Regulators Take Reins of Cosmopolitan Life, Cauley Among Creditors

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.

Gone is Cosmopolitan's four-member staff, which, as of March, oversaw a block of 78 excess loss coverage policies, 14 of which were scheduled to renew on May 1.

Those 14 policyholders were notified that their ELC coverage would not be renewed, and Pulaski County Circuit Judge Willard Proctor Jr. ordered the remaining policies canceled effective April 30, 2009.

Cosmopolitan Life appeared to be in good shape when reporting its Sept. 30, 2008, financials. But the fourth-quarter numbers showed a formerly well-capitalized firm rapidly moving toward an imperiled position.

The company's loss of $68,000 through the first nine months of 2008 rocketed to $1.1 million at Dec. 31. Capital and surplus plunged from $2.2 million on Sept. 30 to $835,196 at year's end.

Lile blamed some unexpected claims combined with a declining book of business caused by the economy and small employer clients looking to the federal government for another option for employee health coverage.

"They feel like they're one of the first people to be helped by a new government plan, and as a result, new business dropped significantly," Lile said.

Problems at Cosmopolitan Life effectively killed Advance Insurance Group of America, a third-party administrator for self-insured plans, of which Lile was also president.

"We have no business and no employees," Lile said of AIGA. "We're effectively shut down as of July 1."

The Letter

In a March 17 letter to the Arkansas Insurance Department, Cosmopolitan Life's CFO, Tim Richards, laid bare the company's dire predicament:

"There is approximately $1.4 million in claims that have been processed by Advance Insurance Group of America (AIGA), our contracted third-party administrator for claims processing, that have not been funded by the company but which are outstanding liabilities of the company.

"The current liquid asset position of the company is less than $1.4 million.

"For at least the next several months, the anticipated cash flow of the company will be negative. If current trends continue, incurred claims will exceed premium income by approximately $100,000 per month.

"The company has not paid premiums due to its reinsurer for at least the last four months, thereby putting its reinsurance coverage in jeopardy. Without any reinsurance, the company would be responsible for all claims up to $1 million per individual. With the reinsurance in place, the company's liability is limited to $200,000 per individual.

"The company has not paid all of its federal or state withholding taxes or unemployment taxes on wages for the years 2007 and 2008. This liability is approximately $100,000 for the company.

"As a result of the described liabilities of the company and the less than adequate current liquid assets to pay them as well as the anticipated negative cash flows of the company, further transaction of business by the company would be financially hazardous to its policyholder, creditor or to the public."

This stark revelation led the insurance department to obtain a permanent injunction and the appointment of a receiver - the Insurance Department's deputy receiver Steve Uhrynowycz - the very next day.

Accompanying the company's money troubles are lawsuits over claim disputes by Hot Springs National Park Hospital Holdings LLC and Indigo LR LLC.

Hot Springs National Park Hospital is suing for more than $600,000 in damages related to unpaid medical services provided to employees of Partee Flooring Mill.

The 2008 case, which is seeking class-action status, was originally filed against Partee Flooring but was moved from Pulaski Circuit Court to U.S. District Court, and Lile, AIGA and Cosmopolitan Life were added as defendants.

The other case, filed this year in federal court in Little Rock, alleges unpaid 2008 claims of $11,992 for an employee of the Indigo store in Park Plaza Mall. Lile, AIGA and Cosmopolitan Life are listed as defendants.

 

Cosmopolitan Life Insurance Co., Little Rock

 

Stockholders

                                          Class A       Class B

Stephen Whitwell         31,000         6,500

J. Matt Lile III                  0                   1,750

Craig Metz                      0                   1,750

 

Surplus Note Holders

J. Matt Lile III, president of Cosmopolitan Life     $125,000       Nov. 29, 2004

American Capital Holding Inc., Jupiter, Fla.      $250,000       Dec. 8, 2004

SEC Consultants LLC, led by Gene Cauley       $2.5 million    Dec. 17, 2006

 

                                             Admitted                                   Capital &

                                             Assets               Liabilities       Surplus

Dec. 31, 2003                    $2,118,909       $1,378,723    $740,186

Dec. 31, 2004                    $2,483,740       $1,657,988    $825,752

Dec. 31, 2005                    $2,160,581       $1,352,700    $807,881

June 30, 2006                    $1,444,792       $1,099,409    $345,383

Dec. 31, 2006                    $3,966,245       $1,157,324    $2,808,921*

Dec. 31, 2007                    $3,628,256       $1,350,139    $2,278,118                           

Sept. 30, 2008                   $3,718,418       $1,648,014    $2,070,403

Dec. 31, 2008                    $2,578,832       $1,743,636    $835,196

*Reflects $2.5 million loan from SEC Consultants on Dec. 17, 2006

 

Corporate History

  • Founded with $10,000 of capital on Oct. 14, 1931.
  • H.H. Hubble acquired sole ownership in 1956.
  • Company stock transferred from Hubble estate to Georgia M. Tucker on Feb. 2, 1970.
  • Tucker ordered by the insurance commissioner to step down as president and divest 51 percent of voting power on Dec. 21, 1995.
  • Stephen Whitwell, a North Little Rock attorney, buys Tucker's remaining shares to acquire sole ownership on July 16, 1998.
  • Company enters into a third-party administrator services agreement with Advance Insurance Group of America on June 28, 2002. Cosmopolitan Life provides stop-loss coverage to self-insured plans administered by AIGA. J. Matt Lile III is president of both companies.
  • Cosmopolitan Life reports a $1.1 million loss for 2008 on March 1 and warns insurance department of dire financial situation on March 17, 2009.
  • Court-appointed receiver assumes operational control of company on March 18.