Flash Report: Applied Underwriters- Is the Sale In Trouble?

The Iowa Insurance Department has approved the sale of the Applied Underwriters’ related companies but with very telling conditions. California and Texas officials have, so far, not approved the deals. CDI and Texas officials decline to say what is holding up the decision. Neither state has released the documents associated with their review. There is no indication where either Department is in the decision process.

Iowa Kicks Them Out

Iowa Insurance Commissioner Doug Ommen signed off on the sale of Applied Underwriters to its chief executive, and a Cayman Islands-based carrier, but not before placing conditions on the operations of the companies going forward.

Included in the Iowa Commissioner’s conditions is the requirement that Applied must re-domesticate all of its Iowa companies within a year of closing. The carriers domiciled in Iowa include Applied Underwriters Captive Risk Insurance Company, Continental Indemnity Company, Illinois Insurance Company, and Pennsylvania Insurance Company. California Insurance Company is domiciled in California, while Texas Insurance Company is domiciled in Texas.

Iowa also conditioned the approval by ordering that “No person or entity other than Berkshire [Hathaway], [Sidney] Ferenc, and the Applicant [Applied Underwriters CEO Steve Menzies] will be a shareholder of AU Holding at any time before, during, or immediately after the consummation of the proposed transactions.”

The ownership requirement is unusual because the structure of the deal has Menzies acquiring control of Applied’s insurance carriers through the North American Casualty Group. But offshore-based United Insurance Company and its controversial Chairman Jamie Sahara will acquire the non-licensed Applied Underwriters Inc. and related entities that will continue to provide non-insurance business services to the carriers. Presently all money coming from “insureds” into the carriers comes through the unlicensed company.

United is also acquiring a captive in Hawaii.

To the extent that AUI continues to provide services to the carriers, Iowa’s Ommen ordered the carriers to provide notice to the Department of “any changes to the fee structures of the service agreements” for as long as the carriers are domiciled in Iowa.

California’s Tainted Decision

Whatever happens, the California Department of Insurance review is clouded by Insurance Commissioner Ricardo Lara’s reported recusal from the process. Lara took money in the form of campaign donations from individuals affiliated with Applied Underwriters. Lara also held multiple meetings with the parties directly involved in the sale. There have been calls for criminal investigations.

Many questions are remaining for California employers and consumers. Among those questions:

  • Does the CDI have sufficient deposits on hand to cover claims should there be a failure, whether or not by choice;
  • How is CDI approaching the requirements for the carriers because Berkshire will no longer be involved?
  • How will CDI approach reinsurance credits and financial analysis since virtually all of the reinsurance has apparently been passed through to participants in the EquityComp program.
  • What consideration has CDI made for the vast numbers of litigants who have claims and who, based upon history to date, are winning cases.
  • How will CDI approach the issues surrounding whatever new rating is made by AM Bests?
  • How will CDI approach the analysis of the relationship between the licensed carriers and the unlicensed entities who collect funds, especially in light of the fact there is different ownership.
  • How CDI consider who the ownership of the unlicensed entities transfers to in light of the relationships?

Timing Issue

A key deadline in Berkshire Hathaway’s (NYSE: BRK.A) planned sale of its Applied Underwriters workers’ comp subsidiary came and went with all-important approvals of the proposed $737 million deal still missing. The agreements between the parties called for the transaction to be closed with all regulatory approvals received by September 30th.

Under the proposed sale, Berkshire Hathaway could walk away from the deal and pocket a $50 million deposit that was paid as part of the agreement if the September 30th deadline lapses. United Insurance Company put up $37 million of the deposit with the rest coming in the form of an irrevocable letter of credit from Applied with Berkshire the named beneficiary.

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