Insurance executives and state regulators have pinned the in Louisiana on a rash of bad breaks: Several dangerous hurricanes, a tidal wave of litigation and a tough market for reinsurance.
But there was another key factor in nearly all of the failures, documents show, one that was squarely within the insurers鈥 control.
Eleven of the 12 failed companies operated under a structure that sent hundreds of millions of dollars off the books of the insurer to less-regulated affiliates. The practice, legal but frowned upon by regulators, raises questions about whether insurers were spending money wisely 鈥 or sending as much cash as possible to affiliates, leaving less money on hand to pay claims and buy reinsurance.
鈥淭here is money to be made in insurance, even when it appears things are tough,鈥 said Gavin Magor, director of research and ratings at Weiss Ratings, which analyzes and rates property insurers.
Most of the companies were welcomed with open arms by Louisiana officials, who handed over huge bundles of the insurer of last resort, and sometimes grant money to boot.
The state鈥檚 embrace fueled rapid growth of the companies. It also tended to concentrate their policies in t 鈥 twin concerns that auditors flagged for years.
When it came time to pay claims after major hurricanes hit Louisiana in 2020 and 2021, the dominoes fell. Companies that collectively held a sixth of the market failed, forcing tens of thousands of policyholders who had made claims into a slow-moving, 听Many of the 220,000 policyholders of the failed firms were placed onto the rolls of Citizens, costing them more for insurance at a time when the cost of just about everything was rising.
The saga raises pointed
The affiliate model is designed to deliver money from the insurer to the affiliate, called a managing general agent, or MGA, which does all the work, and from there to stockholders.
In 2019 and 2020, 10 of the companies that went belly-up sent a net of nearly $650 million to less-regulated affiliates, according to an analysis by The Times-Picayune | The Advocate. Over the same span, the insurance companies themselves posted a net loss of $440 million.
Several close observers of the insurance industry said there is a key reason to arrange an insurance company this way: To extract profits with less scrutiny. While insurers must routinely open their books to state regulators, that鈥檚 not true of their affiliates. That makes it nearly impossible to tell whether the money paid to them was well-spent 鈥 or how much of it went to the company鈥檚 principals or its investors.
鈥淲hat鈥檚 the purpose of these insurers?鈥 Magor, of Weiss Ratings, asked rhetorically. 鈥淚s it really to offer a service that makes a reasonable margin on their policies and provide a service to policyholders and benefit from that?
鈥淥r is it to extract as much money as possible during the good years and pray they don鈥檛 have any bad ones? If they do, they can walk away with a little cash and be very happy anyway.鈥
Magor noted that paying affiliates incentivizes insurers to simply meet the minimum liquidity amounts required by regulators, sending the rest to related companies that don鈥檛 bear risk.
Some insurance executives and regulators say the potential hazards of the affiliate structure are overblown.
James Graganella, the former CEO of Southern Fidelity Insurance Co., one of the 12 failed insurers, stressed that 鈥渘obody was sucking money out of Southern Fidelity while I was there.鈥
He blames the firm鈥檚 2022 collapse instead on policyholder lawsuits and the dramatic spike in costs for reinsurance. And he said he took a big financial hit when the firm went under and its shares went to zero. He said the affiliates only paid out profits when the insurer itself was in the black.
Still, Graganella acknowledged the affiliate model has advantages for investors. He said no one would have invested in Southern Fidelity if it were set up as a traditional insurer, because it鈥檚 too hard to extract profits from a regulated entity.
鈥淚f the profit is in the insurance company, you can鈥檛 get that money to stockholders,鈥 he said. 鈥淩egulators won鈥檛 approve that. If you trust the government, you鈥檙e a fool.鈥
鈥楳anipulated and deceived鈥
The increasing presence of companies that rely on affiliates doesn鈥檛 by itself explain Louisiana鈥檚 market crash. State regulators note that several firms with similar structures didn鈥檛 collapse. And multiple factors usually contributed to the demise of the firms that did fail.
