Media Coverage: Insurers’ Florida Profits Questioned

Mar 29, 2010



Recent media coverage relating to insurance company financial reporting is reprinted below.  Letters to the Editor written by various insurance company representatives are also included.


Florida Today:  March 23

Our views: Don’t deregulate

A bad property insurance bill that passed the Florida Legislature in 2009 but was vetoed by Gov. Charlie Crist has raised its ugly head again:

A bid to let insurers raise rates without proving they’re justified to the state Office of Insurance Regulation.

The bill has been softened this year, capping annual increases at 5 percent the first year and 15 percent in the future. But it’s still an invitation to insurers to gouge homeowners at will.

The OIR is all that stood in the way of insurance giant State Farm last year when it claimed it could become insolvent without a huge 47 percent rate hike and threatened to dump 1.2 million policyholders, including 26,521 in Brevard, if it didn’t get it.

Florida Administrative Law Judge Daniel Manny shot down that baloney, saying State Farm’s rate increase request was rigged with sham transactions and economic distortions with its parent company.

Meanwhile, State Farm increased its president’s pay by $400,000 in 2008, according to the Sarasota Herald-Tribune.

State Farm eventually struck a deal to drop only 125,000 policies this year in exchange for a 14.9 percent rate increase, showing consumer protections against skyrocketing rates remain weak at best.

Need more proof insurers can’t be trusted to operate without rate regulation?

A yearlong investigation of the property insurance market by the Herald-Tribune found insurers can siphon off profits to sister companies that don’t have to open their books to the OIR and continue to hand out big bonuses and other forms of compensation to top executives.

The Herald-Tribune found Florida property insurers paid out “more than $38 million in executive bonuses and $32 million in other perks from 2006 to 2008.

At the same time, Florida homeowners were being socked with soaring rates.

Yet some state lawmakers want to pull the plug on any OIR oversight of property insurance rates.

The House Insurance, Business and Financial Affairs Policy Committee last week voted to strip OIR of power to deny rate hikes. State Rep. Ritch Workman, R-Melbourne, voted yes for the industry-friendly bill.

Instead of falling over backwards to do the bidding of the deep-pockets insurance lobby, lawmakers should order a probe of potentially fraudulent insurance practices and close regulatory loopholes that allow insurers to shift their profits out of the sunshine.

It’s true there are other issues with the Florida insurance market, including inadequate reserves among small companies picking up policies shed by giants like Allstate and State Farm and the possibility a huge storm would empty the state catastrophe fund.

Those problems should be addressed.

But gutting the OIR’s authority to ensure rate hikes are warranted and based on valid numbers would be a travesty.

If the reckless bill is approved, Crist should spike it again.


TCPalm:  March 22

Anthony Westbury: Small insurance companies could leave residents at risk

ST. LUCIE COUNTY – How risky is your property insurer?

If you’re with a small company, chances are, very.

According to state insurance regulators, insurance agents and other observers, one in three privately insured Florida homeowners relies on insurers who exhibit worrying signs of financial risk.

How bad is it? The state Department of Insurance Regulation currently has several small insurance companies under close watch; others have failed within the past few months, and it’s been five years since the state was hit by a significant hurricane.

How did we get to this unhappy state of unreadiness?

Ever since Hurricane Andrew in 1992 and the multiple storms of 2004-2005, insurers have been trying to raise their rates to cover what they regard as unusual risks, particularly in the eastern coastal zone.

At the same time, state regulators have routinely denied the biggest insurers the enormous rate hikes they claim to need to stay in business. In response, the State Farms, Allstates and Nationwides of the industry have either walked or threatened to. Hundreds of thousands of homeowner policies had to be transferred to the state’s insurer of last resort, Citizens Property & Casualty, to close the gap.

Then a couple of years ago, regulators realized Citizens was becoming dangerously over-exposed itself. A direct hit from even a small storm could quickly wipe out the company’s relatively slim reserves.

So state regulators began opening the doors to small, startup insurers and they began encouraging policyholders to move to the new companies to lessen the load on Citizens.

