California Balks at Applied Underwriters Sale, Questions Subsidiary’s Move to New Mexico

October 21, 2019 by

The California Department of Insurance has denied an application for approval of the sale of California Insurance Co., a subsidiary of Applied Underwriters that was sold in a massive deal that has been under scrutiny over ties to campaign contributions executives reportedly made to the state’s insurance commissioner.

The CDI sent out a denial letter to CIC executives and then made their denial public on Monday morning.

California insurance regulators are upset that the $920 million sale of Berkshire Hathaway’s Applied Underwriters workers’ compensation unit to Applied Underwriters founder Steve Menzies was apparently closed without their approval.

The California Department of Insurance says it must sign off on the deal because one of Applied’s subsidiaries, California Insurance Co., is domiciled in the state.

However, The Associated Press reported that Applied Underwriters said that the California Insurance Co. is now domiciled in New Mexico, which did sign off on the deal.

CDI now says the decision to merge the entity with a New Mexico-based entity also required department approval.

Applied sent out notice of the deal, which has been pending regulatory approval from the CDI for months, just over a week ago. The deal is valued at $920 million, and includes the buyout of all other shareholders, including the 81% of the 25-year old company’s stock held by Berkshire Hathaway Inc., according to the announcement released by an Omaha communications firm on behalf of Berkshire.

On Thursday, the CDI issued a statement saying the department had yet to approve the deal.

“The California Department of Insurance was disturbed to learn that the parties to this transaction purportedly acquired California Insurance Company without obtaining the statutorily-required approval of the California Department,” the statement reads. “In light of this development, we are currently exploring all available options.”

Spokespersons for Applied and Menzies, who was joined in the acquisition by the Quasha Group led by Quadrant Management, have not replied to a request for comment.

Applied is a national provider of workers’ compensation insurance, other commercial insurance, and risk transfer and financing plans. The company is headquartered in Omaha, Neb. Applied’s subsidiaries include California Insurance Co., Continental Indemnity Co., Pennsylvania Insurance Co., Illinois insurance Co. and Texas Insurance Co. that are collectively known as North American Casualty Co.

While Menzies acquired the insurance operations, Quadrant Management, a New York-based investment management firm headed by CEO Alan Quasha, acquired the services companies of Applied.

The CDI is seeking to block the move based on a section of California Insurance Code.

“Pursuant to CIC 709.5(b), any attempt to transfer the domicile of a California domestic insurer to another state in which it is admitted may only be effected upon the prior approval of the California Insurance Commissioner,” the Oct. 18 letter, addressed to Jeffrey A. Silver, an executive at Applied and CIC, states. “An insurer seeking to transfer its domicile is required to provide the California Commissioner with information and documentation reasonably necessary to determine whether the proposed transfer of domicile is in the best interest of the policyholders of this state.”

If CIC continues with the merger with a New Mexico domestic insurer, CIC’s California certificate of authority “will be extinguished by operation of law” and the surviving entity will not be qualified to transact insurance in California, according to the letter.

“Additionally, if the merger is consummated, the surviving New Mexico insurer will nevertheless have numerous in-force California policies notwithstanding that it will no longer be authorized to transact insurance in California,” the letter states. “As a result, any attempt by the New Mexico insurer to maintain such policies in-force, renew any expiring California policies, or issue any new California policies without a California Certificate of Authority will be in violation of California law.”

Efforts to sell Applied appear to have started earlier this year due to a channel conflict, which was made known when Berkshire Hathaway Chairman Warren Buffett told CNBC that Applied is a smaller firm that has to compete against two larger insurance companies Berkshire owns that also sell workers’ comp coverage. Applied provides workers’ comp and services to small and medium-sized enterprises.

In July there were reports that Applied was being sold in a large acquisition, in a deal likely involving Cayman Islands-based United Insurance Co.

Applied has been tangled up in a controversy involving California Insurance Commissioner Ricardo Lara. The commissioner has been under fire for taking campaign contributions from the insurance industry, despite his pledge not to do so, and allegations that he made first contact with an agent of Applied offering political support in conjunction with seeking approval for a change of control in the company.

Menzies was named in a writ of administrative mandamus filed in August in San Francisco Superior Court by Oceanside Laundry and RDR Builders Inc. seeking judicial review of the Lara’s actions in two cases in which the companies claim he violated their rights. The writ is part of an effort to overturn decisions by Lara in cases involving Applied Underwriters, alleging the decisions by Lara were swayed by contributions to his campaign from people affiliated with Applied.

The San Diego Union Tribune reported last month that Eric Serna, a New Mexico lobbyist who more than a decade ago retired from the position of New Mexico’s insurance commissioner while under investigation, was also in meetings with Lara and insurance executives. One of those meetings included the proposed buyer and seller of Applied Underwriters. according to the Tribune.

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