholders at risk and the state on the line to cover the company’s obligations.
Mabee has denied the charges, insisted that the company was fully solvent and portrayed himself as the victim of a political vendetta by the insurance commissioner.
Behind the seizure, however, lies a greater drama. Quackenbush’s move came after nearly a year of increasingly contentious dealings with Mabee.
In an industry in which regulatory issues are most often settled through quiet negotiation, Mabee has reacted to Quackenbush’s initiatives with undiluted public hostility.
When the insurance regulators first questioned Golden Eagle’s finances last year, Mabee responded with a lawsuit contending that he had not been given an opportunity to justify the company’s accounting. A state judge rejected that argument, ruling twice in three months that Quackenbush had acted entirely within his authority.
Mabee further charged publicly that he had been made a target because he had contributed a mere $1,000 to the commissioner’s 1994 election campaign. He even offered a $100,000 reward to anyone with evidence that Quackenbush was singling out Golden Eagle for discipline.
“I’m stepping on the toes of lots of insurance companies out there that contributed heavily to” Quackenbush, he said in an interview last week with The Times. “The end result is he takes over a company worth a billion dollars.”
Quackenbush called the charge “an unfounded allegation.”
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Others agree that Mabee’s provocative attitude increased the chance of a harsh regulatory reaction.
“John Mabee’s been very much in their face,” said Fred Kilborn, a San Diego independent actuary who examined Golden Eagle’s books. “He’s insufficiently willing to bow to authority. I wasn’t surprised to see some sort of action [by Quackenbush], because it’s hard to thumb your nose at government and get away with it.”
For his part, Quackenbush insists: “We’ve kept emotions completely out of this. But we concluded that this company was being operated in a hazardous manner.”
The battle over Golden Eagle Insurance is unusual for several reasons. For one, the seizure is a particularly aggressive step for Quackenbush, who has been criticized by consumer groups for favoring the insurance industry in regulatory matters.
Moreover, Mabee is a highly prominent member of the establishment in San Diego, Gov. Pete Wilson’s hometown.
For nearly 20 years, Mabee, 76, has reigned as president and now chairman of the Del Mar Thoroughbred Club, controlling the fabled racetrack that is the enduring hub of the San Diego social scene.
John and Betty Mabee’s 50th wedding anniversary party in 1991--at Del Mar, naturally--was attended by a glittering crowd of 400 that included the Pete Rozelles, diet queen Jenny Craig and bandleader Bob Crosby (whose brother Bing was Del Mar’s founder).
Over the years, he has been a fixture of San Diego business as well. After coming to San Diego from Iowa in the early 1950s, he built a small local grocery into the regional Big Bear chain, which grew to 19 stores and once ranked as one of the country’s 100 largest grocery companies. (He sold off the stores in 1993 after losing market share to the bigger Vons and Lucky chains.) His Golden Eagle Farm in nearby Ramona remains one of the state’s most successful thoroughbred breeding facilities, turning out a steady stream of winners that includes Best Pal, a gelding that is the most successful California-bred runner, placing second in the 1991 Kentucky Derby.
But perhaps Mabee’s most dynamic holding was Golden Eagle Insurance. The company was founded in 1984, when Mabee injected $3 million into a nearly defunct insurance company languishing in the estate of failed Nixon-era financier C. Arnholt Smith.
Under Mabee, the firm specialized in obscure or unpopular lines of insurance. These included thoroughbred breeder’s coverage, construction-defect liability and--after the Northridge earthquake--California homeowners insurance.
Once Mabee chose to enter a market, he pursued it with a vengeance. That may have gratified insurance agents always on the lookout for policies to sell, but it made regulators uneasy.
Golden Eagle’s homeowner premiums, for instance, soared to $7.5 million in 1995 from a paltry $114,000 the year before. Similarly, when deregulation opened the state’s workers’ compensation market to competition in 1994, Golden Eagle plunged in, quickly becoming the state’s third-largest carrier of those policies.
Meanwhile Mabee squabbled with competitors, who said he imprudently undercut their rates to win business, and fielded hundreds of lawsuits from customers, many of whom complained he fought them implacably over even trivial claims.
“They have a reputation as a company that you have to take to court if you’re going to collect,” said one San Diego attorney who asked to remain unidentified. “They have a pretty strong history of denying claims.”
“Yeah, we’re tough,” Mabee responded in the interview with The Times. “But I think we’re reasonable.”
Then there is the climactic battle with state regulators. Insurance department officials say Mabee staged fierce public relations battles with them as a way to avoid dealing in good faith with their concerns about Golden Eagle’s financial condition.
“There was a problem getting information out of them,” Quackenbush said. In the end, he added, “we didn’t have trust or faith in the numbers he [Mabee] was giving to us.”
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Mabee’s squawks about political influence even led the state Senate Committee on Insurance to make quiet inquiries about Quackenbush’s investigation. The committee staff quickly came to see things the commissioner’s way, sources say.