Harry and Sondra Quatraro of Fort Pierce were with Citizens, who sent them a letter in 2008 advising them to transfer to a new company, Magnolia. They were assured that Magnolia was a good company.

Luckily they never had to file a claim with Magnolia; if they had it might have been disastrous.

The funding requirements for the startups was incredibly low. For as little as $4 million in assets you, too, could start a Florida property insurance company. Insurance experts reckon a company should have at least $15 million in reserves to weather catastrophic events,

By 2009, many of these small fries had come under the regulators’ microscope. Magnolia was one of the worst ones. The company was overextended and undercapitalized. In fact, it didn’t even have an office; the owner was operating out of his Key Biscayne home.

The Quatraros received another letter in January this year informing them Magnolia was dropping them. Despite the short notice, their agent found another insurer that seems a little more stable.

Alex Sink, the state’s chief financial officer and a candidate for governor, has been asking the question on everyone’s lips.

“Our insurance companies ought to be making good profits,” Sink reasoned, because we’ve had no storms for five years.

So why are they in such a mess?

It seems in many cases small companies have used windfall profits to squirrel away cash to out-of-state accounts rather than better cover their exposure here. It’s a recipe for disaster, most observers agree, and at least one bill in the Legislature this session seeks to address the undercapitalization issue.

We’re only nine weeks away from the beginning of hurricane season. In addition to the normal worries at this time of year, you have to ask: Is my insurer ready for the Big One?


The Sarasota Herald-Tribune recently published the results of a yearlong investigation into the financial health of Florida-based property insurance companies.

To check out the fiscal health of your insurer, go to:

Anthony Westbury is a columnist for Scripps Treasure Coast Newspapers. This column reflects his opinion. For more on St. Lucie County topics, follow his blog at Contact him at (772) 409-1320 or


Bradenton Herald:  March 21, 2010

Insurers losing money despite lack of storms

Most insurance companies in the red even with Florida’s dearth of hurricanes

By Beatrice E. Garcia

After four hurricane-free years in central and South Florida, insurance companies should have been raking in the profits. All that premium money pouring in – and no big catastrophe claims checks going out.

Not so. Most of the state’s insurance companies report they are losing money. If the numbers are valid, the next big storm could not only destroy your home but also the company that insures it.

Based on insurers’ 2009 annual reports, 50 of out 70 Florida-based companies posted losses on their insurance business for the year; 31 of the companies reported a drop in reserves – the money insurers set aside to pay claims.

These Florida-based companies, many of them small, write about 52 percent of the residential homeowners insurance in the state. The rest is written by Citizens Property Insurance, the state-run company; State Farm Florida Insurance, the largest private carrier; and several dozen companies based outside of Florida.

The dreary financial reports coincide with a push in Tallahassee to pass legislation that would free up insurance companies to raise their rates at will – as much as 5 percent initially and as much as 15 percent in the future. Right now, any rate increase requires state approval.

Some are puzzled at how insurers can be doing so poorly during a time when hurricanes have bypassed Florida.

“Our insurance companies ought to be making good profits,” said Alex Sink, the state’s chief financial officer and a candidate for governor. Sink has asked Insurance Commissioner Kevin McCarty for a status report on the financial health of Florida-based insurers. It’s due Wednesday.

The companies aren’t alone in issuing dire warnings about the industry.

Demotech, a Columbus, Ohio-based rating agency, withdrew positive ratings on 10 Florida companies over the past year, including Magnolia Insurance, Edison Insurance and two insurers operated by Northern Capital Group.

A.M. Best, another rating agency, downgraded five Florida-based insurers – different ones – because they didn’t meet capitalization or other requirements.

And yet, in a move likely to fuel skepticism about insurance company losses, one company, Southern Oak, was just slapped by the state for overpaying a sister company to perform routine paperwork, pay agents and resolve claims.

It made Southern Oak’s bottom line look worse than it actually was.

If insurance companies are as bad off as they say they are, South Florida residents are especially at risk. In Miami-Dade, Broward and Palm Beach Counties, about 776,404 – nearly 55 percent of the 1.4 million insured homes – are covered by smaller firms that collect less than $200 million in annual premiums.

