The Utah State Insurance Department has given Southern American Insurance Co., owned by Seven Peaks Resort owner Victor Borcherds, until Dec. 31 to clear from its books more than $5 million in mortgage loans the company made to the Provo Aquatic Park and the Excelsior Hotel.

Southern American, with offices adjacent to the water park in east Provo, has outstanding mortgages of $2.7 million to both the water park and the hotel, also owned by Borcherds.Borcherds purchased Southern American in March 1988 and moved it from Tennessee to Utah. The company mainly writes surety bonds and asbestos liability.

Billy W. Lovelady, the state's chief insurance examiner, said the mortgages exceed the state's limit on the amount of secured assets insurers are allowed to hold. An insurer's secured assets are not supposed to exceed 10 percent of its surplus assets.

"The reasoning is liquidity," Lovelady said. The mortgages "may be as good as gold, but you never know when you're going to get caught in a down market."

According to Southern American's 1990 financial statement, mortgage loans made up about 52 percent of the company's surplus assets.

Under a qualified exemption allowed by state law, the State Department of Insurance is allowing Southern American to do business in Utah despite exceeding the 10 percent limit. However, if Southern American fails to replace the mortgages by the deadline, state insurance officials could shut the company down.

Lovelady said insurance officials are working with Borcherds because they were aware of the mortgage loans at the time they were made and failed to do anything about it.

Borcherds says he intends to abide by the State Department of Insurance's request and is currently involved in negotiations that would remove the mortgages from the company's books. Subject to the approval from state insurance officials, he likely will create another company, take out another mortgage and pay off the water park and hotel mortgages.

In fact, Borcherds agrees with the state's request and said removing the mortgages will allow the company to write insurance in more states. Currently Southern American is only allowed to write insurance in five states because of the mortgage loans. According to Business Insurance, an insurance trade publication, Texas and Mississippi recently removed Southern American from their lists of approved insurers.

"It will be good for us to take care of this. Then we'll be able to do business anywhere we want," Borcherds said.

Borcherds said Southern American issued the loans because he would rather pay interest to himself than a bank. Both the hotel and the water park are worth much more than the $2.7 million mortgages, he claims.

"I could sell both places for more than $10 million in 10 minutes," he said.

Even though state insurance officials do not approve of Southern American's mortgage loans, they praised the company for improving its surplus assets. At the time Borcherds purchased the company its surplus assets were $8.6 million. As of Dec. 30, 1990, the company had $10.3 million in surplus assets. Two years before Borcherds purchased the company it lost more than $2 million. Last year Southern American showed a net profit of $4.1 million.