ZURICH (Reuters) - Zurich Financial Services Group canceled the $1.1 billion sale of Universal Underwriters to a private equity house after a regulator found irregularities at the unit, the insurer said.

Zurich said the sale to a group of investors headed by private equity group Hellman & Friedman did not go to completion after the auto dealer insurance unit was forced to take a $100 million charge in the third quarter following a market conduct survey.

The insurance heavyweight in April said it would sell the U.S. unit to the Hellman & Friedman-led group to focus on its core business. The deal had been expected to close in the third quarter of last year.

It has now decided to keep the business, integrating its back office into its other operations but keeping the separate distribution system at the direct underwriter and specialty insurer to car, truck and motorcycle dealerships.

Zurich has largely completed a multi-year restructuring drive after an ill-conceived foray into non-core business aggravated its financial troubles during the stock market slump at the start of the decade.

The company said its decision to keep Universal Underwriters followed a routine investigation by insurance regulators in the Kansas unit, which found that the unit had charged some clients different prices for similar policies.

"In cooperation with the Kansas Department of Insurance, Universal Underwriters has put into place a comprehensive remediation plan, and it has made substantial progress in implementing this plan," Zurich said.

The unit will keep a closer eye on internal control to make sure it acts in line with the rules and is confident it will not have to take any further similar charges in the future, a company spokesman said.

In April, Zurich said it planned to sell Universal Underwriters for more than 1.2 times its book value and that the unit had gross written premiums of $1.5 billion in 2004. The business was profitable, turning in a return margin that easily met Zurich's internal hurdle rates, a spokesman said.

This is cache, read story here