Sharon Cooper, a spokeswoman for Selective, said the Federal Emergency Management Agency, which runs the federal program, did not grant regulatory approval. She said the agency did not disclose why.

Howard Leikin, deputy administrator for insurance with FEMA, declined to discuss why the agency turned down the Selective-Seibels deal other than to say it did not meet the agency's criteria for a sale.

Seibels said it is seeking the sale of its flood insurance program because it did receive a financial assistance-subsidy arrangement with the Federal Insurance and Mitigation Administration.

The company said the action was taken by FEMA in light of supervisory restrictions placed on the company by the South Carolina Department of Insurance and the North Carolina Department of Insurance. The restrictions prevent the company from writing new and renewal business.

The company must seek authority before writing renewal business, it said in a statement. The company is also restricted from doing business in Arizona and California.

The cause stems from litigation between the company, its subsidiaries, and Human Dynamics Corp. in Arizona and California. Seibels is accused of writing a workers' compensation policy for HDC without first seeking approval from state regulators.

The company has been under orders by regulators to seek approval before taking on any new business due to the deterioration of it financial condition.

Mr. Leikin said policyholders are in no jeopardy of losing their policies under Seibels. He said current policies will be renewed, but the company can not write new business. Seibels has approximately 100,000 policyholders in 46 states, Mr. Leikin estimated.

Seibels said it wrote $44.7 million in flood insurance in 2001 and $22.5 million in 2002.

Susan Kenney, vice president, marketing and sales for Seibels, said in an e-mail reply to questions, that the company is continuing to look for a buyer of its flood insurance business. She said the departments of insurance continue their administrative supervision. The HDC litigation continues, she added.

Selective was looking to purchase the book of flood insurance service for $4 million cash, and another $1 million in subsequent payments if certain undisclosed conditions were met. Selective would not disclose the number of policies and premium amount it expected to garner from the deal.

Last year, Selective purchased the flood book of Union American Insurance, in Miami, and Highlands Insurance Group, of Lawrenceville, N.J. The two combined covered more than 20,200 policyholders and $6.6 million in premium.

Selective said it currently services more than 126,000 flood policies at close to $50 million in premium under the National Flood Insurance Program.

Selective plans to continue to pursue expansion of its book on flood insurance, Ms. Cooper added.