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New Mexico says California issued conservator order for nonexistent insurer

New Mexico regulators are disputing the legitimacy of an order issued by a California state court to place California Insurance Co. into conservatorship and block its merger with a New Mexico-based insurer.

Steve Menzies, CEO of Applied Underwriters Inc., orchestrated the merger of California Insurance Co. with New Mexico-domiciled California Insurance Co. II in an effort to win approval for the purchase of a group of workers' compensation companies that he founded and had been majority-owned by Berkshire Hathaway Inc. Applied Underwriters is the holding company for California Insurance Co.

California regulators in September signaled that they would not be able to approve or disapprove the merger by a drop-dead date of Sept. 30 listed in the original stock purchase agreement. In response, Menzies obtained a 10-day extension and received expedited permission from New Mexico to create California Insurance Co. II and merge the California-domiciled entity into it.

However, the California Department of Insurance, or CDI, said the merger into a New Mexico-domiciled entity also needed its approval, which on Oct. 21 it declined to give. On Nov. 5, the CDI disclosed it had obtained a court order placing California Insurance Co. into conservatorship with immediate effect to block the transaction and, it said, to prevent harm to policyholders.

But in a statement dated Nov. 6, the New Mexico Office of Superintendent of Insurance, or OSI, said California's order was issued without advance notice to it or any other interested party and was predicated on an incorrect assertion that California Insurance Co. is still a California corporation and domiciled in the Golden State.

"OSI does not believe that either of those assertions is correct," the regulator said in the statement. Following the Oct. 9 closing of the deal, the New Mexico-domiciled entity received permission from the New Mexico secretary of state to change its name to California Insurance Co.

"By virtue of these transactions, the entity CIC CA no longer exists," OSI said. It also said counsel for CDI acknowledged in a letter that the original California Insurance Co. would no longer exist once the merger with the New Mexico company was completed.

"As acknowledged by the Commissioner's counsel, CIC CA ceased to exist as of Oct. 9," OSI said. "The assets and operations of CIC NM are not subject to a conservation order directed against a California entity that ceased to exist."

OSI said it believes an order of conservation against a "nonexistent company cannot and does not supersede" its authority over the surviving New Mexico company.

Though New Mexico approved the deal, California disputes whether completion of the merger was actually successful given that it did not give its approval. In its Oct. 21 action, the CDI denied the Form A application for a change in control of California Insurance Co., and further warned that the subsidiary would lose its license to do business in the state if the deal closed.

Michael Soller, a spokesperson for the CDI, told S&P Global Market Intelligence in an email that California law requires prior approval by the regulator before any sale or merger of a company domiciled in the state.

"California law is clear, and nothing in New Mexico's press release changes our position," Soller said. "We will continue to work directly with New Mexico regulators to make sure all policyholders are protected through this conservation process."