Unusual circumstances surround dropped sale of Universal Underwriters

Most failed company mergers remain a secret, except to a handful of insiders.That was not the case with the collapsed attempt by Zurich Financial Services Group to sell its affiliate, Universal Underwriters Insurance Company. This failure was no secret because the parties had announced the sale before it was completed.

“The fact that a sale of a company this large was announced to the public and then dropped is highly unusual and something we don’t often see,” according to SNL Financial Group Senior Analyst Eric Fitzwater.

Some of the circumstances surrounding the cancellation of the sale are known, although the full picture is still a bit hazy. Did the buyers get cold feet or did the seller, Zurich, come to a new appreciation of its subsidiary?

Universal Underwriters employs 900 people in its Overland Park, Kan., headquarters and another 900 in 28 regional offices. The 83-year-old company is the nation’s largest writer of automobile, truck and motorcycle dealers, as well as the automotive aftermarket industry.

“Universal Underwriters has always been a strong performer with a consistent 12 percent return on equity,” Zurich spokesperson Keith Owen said. “They are market leaders.”

The proposed $1.1 billion sale of Universal Underwriters Insurance Co. to Hellmann & Friedman LLC, a San Francisco-based private equity investment firm, fell through following a regulatory examination that mandated tens of millions of dollars in customer refunds.

On Jan. 16, Universal Underwriters’ parent, Zurich Financial Services Group, announced that the parties had agreed not to proceed with the transaction. The company said that the decision followed “the identification of regulatory matters specific to Universal Underwriters, which surfaced during a routine market conduct examination performed by the Kansas Department of Insurance.”

In a press release, David Tunnel, managing director at Hellmann & Friedman LLC, shed little additional light on the reason for his firm’s change of mind. “We agree that not pursuing the transaction is in the interest of both parties and we respect Zurich’s decision to keep Universal Underwriters as part of its North American business,” Tunnel said.

Whether buyers Hellmann & Friedman did not want to get embroiled in the regulatory pot of issues is not known. They had sought to revise the terms of the purchase as a result of the Kansas directive but said that “the two parties couldn’t come to mutually agreeable terms.”

When asked recently if the refunds were behind the decision to scrap the purchase, Hellman and Friedman declined further comment.

Zurich’s strategy
When the sale was still on, Zurich Financial Services CEO James J. Schiro explained why he thought the sale made sense. “Universal Underwriters’ business model is no longer in line with our unified operating model and brand for Zurich’s North American commercial businesses. … H & F is a partner that will help Universal Underwriters to capture identified business opportunities that currently fall outside of Zurich’s strategy.”

Universal is a direct writer, unlike its parent Zurich, which uses agents in the more than 50 countries in which it writes. Also, although Zurich has had Universal as an affiliate since 1982, its products are not in line with the other markets that Zurich serves.

Zurich spokesperson Owen explained that after the failed sale, Universal was re-evaluated and executives decided that the company does in fact fit the overall strategy. “The success of Universal is obvious,” Owens said. “After taking a long, hard look at Underwriters and seeing they are consistently meeting profitability targets, Zurich decided that Underwriter’s direct distribution model is a good fit for the markets they serve. Zurich now embraces this model as one that is consistent with its global strategy of delivering products and services to customers in the ways they want to receive them.”

Owens said that there will be no significant changes for customers or agents. Most changes will be in back-office operations.

In the routine audit that apparently killed the transaction, the Kansas Insurance Department said it had found a “large number of rating errors” in Universal’s commercial package policies where customers were charged above rates allowed in that state. The department ordered refunds ranging from $1,000 to $10,000 per commercial account on policies issued since Jan. 1, 2002. Kansas also imposed penalties of $18,000.

The Aug. 17 report also said that Underwriters “failed to maintain a valid and up-to-date internal or external audit program.”

Kansas could be just the first state to take action. Zurich and Universal are auditing other states to see if premiums in those states also exceeded the allowed rating structure. “Actually, it is anticipated that there will be approximately $100 million in refunds, more or less,” confirmed Owens. “The amount will cover the estimated cost of the refunds and the cost of administering them. An independent auditor is looking at the problem in the other 49 states, where based on the rate structure, refunds will need to be made.”

The monies should not be an issue for the company. SNL analyst Fitzwater said that profitable Universal Underwriters with its parent company, Zurich, is “well-equipped” to handle the refunds nationwide.

Topics Legislation Underwriting Kansas