Ferenc, the CEO, left most day-to-day decisions to Menzies, the president, who ran the company with a small cadre of executives, former employees said. Everyone else was kept in the dark about matters outside their department. One former worker described Menzies as the Wizard of Oz -- the man pulling strings behind the curtain whom few people ever met.
Outside brokers who brought in business could win cases of wine, TaylorMade golf clubs or, for star performers, a trip to Napa, including airfare, hotel, rental car, a hot-air balloon ride and a tasting at a faux 13th-century Tuscan castle and winery -- all spelled out on an Applied website promoting sales of its products.
Fat Margins
It’s hard to pinpoint Applied’s profit. The unit accounts for just a sliver of Berkshire’s insurance business, which also includes Geico and contributed about one-fifth of the $24 billion of net income at Buffett’s firm last year. But state regulatory filings show how lucrative Applied’s workers’ comp plans were. Net income at California Insurance, one of the company’s largest subsidiaries, rose to $65.5 million in 2014 from a loss of $4.4 million five years earlier.
Margins were fat, too. The same subsidiary made more than 35 cents on each dollar in premium revenue it collected every year from 2010 to 2014, while workers’ comp insurers in California posted, in aggregate, an underwriting loss, according to the state’s insurance regulator.
Buffett must have been pleased. Ferenc and Menzies got paychecks that rivaled those of some Berkshire senior executives. In 2015, each made about $9 million from salary, bonus and other compensation, according to a filing with the Nebraska Department of Insurance. That compares with Jain, who was paid $11.8 million that year by the company’s much larger insurance carrier National Indemnity.
Shasta Linen
Shasta Linen Supply got a quote from Applied in 2009 and signed up for a three-year plan. When it came to a close, the bills didn’t stop, even though the company, which employed about 60 people, had already paid more than $900,000 for coverage. Applied wanted an additional $244,213.
Shasta refused to pay, arguing that the additional fees exceeded its obligations under the state-approved policy and weren’t fully explained. In 2014, Shasta appealed to the California Department of Insurance, challenging the plan’s legality.
After a lengthy proceeding, California Insurance Commissioner Dave Jones ruled in Shasta’s favor in June, declaring Applied’s reinsurance-participation agreement illegal and void. His 70-page decision laid out how Applied had circumvented regulatory oversight to boost its profit. The insurer, he wrote, fundamentally changed the terms on a state-approved workers’ comp plan, putting the burden of claims back on the employer.