If a homeowner’s insurer goes belly up, the state’s guaranty fund will pay up to $500,000 – which might not cover all of the homeowner’s losses. Those payments could result in additional taxes for Floridians if the guaranty fund runs out of money to pay losses and needs to raise more.

Insurers say they have been left vulnerable by a combination of factors, including:

The state’s determination to hit the brakes on rate increases. Numerous rate hike requests have been whittled down or rejected.

The rise in the cost of “reinsurance” – backup insurance that companies buy to limit their exposure in the event of a disaster.

The state’s schedule of wind mitigation discounts, which grants major rate cuts to homeowners who buy shutters and pay for other improvements to make their homes more hurricane-ready. Companies complain the discounts are overly generous.

The reopening of Hurricane Wilma claims as policyholders put in for additional losses – often at the insistence of public adjusters, who represent homeowners.

As in the case of Southern Oak, the payment of overly generous commissions to affiliated companies that drain revenue from the insurer and leave it with little income or sometimes even losses.

Regulators and lawmakers have started to focus on this last problem.

Last week, state Rep. Alan Hays, R-Umatilla, called for an investigation, noting some company executives are paid big bonuses, and generous commissions go to sister companies at the same time the insurer is agitating for higher rates.

Some remedies are emerging in Tallahassee. One is a massive insurance bill that would require each property insurer operating in Florida to boost its reserves to $15 million; the current requirement: just $4 million.

It would also allow insurers to increase rates to offset those mitigation credits. While good for insurance companies, that would cost homeowners big money.

Meanwhile, for the first time in three years, rate hikes are winning approval from the state. Over the past 10 months, regulators have OK’d 75 rate increases – some for more than 20 percent – for insurers selling home and windstorm coverage. Insurers say it’s not enough and that higher increases still are needed so companies can sock away revenue to pay future claims.

The state’s largest insurer, State Farm, which won a 14.9 percent rate increase last year, says it had an underwriting loss of $463.9 million in 2009. In conjunction with the rate hike, the company got permission to drop 125,000 Florida policies.

State Farm and other Florida insurers say they have been undermined by a 2007 law that required insurers to lower rates if they purchased reinsurance from the state’s catastrophe fund at lower than the going rate in the private market. Savings had to be passed on to customers.

The same 2007 law froze the rates charged by Citizens Property Insurance, the state-run insurer, through 2009 and freed the company to compete head-on with private carriers. Locking in the rates at Citizens put the private insurers at a disadvantage, those companies say.

There was a time when Citizens was mandated to have the highest rates in the state. No longer.

John Rollins, who runs Rollins Actuarial Services in Newberry, says traditionally insurers will build up their reserves in years when hurricanes veer away from Florida. He contends flat rates have prevented that from happening.

According to Rollins, 40 cents out of every $1 of premium collected by Florida property insurers is spent on backup insurance; 25 cents is spent on noncatastrophe claims such as fire and theft; and another 30 cents covers underwriting expenses, which include the cost of servicing claims, agents’ commissions, administrative costs and premium taxes.

That leaves about a five-cent profit for an insurer that can run efficiently and contain its expenses.

“The average company isn’t achieving (that five-cent profit) because it can’t charge a premium large enough to cover all those costs,” he says.

Southern Oak, the company ordered to slash what it pays to the sister company – called a managing general agent – is not the only insurer facing closer scrutiny these days. Several are being examined, said a spokesman for the Office of Insurance Regulation. The office would not identify those companies.

Not everyone is down on selling insurance in Florida. American Integrity, a company based in Tampa, and New York based-Privileged Underwriters Reciprocal Exchange have added capital in the past 12 months and are poised to grow.

Robert Ritchie, American Integrity’s president, says the company will be writing new policies throughout the state and is interested in taking over some of the 125,000 policies State Farm won’t be renewing in the next 12 months.

American Integrity won approval for a 14.8 percent rate hike in late 2009.

“I’m not happy that homeowners will see rate increases,” says Ritchie. “(But) we need to do a better job overall explaining the need for rate increases and why the pain is being felt this year when actually it has been building over the past three years.”