“The bottom line was that there were some real serious problems in the company,” said a source familiar with the committee inquiry.
By midyear 1996, state regulators were growing concerned about what they regarded as Golden Eagle’s unacceptably slim capital margins--the product of its predilection for undercutting competitors’ rates. By pitching his rates low, Mabee could generate very fast growth in new policies--but he risked mortgaging the company’s future by depriving it of a decent financial cushion.
But that paralleled how Mabee conducted his other affairs. At Golden Eagle Farm, for instance, Mabee favored gelding, or castrating, his best horses. The practice made the steeds more compliant to trainers and thus may have helped them win richer purses. But it rendered them all but valueless when their racing careers ended and they were incapable of going to stud.
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Finally, regulators in September ordered Golden Eagle to increase its claim reserves by $135.8 million--a sum that would seriously cut into Mabee’s and the company’s net worth.
The regulators also warned that Golden Eagle was taking on far more business than its capital resources warranted and said they were going to closely monitor the company’s finances. The unmistakable signal was that Golden Eagle was writing too much business for its own health.
Toward the end of the year, Quackenbush met with Mabee in one last attempt to extract reliable financial figures from the company.
“He said our numbers were wrong,” Quackenbush recalled. “But he still didn’t provide us with audited 1995 financial figures.”
Soon after that, Quackenbush assigned Karl Rubinstein, a private lawyer and insurance expert, to investigate the company.
Rubinstein says he soon discovered why Mabee may have been reluctant to provide the commissioner with detailed financial data: There were widespread irregularities.
Raising particular concern was Golden Eagle’s relationship with Mesa Reinsurance, a reinsurance company--a firm other insurance companies pay to assume some of their own policy risks--100% owned by Mabee.
Rubinstein says he unearthed a series of sham transactions purporting to be loans to Mabee from Mesa. In fact, he and Quackenbush contend, Mesa had almost no existence apart from John Mabee: Of its $80 million in purported assets, some $66 million was in the form of unsecured loans--that is, loans without collateral--to Mabee himself.
Those loans, they say, were actually loans by Golden Eagle to Mabee; they contend the Mesa arrangement was devised to circumvent rules that would have required Quackenbush’s approval for any loan transaction directly between Golden Eagle and Mabee, its owner.
Mabee insists that the loans he took from his own company were “perfectly legitimate” and that Quackenbush is overlooking $107 million he contributed to Golden Eagle.
“He needs a headline,” Mabee groused.
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Meanwhile, Rubinstein says he found something else “chilling”: evidence that top officers were altering company records.
Part of that evidence came from a former Golden Eagle claims adjuster named Kevin Curry, who is suing the company for wrongful termination.
Curry, who gave Rubinstein a sworn deposition, said he had received a call on March 26 from Kathryn Duvivier, the owner of an Encinitas construction company. Duvivier complained that she had been rejected for liability insurance by a number of insurers because their searches kept turning up a $560,000 claim she had made with San Diego-based Golden Eagle as recently as 1995.
The problem, she said, was that she had not been insured by Golden Eagle since May 1993.
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As he tried to investigate the matter over the next two months, Curry testified, company officers warned him off the case, made veiled physical threats and even offered him what he interpreted as a $200,000 bribe to keep silent. He was told that the Duvivier file had been personally handled by Mabee and that he shouldn’t ask questions.
In all, Curry testified, he found that records on 10 to 15 similarly large pre-1995 losses totaling as much as $15 million had been altered to move the losses to 1995 or later.
The effect of such changes, argues Rubinstein, would be to make Golden Eagle’s reserves for the years before 1995 appear to be more prudent than they actually were. Rubinstein says he has found other record changes paralleling those noticed by Curry. Some alterations, he says, occurred over one weekend in late January during a period when he was electronically denied access to the company’s computer files.
“It was spooky city,” he said later in an interview, adding that the changes were evidently aimed at “keeping the department from ascertaining the full level of the company’s [financial] exposure.”
Golden Eagle executives variously attributed the data alterations to clerical errors and to the act of disgruntled ex-employees--meaning Curry and another employee who have filed a class-action suit against Golden Eagle alleging wrongful termination.
“They’ve got a couple of disgruntled employees who tried their best to blackmail us,” Mabee said in The Times interview. The data changes, he said, “don’t make one iota of difference to the finances of the company.”
Mabee says he will fight Quackenbush’s seizure in court, although Switzerland-based Zurich Centre Group has already agreed in principle to take over the company and cover all existing policies. As many as four other companies have also expressed interest in making a bid to Quackenbush for Golden Eagle’s remains.
Whatever happens, Quackenbush says he is determined to make the seizure stick.
“I can’t conceive of John Mabee ever again being in control of this company,” he said.
Hiltzik reported from Los Angeles and Kraul from San Diego.
