American Safety Sues to Reverse Agency, Insurer Buy
Bermuda-based American Safety Insurance Group says it has filed suit to rescind the previously announced acquisition of a Michigan insurance agency and two related insurance companies specializing in insurance program business. American Safety says misrepresentations led to the decision to not acquire, and efforts had been made outside of the courts to do so.
In January 2000, American Safety Holdings Corp. acquired the stock of L&W Holdings, Inc. and its wholly owned subsidiary, RCA Syndicate ##1, Ltd., an Illinois licensed insurance carrier operating on the INEX (formerly the Illinois Insurance Exchange). According to A.M. Best, RCA reinsures commercial auto liability and physical damage, general liability, and limited property coverages for four major programs: garagekeepers, used car dealers, sand and gravel haulers, and insurance agents errors and omissions. The programs are marketed in Louisiana, Mississippi, Florida, Georgia, and Texas.
Best says another major program consists of ocean marine coverages, which is marketed in numerous states and foreign territories. The company's operations are managed by its parent, L&W Holdings, Inc., which has authority for underwriting and binding coverages. Prior to its purchase in 1995, RCA had been inactive for ten years.
At the same time American Safety bought L&W and RCA, it also bought the stock of Principal Management, Inc., an insurance program development and management group headquartered in Okemos, Michigan. Third, it also acquired the stock of Pegasus Insurance, a Cayman Islands licensed insurance carrier.
The transactions were structured as stock acquisitions, with the purchase price payable by American Safety consisting of cash plus American Safety common shares and earnout provisions for the future issuance of additional common shares.
According to American Safety, when RCA Syndicate ##1, Ltd. filed its 1999 Annual Statement in March 2000, American Safety first became aware that there had been material adverse change in the business affairs and financial condition of the acquired companies from that represented by the sellers. The buyer launched an investigation which disclosed that the insurance claims experience of the acquired companies had been misrepresented and that incurred losses from insurance claims were significantly higher than what was reported in their claims records and their financial statements.
As a result, American Safety then made written demand upon the selling shareholders of the acquired companies for rescission of the transactions, including a return of the purchase price paid for the companies. American Safety has now filed suit to rescind based on what it calls "the sellers' breach of the representations and warranties made concerning the business affairs and financial condition of the acquired companies."
American Safety says its demand for rescission of the transactions will have no effect on American Safety's 1999 earnings. The sellers' misrepresentations as to the business affairs and financial condition of the acquired companies, and the under-reserving for claims, relate only to the operations of the acquired companies.
Lloyd Fox, president and chief executive officer, said, "The sellers' misrepresentations concerning the business affairs and financial condition of the acquired companies were a shock to American Safety. Upon learning of the adverse changes in the financial condition of the acquired companies, we took appropriate steps to investigate the situation which led us to conclude that the selling shareholders had not accurately disclosed their claims experience and had betrayed the trust that was placed in them by American Safety.
"We are pursuing appropriate legal remedies to rescind these transactions and to restore American Safety to its position prior to these transactions," he added. "Despite this unfortunate situation, American Safety remains a financially strong organization."
Based on presently available information, the effect on the first quarter 2000 results of American Safety Insurance Group, Ltd. is expected to be a reduction both in net income of approximately $3.5 million and earnings per share of approximately $.59.
A representative of the acquired firms did not return PropertyAndCasualty.com's request for an interview or comment on the situation.
American Safety Insurance Group, Ltd. is a specialty insurance and financial services company.