St. Petersburgh Times:  The Buzz (Blog), March 17, 2010

Blog:  State lawmaker wants investigation of insurance companies

State Rep. Alan Hays on Wednesday called for the Legislature to investigate property insurance companies in Florida, noting the millions executives made in bonuses and other perks as the companies threatened to leave Florida and begged the state for higher rates to make them profitable.

“We certainly need to have answers as to whether the practices were appropriate,” said Hays, R-Umatilla, a member of the House Insurance, Business & Financial Affairs Policy Committee.

Citing a year-long investigation conducted by the Sarasota Herald-Tribune — “How insurers make millions on the side” — Hays said he wants to hold hearings to sort out the truth much like they do in Congress. The committee’s chairman Republican Pat Patterson, a senior account agent at Allstate, dodged discussion of the issue. (The lawmakers, including Hays, then approved a measure to give insurance companies the ability to offer unregulated rates.)

Hays isn’t the only Florida politician wanting answers to the questionable practices exposed in the newspaper’s series. Chief Financial Officer Alex Sink is asking Florida Insurance Commissioner Kevin McCarty to appear before the Cabinet on Tuesday.

But still Hays voted for a controversial deregulation bill (HB447), sponsored by Rep. Bill Proctor, that would allow property insurance companies to offer an unregulated policy to homeowners. The legislation caps the annual cost increases at 5 percent for the first year and 10 percent and then 15 percent in future years.

Republicans are pushing the measure as a “market-based” proposal that would allow homeowners to bear the true cost of the policy and get better service in return. But critics including Sean Shaw, the Florida Consumer Advocate, suggest it will limit options for homeowners to this Cadillac plan for Citizens, the state-backed insurer. “To raise the rates and never have to prove to (the Office of Insurance of Regulation) that there rates are justified,” Shaw said.


Sarasota Herald Tribune:  March 22, 2010

Letter to the Editor:  Sunshine insurer provides facts

The March 14 article “Not saving for a rainy day,” referred to Sunshine State Insurance Co. and U.S. RE Corp. and stated that “profit goes to the man behind both ventures, Tal Piccione.” This is not true.

Sunshine State’s fees to its managing general agency have been used to finance capital contributions to the company year after year. It is the reinsurers, which protect Sunshine State policyholders against catastrophic losses from hurricanes, that pay U.S. RE. They do so at standard reinsurance brokerage fees, no more than are paid to U.S. RE in connection with reinsurance placed for other insurance company clients.

We take issue with being included with other carriers that are claimed to have profited at the expense of policyholders. Further, the statement that Sunshine State passed off as much as 90 percent of its business to reinsurers is not true today.

Sunshine State has, since 2005, protected its policyholders against multiple hurricanes as experienced in 2004 and 2005 — which resulted in the company paying $400 million in homeowner claims. At the same time the company is able to offer competitive prices to its policyholders.

Sunshine State’s surplus as of year-end 2009 was $12.1 million. Sunshine State is owned by Fenelon Ventures. While Tal Piccione is a principal of Fenelon, there are other shareholders and independent directors serve on the Sunshine board. Sunshine State has been in business for 13 years, paid more than $600 million in claims, and created an insurance market for Florida homeowners when giant insurers were leaving the state.

Mechlin Moore, President
MDM Communications
Rye, N.Y.


Sarasota Herald Tribune:  March 18, 2010

Letter to the Editor:  Be proactive on Florida insurers

Property insurance company schemes as the ones depicted in Paige St. John’s exposé, “How insurers make millions on the side,” have surfaced from time to time, and will continue to rear their ugly heads until our elected state officials and the state insurance department take a proactive stance.

The problems associated with funding new property insurers, and allowing them to siphon profits via dividends and to pay outrageously high reinsurance premiums back to their offshore lenders, instead of prudently saving profits for a contribution to the companies’ surplus for the proverbial rainy day, i.e. hurricane losses, are at best a fraudulent scheme, with no legitimate prospect of survival.

