Regulators Take Reins of Cosmopolitan Life, Cauley Among Creditors

by George Waldon  on Monday, Oct. 12, 2009 12:00 am  

State insurance regulators are still sorting through the tattered balance sheet of a 78-year-old Little Rock company to determine if it can be salvaged.

A court-ordered receiver has directed the affairs of Cosmopolitan Life Insurance Co. since March, when the Arkansas Insurance Department learned that what appeared to be a stable company had suddenly fallen into what its chief financial officer called a "financially hazardous" condition.

Its problems included negative cash flow of $100,000 per month, unpaid payroll taxes dating back to 2007 and unpaid premiums for the reinsurance that limited the company's exposure to large claims.

Cosmopolitan's primary product was excess loss coverage policies for companies with self-funded health insurance plans.

"We're still evaluating what we have in the way of assets and outstanding claims," said Jay Bradford, Arkansas Insurance Commissioner. "We are quite concerned about it but won't know until January when we can make a final evaluation on whether or not it can be saved."

It's hard to see what's left to salvage.

A $1.1 million loss for 2008 plunged Cosmopolitan's capital into the danger zone, and disclosure that the company was on the path to insolvency prompted regulatory intervention. What caused the loss?

"That matter is still under scrutiny," said Mel Anderson, deputy commissioner for finance at the Arkansas Insurance Department.

"More claims than premiums; that's the bottom line," said J. Matt Lile III, former president of Cosmopolitan Life.

Stephen Whitwell of North Little Rock, majority shareholder in Cosmopolitan, might appear to have the most to lose. But the biggest financial casualty could be a cash-strapped Little Rock businessman: Gene Cauley.

The former class-action lawyer infused $2.5 million into Cosmopolitan Life through his SEC Consultants LLC nearly three years ago. The money, used by the company for capital, amounted to a loan that was to pay 8 percent interest annually.

The Cauley funding appears to be convertible to an ownership stake in Cosmopolitan and is linked with an option to buy a 50 percent stake in the company. Given the firm's financial situation, the loan could be considered so much unsecured debt at a time when Cauley is trying to raise $8.8 million to pay restitution to clients whose settlement money he has admitted stealing.

"It is a significantly subordinated debt," Anderson said.



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