For instance, many failed insurers had grown at a breakneck pace when they entered the Louisiana market 鈥 something auditors repeatedly flagged, according to documents filed with regulators.
One reason for that: A surefire way to grow quickly was to take policies from Citizens, which would generally hand them off in huge batches to any qualified company willing to take them. That meant the new firms鈥 policies were often concentrated in risky areas.
And that had devastating long-term consequences. In the end, nearly three-quarters of the transferred from 2008 to 2020 went to companies that later went under.
One of them, Americas Insurance Company, grew its Louisiana premiums by a whopping 552% over a decade. It paid tens of millions of dollars to affiliates in the quiet years. But when Hurricane Ida hit in 2021, more than half of its 25,000 Louisiana policyholders filed claims 鈥 a rate that an insurance lawyer called 鈥渇atal,鈥 and far outside the norm.
The vast majority of the firm鈥檚 policies were in Louisiana鈥檚 coastal zone. The firm didn鈥檛 have nearly enough money or reinsurance protection to cover its $230 million in insured losses. The state liquidated it. Many policyholders are still fighting for the money Americas owed them.
When Louisiana regulators peered into Americas鈥 books after its collapse, they discovered the firm should have been under their supervision much earlier. The Insurance Department said the firm 鈥渕isled, manipulated and deceived鈥 its regulators by failing to disclose that its assets had been pledged against an $8 million bank loan. If regulators had known that, they testified, they would have put the firm under supervision and possibly taken away its policies.
Instead, Americas鈥 failure, 鈥渙ne of the largest in Louisiana鈥檚 history of insurance,鈥 left the state with an 鈥渁stronomical鈥 volume of unpaid claims, the Insurance Department鈥檚 lawyers wrote. The state is now battling in court to force the firm and its executives to pay millions owed to policyholders.
In a statement, attorneys for former Americas CEO Ray Pate and executive Alexander "Chip" Blondeau, called the state's claims "baseless" and said they relied on "the professional advice of reputable outside attorneys, independent public accountants and other professionals" to comply with laws and regulations. They said regulators were fully apprised on the loan and approved the deal.
"The failure of (Americas) and many other insurance companies doing business in Louisiana was the result of the catastrophic losses caused by Hurricane Ida and other storms, and not due to any actions or inactions by Pate or Blondeau or the other directors or officers of (Americas)," the firm said.
鈥楾hem boys love to hunt鈥
While the state has not accused other companies of the same level of mismanagement, Americas was hardly the only insurer writing in Louisiana whose financial practices came under fire from regulators.
Southern Fidelity Insurance Co., for instance, made a curious acquisition a few years ago: A hunting lodge that served as a residence for Graganella, its chief executive.
Formed in Florida in 2005, Southern Fidelity quickly began taking policies from the state-run insurers of last resort in both Florida and Louisiana, including more than 27,000 policies from Louisiana Citizens. That infusion tripled its market share in Louisiana.
One of its new customers was Donelon, the insurance commissioner, who publicly announced his switch from Allstate, and crowed about how much money he was saving.
In 2014, the fast-growing company bought a hunting lodge on 1,300 acres outside Tallahassee. The company paid $5.7 million for the rural property, called Oldfields, which included a 6,800-square-foot home and other buildings.
Graganella said in an interview that he bought the lodge to entertain agents and as an investment for the firm. He said he 鈥渘ever lived in the plantation.鈥
But his own lawyers claimed in a lawsuit that Graganella and his family lived there and 鈥渢reated Oldfields as their personal residence鈥 until the firm fired him in 2021. The company was liquidated the following year. Graganella sued to get access to the eight horses, 22 dogs, 50 deer, tractors and other personal items he left at the property.
Tarps cover the roofs of City Place Townhomes in Lockport on Wednesday, January 12, 2022. The complex is closed due to damage from Hurricane Ida. (Photo by Brett Duke, | The Times-Picayune | The New Orleans Advocate)
Southern Fidelity also made payments to a complicated web of affiliates, several of which in turn appeared to pay Graganella a salary.
