Berkshire Hathaway sells insurer accused of ‘reverse Ponzi scheme’

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Warren Buffett’s Berkshire Hathaway has agreed to sell Applied Underwriters, a workers’ compensation insurer that has been stuck under a cloud of multiple regulatory investigations.

In a rare divestiture for Buffett, who is known to buy companies and keep them for the long term, Berkshire agreed to sell the company to Bahamas-based United Insurance Co., which was recently part-owned by Aon, according to a filing late Thursday with the California Department of Insurance.

UIC is acquiring Berkshire’s 81-percent stake in the insurer, as well as the stakes owned by two other executives, according to the filing. Financial terms of the deal weren’t disclosed.

One of the largest sellers of workers’ compensation insurance in the US, Applied Underwriters has been accused of being a “reverse Ponzi scheme” in a pending civil suit filed in 2016 by ex-clients — an accusation the company has denied.

Regulators also are probing the company over allegations of bait-and-switch tactics. The company is under investigation by New York and New Jersey regulators for selling unregistered insurance products. The company has denied any wrongdoing.

While Berkshire has never disclosed exactly how much it paid for Applied, a 2007 report from SNL financial put the deal price at $339 million.

That deal was apparently so expensive that Deloitte, in a 2015 report, excluded it from insurance deals because it would “skew” the data.

Nevertheless, “It’s probably been a successful investment,” Meyer Shields, analyst at KBW, told The Post, estimating it could now be worth between $1 billion and $1.2 billion.

In 2015, Berkshire told the Omaha World-Herald that Applied Underwriters had assets of $2.7 billion. But getting sold off by Berkshire — and losing Buffett’s sterling reputation — could negatively affect the value, too, Shields added.

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“If your being sold by Berkshire, how does that negatively impact your earnings power? Are you forced to charge a little bit less [for insurance] because you don’t have the same strength of promise?”

A consortium of insurers and hedge funds was previously reported to be interested in the company, according to a February report in Reuters. Berkshire confirmed later that month it was divesting from Applied — a rare instance of Buffett walking away from an investment.

New York’s Department of Financial Services, led by Superintendent Linda Lacewell, has been investigating the company for about a year for offering a workers’ compensation insurance package — called EquityComp — that it isn’t legally allowed to sell in the state, according to a source familiar with the investigation.

Ex-clients allege that the EquityComp program makes the small businesses responsible for paying out insurance claims instead of the insurer — an arrangement that they claim amounts to a fraudulent bait-and-switch.

In a 2017 amended complaint, ex-customer New York-based Breakaway Courier alleged that “Unlike a Ponzi scheme where early victims are paid with the investments of others, Berkshire Hathaway’s reverse Ponzi scheme requires insureds to cover each other’s losses.”

In a statement in April, Applied Underwriters said EquityComp “is neither a reverse Ponzi scheme or a Ponzi scheme as alleged in court complaints,” adding that “Each EquityComp insured is responsible only for its own policy.”

Earlier this year, Applied’s general counsel, Jeffrey Silver, said Berkshire was exploring a sale due to “channel competition” with other insurers owned by the holding company, like Geico.

Jamie Sahara, chairman of United Insurance, didn’t immediately return a voicemail seeking comment.

“The story published today in the NY Post regarding Applied Underwriters is grossly inaccurate and incomplete,” Applied Underwriters spokesman Mark Veverka said, declining to elaborate.

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