By Nicole Friedman
A former insurance subsidiary of Warren Buffett's Berkshire Hathaway Inc. sparred with the California Department of Insurance on Monday about whether its recent sale violated state insurance regulations.
Applied Underwriters, a workers' compensation insurer, said Wednesday that its co-founder Steve Menzies and Quadrant Management bought the company, including the 81% owned by Berkshire, for $920 million. Berkshire said in a regulatory filing on Oct. 15 that it completed the sale of its stake Oct. 10.
Berkshire bought its majority stake in Omaha, Neb.-based Applied Underwriters from Mr. Menzies and co-founder Sid Ferenc in 2006. Berkshire said in February that it planned to sell the company to avoid overlap with other Berkshire-owned workers' compensation insurers. Berkshire rarely sells fully owned subsidiaries.
Insurance companies are regulated on a state level and the sale of an insurer can often require approval from multiple states.
The Applied Underwriters sale was approved by regulators in Iowa and Texas, according to the regulators.
Applied Underwriters also applied for California's approval, because one of its subsidiaries, California Insurance Co., was based in California.
But Applied Underwriters said Monday that the California regulators didn't make a decision on the sale quickly enough, so the company chose to merge its California subsidiary with a newly formed insurer based in New Mexico and get approval for the sale from New Mexico regulators instead.
The California regulator observed a hearing to move the company to New Mexico and didn't object, Applied Underwriters said.
But the California Department of Insurance said Friday in a letter to Applied Underwriters that the company failed to get California's approval to move the subsidiary to New Mexico.
The department also said it denied approval for Applied Underwriters to be sold.
California said in its letter that Applied Underwriters notified the California department one day before the New Mexico hearing. Even though the department didn't object during the hearing, it said, the company was still required to apply to California for approval before moving the company.
"If the reported merger of California Insurance Company is completed without the California Department of Insurance's approval, its existing California certificate of authority will terminate by operation of law and the surviving entity will not be qualified to transact insurance in California," the California regulator said in a statement.
Applied Underwriters said California Insurance Co. has voluntarily stopped selling insurance in California. "I am baffled by the [California Department of Insurance's] current approach," Mr. Menzies said in a statement.
In a statement, the California regulator called Applied Underwriters' plan to stop selling insurance in the state an "empty offer."
"Our concern is their existing policyholders and covered workers, and our actions seek to protect them," it said.
A new company called California Insurance Co. was incorporated in New Mexico on Oct. 15, according to the New Mexico Secretary of State's website. It merged with the California Insurance Co. of California on the same day, according to the website.
New Mexico's insurance department didn't respond to a request for comment.
Applied Underwriters asked the Iowa Insurance Division earlier this month to confirm that Iowa's approval of the sale would still suffice if California Insurance Co. moved to New Mexico and the sale received approval from New Mexico, according to emails released by the Iowa Insurance Division. The Iowa department confirmed that its approval would stand if the company moved to New Mexico and got approval there.
Applied Underwriters has run into state regulatory issues in the past regarding its profit-sharing workers' compensation policies. It agreed to stop selling those policies in some states without filing for approval.
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