The Florida Department of Financial Services looked into Southern Fidelity after it was put into liquidation. A brief initial report attributed the firm鈥檚 failure to inadequate premium rates and inability to get reinsurance, among other things.
The report didn鈥檛 mention affiliate transactions. But it did mention the hunting lodge 鈥 pointedly. Investigators wrote that the property provided no income to the company, while costing nearly half a million dollars a year in maintenance alone.
鈥淭he department is examining whether [Southern Fidelity] took active measures to conceal these costs from (regulators),鈥 the report said.
The final report on the solvency may take seven years.
Graganella, who now operates a family-run insurance agency, denied hiding payments for the lodge, which he said proved to be a good investment because liquidators later sold it at a profit.
鈥淭he plantation 100% funded itself,鈥 he said. 鈥淚t was also a way that got a lot of Louisiana business, because them boys in Louisiana love to hunt, don鈥檛 they?鈥
鈥楻elatively few losses鈥
A prospectus from Maison Insurance Co. from the early 2010s offers a window into the appeal the strategy of these failed insurers might have for investors.
At the time, large carriers were pulling out of storm-prone coastal areas like south Louisiana. State officials were desperate to get people off the rolls of Citizens, which had grown dramatically since Katrina. Maison saw some of its competitors quickly build a book of business by taking thousands of Citizens policies.
As the firm鈥檚 parent prepared to go public, it told investors it had a 鈥渦nique opportunity鈥 in Louisiana. And while it noted there were risks, the firm told investors that in the decade after Katrina, there had been 鈥渞elatively few losses arising from tropical storm activity,鈥 which meant reinsurance was plentiful and cheap.
鈥淎lthough the Louisiana property and casualty insurance market is particularly susceptible to risks due to hurricanes, the statistical likelihood of experiencing catastrophic hurricane-related losses is not as great as recent storm activity might suggest,鈥 the firm told investors in 2014.
True to its predictions, the company dodged huge losses in south Louisiana for years, even though its book of business was concentrated in risky areas. By 2019, its policies were most heavily concentrated in St. Tammany and Jefferson parishes, at around 6% of its book of business each.
Maison鈥檚 claims to investors that hurricanes were rare 鈥 and that reinsurance was cheap and plentiful 鈥 would eventually come back to haunt it as well as FedNat, another regional insurer that bought Maison in 2019.
About a month after Ida, FedNat announced it was pulling out of the Louisiana market and letting the Maison policies expire. The next year,
FedNat鈥檚 CEO, Michael Braun, blamed the failure of Maison鈥檚 Louisiana business on 鈥渢he unprecedented number of catastrophe weather events,鈥 along with a 鈥渉ardening reinsurance market鈥 for the company鈥檚 weakened position.
A question of structure?
The structure of insurers that rely on affiliates has both drawn scrutiny from regulators, and officials with the Louisiana Department of Insurance say it鈥檚 not ideal to have companies organized that way.
But Donelon, who left the insurance commissioner鈥檚 post this week after 17 years in the job, said the state can鈥檛 鈥渕icromanage鈥 insurers鈥 finances. He stands by his strategy of championing regional firms as a way to get policies off Citizens, which by state law must charge more for insurance. And he argues that a failure to buy enough reinsurance 鈥 as opposed to overpaying affiliates 鈥 was mostly to blame for the wave of collapses.
Even so, he acknowledges that insurers often use affiliates to maximize profits, and he said he would support legislation to shine more light on the income paid to executives by affiliates, whose books are not public.
鈥淚t is easier to get money out of an (affiliate) than it is from an insurance company,鈥 Donelon said. 鈥淚t鈥檚 legal for them to operate that way.鈥
Graganella, the former CEO of Southern Fidelity, agreed with that assessment. He said he structured the company with the affiliate model precisely because it鈥檚 easier to reward investors that way.
