Flash Report: CDI Rejects Applied Sale; Blocks Escape To New Mexico

The California Department of Insurance is rejecting the proposed sale of California Insurance Company to CEO Steven Menzies and says that Applied Underwriters’ attempt to circumvent its oversight is illegal. It is nothing less than a stunning development.

CDI says that Applied actions threaten – or if already consummated in New Mexico cancel – the validity of its certificate of authority to transact business in California.  CDI warns that California Insurance company will not be able to maintain in-force policies, renew expiring ones, or issue any new policies.

The Department has now officially rejected California Insurance Company’s Form A filing linked to the proposed sale by Berkshire Hathaway.

“[T]he competence, experience, and integrity of those persons who would control the operations of California Insurance Company after the change of control indicate that it would not be in the best interests of its policyholders, or the public to permit them to do so,” says CDI attorney Laszlo Komjathy, Jr. in a letter to Applied’s counsel Jeffrey Silver. The letter refers to Steven Menzies, who was to acquire the carrier.

The Berkshire Hathaway subsidiary claimed last week a fait accompli – that it completed the sale without CDI’s approval by merging the carrier into a newly created New Mexico-based carrier. a

Applied Underwriters’ rushed the deal through the New Mexico department, which opened its review, held a public hearing, and approved the merger all in less than 24 hours. It has ties to former New Mexico Superintendent of Insurance Eric Serna.

Applied’s Silver filed a Form A for the merger with the New Mexico Office of Superintendent of Insurance on October 8. The New Mexico regulator opened its review of the deal the same day at 4:10 in the afternoon. Then the Department went on to schedule and hold a public hearing on the matter and issue an order approving the merger all by 3:24 p.m. the following day. CDI financial surveillance department officials attended the public hearing by phone.

CDI officials and industry experts say the deal doesn’t begin to pass the sniff test. “I think the holding company act is pretty clear that mergers have to be approved,” says Mark Webb of Prop 23 Advisors.

The deal in question is the merger of California Insurance Company, which is or was a California domiciled carrier, into a newly created California Insurance Company II (CIC II) that is domiciled in New Mexico. CIC II was only incorporated on October 3 with an October 8 effective date. CDI officials, however, confirmed that Applied needed its prior approval to make such a move. Applied failed to seek or receive such approval.

“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,” writes CDI’s Komjathy. “The Applicant failed, however, to seek the required prior approval of the California Insurance Commissioner or submit the information and documentation reasonably required to determine whether the attempted redomestication is in the interest of the California policyholders.”

Is There a Valid Certificate?

“[I]f the purported merger of California Insurance Company is consummated, the surviving New Mexico entity could not satisfy the requirements for the issuance of a license to write the line or lines of insurance for which California Insurance Company was licensed,” Komjathy warns.

The end result would be that the carriers would not be able to maintain CIC’s in-force policies, renew any expiring ones, or issue new ones without violating California law. Applied Underwriters last week announced the merger was completed, despite not having approval from California.

The deal would have CIC II, the New Mexico company, assuming “any and all liabilities of California Insurance Company including, but not limited to any issued policies as if such policies were issued directly by California Insurance Company, II and that it will maintain the current deposit of California Insurance Company with the California Department of Insurance for the benefit of its policyholders.” Evidence entered in the case indicates that CDI is holding just under $250 million as a statutory deposit. Whether or not this amount is sufficient is an open question.

Interesting Southwest Connection

That Applied and its California Insurance Company ended up in New Mexico shouldn’t be a surprise. Key in many of the meetings and interactions between Applied Underwriters and Insurance Commissioner Ricardo Lara earlier this year was the role that former New Mexico insurance superintendent Eric Serna played. Serna is now with NTG Consultants specializing in insurance management and regulatory consultant.

The evidentiary record shows that CDI personnel participated in the October 9 public hearing on the deal “and raised no objections to the proposed merger,” according to the final order signed by John G. Franchini, New Mexico’s Superintendent of Insurance.

CDI officials, however, note that they received only one-days’ notice of the hearing, and their participation did not relieve CIC of its duty to follow California law requiring it to obtain prior approval.

“The California Form A remains materially deficient for the reasons previously provided, and because, among other reasons, the Applicant failed to disclose or describe Applicant’s plan to merge California Insurance Company into and with a newly-formed New Mexico insurer without the prior approval of the California Insurance Commissioner despite the numerous opportunities for the Applicant to do so,” adds CDI’s Komjathy.

“In light of the recent actions of the Applicant that were not disclosed to this Department until after our October 9 correspondence, the option to withdraw the Form A application is no longer available. For all the foregoing reasons, the Form A application of the Applicant is hereby denied pursuant to California Insurance Code sections 1215.2(d)(1), 1215.2(d)(2), 1215.2(d)(4) and 1215.2(d)(5).”

The conclusion is that if the merger of California Insurance Company into CICII was completed, CIC in California no longer has a certificate of authority.  If the merger -which was announced as completed by the parties – was not completed, then California CIC is still owned by some version of Berkshire Hathaway despite at least one filing with the SEC to the contrary.

There is a question, then, as to whether or not California Insurance Company is operating legally and if its exiting policies are valid.

 

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Applied Underwriters was once but is no longer an affiliate of Berkshire Hathaway. Applied’s management bought it. Berkshire Hathaway bears no responsibility for any of the events which have transpired involving Applied Underwriters’ or its subsidiaries including California Insurance Company.