鈥淧eople that run companies deserve a yield on the profit because they invest money and work their asses off,鈥 Graganella said.
People listen to Louisiana Commissioner of Insurance Jim Donelon answer questions posed by residents during a public meeting on the state's insurance woes at the University of New Orleans on Wednesday, Aug. 3, 2022.
Donelon noted that many firms that later failed might have had a 鈥渃ouple million dollars more鈥 of capital available to buy reinsurance or pay claims if it wasn鈥檛 for the affiliate structure.
In 2020, the department of insurance in Florida, where many of the failed Louisiana insurers were based, launched a targeted review of payments to affiliates. But more than three years later, a spokesperson said it is still ongoing and remains confidential.
Florida鈥檚 legislature also passed several bills requiring more disclosure about the structure of companies and their affiliates.
Patrick Cantilo, a Texas insurance lawyer who works in rehabilitation and insolvencies, noted that smaller insurers often underprice their premiums to gain market share, causing problems down the road.
He also said the affiliate structure can create perverse incentives: Executives often work primarily for the affiliate that is raking in fees, not the insurance company bearing the risk. That can incentivize CEOs to skimp on reinsurance.
鈥淲hen there are no storms, you have years of growth, everybody looks like a superhero,鈥 Cantilo said. 鈥淎t some point, that house of cards will collapse.鈥
Printing money
Accounting guidance followed by Louisiana regulators say affiliate transactions are 鈥渟ubject to abuse鈥 because they鈥檙e not arm鈥檚-length transactions: The companies are essentially doing business with themselves.
Watching such transfers is an 鈥渁rea of emphasis鈥 for regulators because of the potential for abuse, said Stewart Guerin, deputy commissioner of the Department of Insurance. The agency reviews the transactions to see if insurers are simply 鈥渟iphoning money鈥 off the books.
But Guerin added that affiliate payments are not necessarily the answer to the riddle of what caused the collapses, noting that many insurers set up with that model didn鈥檛 fail.
He frets that the state is in no position to be turning away private insurers at a time when hurricanes, fueled by climate change, are driving bigger firms out of the state.
鈥淭he fear is that if this type of structure isn鈥檛 allowed, these companies don鈥檛 exist,鈥 Guerin said. 鈥淚f they don鈥檛 exist, who鈥檚 going to step in and write the policies they were writing?鈥
Four of the current top 20 home insurers in the state use the affiliate model.
Guerin said the agency鈥檚 focus now is on making sure all insurers in Louisiana have adequate reinsurance. He said nothing will prevent further insolvencies if there鈥檚 another hurricane at the scale of Ida.
Blue traps pop up on roofs after Hurricane Ida in Golden Meadow, La., Friday, Sept. 3, 2021. (Photo by Sophia Germer, , The Times-Picayune | The New Orleans Advocate) ORG XMIT: BAT2109040731020007
Birny Birnbaum, executive director for the Center for Economic Justice, a consumer rights organization, said a reliance on affiliates tends to leave little on the books for the insurer itself.
鈥淲hen you鈥檙e giving 80% of your premium to reinsurers, and you鈥檙e giving 40% to (affiliates), there鈥檚 just not a lot left over,鈥 he quipped.听
Birnbaum believes the affiliate structure contributed 鈥渋mmensely鈥 to the problems in the property insurance market in Louisiana and Florida.
Such smaller insurers have found a way to 鈥減rint money,鈥 Birnbaum said: They come into a market with little capital and take a significant share of business from Citizens or private companies leaving the market.
But the model has proved unsustainable, in part because the market for reinsurance 鈥 the only thing that could protect these firms 鈥 is so volatile, he said.
Sustainability may not be the point, however.
鈥淭he executives and parent (company) walk away,鈥 Birnbaum said. 鈥淭he taxpayers are on the hook. ... But the executives continue to make their money.鈥
Editor's note: This story was changed Feb. 1 to correct the net loss reported by the failed insurers in 2019 and 2020.