The state, specifically the Office of Insurance Regulation, needs to conduct an immediate audit of all insurance companies licensed to issue policies in Florida. The audit should include a full disclosure of the financing behind the company and a thorough review of all the companies’ reinsurance treaties and facultative cessions, to look for incestuous or abnormal transactions, and to issue cease-and-desist orders if any violations are found. In addition, all reinsurance secured by the Florida-licensed companies should meet the financial criteria set by the state, and require an A.M. Best’s “A” rating.

George G. Zimmerman

The writer is a former president and CEO of three reinsurance companies.


Sarasota Herald Tribune:  March 18, 2010

William Stander:  Property insurers’ breaking point

In response to “How insurers make millions on the side:”

The unfortunate truth is that during the past several years, government has passed laws and pursued a regulatory environment that has pushed the property insurance market to the breaking point. Undeniably, the state has driven insurers out of the marketplace and, in the process, put anyone who buys insurance in real economic danger the next time a major storm hits.

While we do not agree with many of the conclusions in your article, the fact is that as predicted, short-term efforts to control rates have come at the expense of the market’s long-term stability. More ominously, every insurance consumer — including business owners — will have to pay the debts that come due when the next big storm hits and the government-run insurance mechanisms, Citizens and the Florida Hurricane Catastrophe Fund, run out of money.

The Property Casualty Insurers Association of America believes that we must protect and empower Floridians by focusing the regulators’ efforts on solvency and then restoring true competition among the insurers that remain. We must also take steps to get costs under control. Both the state and insurers share the responsibility of crafting long-term solutions that will mean stronger homes and safer, more financially secure families throughout Florida.

William Stander, Property Casualty Insurers Association


The Miami Herald:  March 16, 2010

Regulators fine, warn Clearwater-based insurer

TALLAHASSEE, Fla. — A Clearwater-based property insurance company is the latest Florida company to run afoul of Florida insurance regulators.

Insurance Commissioner Kevin McCarty ordered Homeowners Choice Property & Casualty Insurance Company to pay a $10,000 fine within 30 days for violating Florida’s insurance regulations and come into compliance with the state’s rules or face losing its license.

In Monday’s notification to the company, regulators said Homeowners failed to provide information of a reinsurance agreement with its affiliate Claddaugh and that it wants the insurer to have the Bermuda company return more than $9 million in premiums.

Homeowners is the second company in a week to be threatened with suspension by regulators.


Sarasota Herald Tribune, March 15, 2010

How insurers make millions on the side

By Paige St. John

Today, nearly half of Florida’s home insurance is provided by companies whose primary profit comes not from insuring homes but from diverting premiums into a host of side ventures.

Investors and executives in 2008 moved $1.9 billion in policyholder money out of heavily regulated insurers, where profits are capped and dividends are restricted, to separate companies that are owned by the same people, housed at the same address and sometimes use the same employees.

As soon as the money is moved, it is beyond the reach of homeowners who might need it to rebuild after a disaster.

It is also free to be paid to investors and owners as profit without interference from regulators.

Meanwhile, insurance executives complained about losses and state-mandated discounts, and pressured state regulators for permission to charge homeowners more — even to end rate regulation altogether.

The payments to themselves, by and large, were legal.

As Allstate and State Farm have fled the state and left homeowners scrambling for coverage, Florida lawmakers have intentionally relaxed rules designed to police insurance company profits. Regulators hoped the promise of profits would persuade investors to start more insurance companies.

The Herald-Tribune spent more than a year investigating the Florida insurance industry, including reviewing the financial filings of more than 70 Florida-only companies that now provide nearly three-quarters of the private property insurance in the state.

It found that:

  • Overhead costs — expenses not related to hurricanes or other disasters — are 50 percent higher in Florida than the national average. The higher overhead cost Florida homeowners an added $900 million in 2009 alone.
  • In cases where the Herald-Tribune could see both sides of the ledger, the overhead charges were inflated. Of the $72 million in management fees that Southern Oak paid its affiliate over five years, nearly half — $35 million — was profit, insurance regulators now say. Three other carriers paid themselves an average 44 percent profit.
  • Some insurers devote so much of their premium to reinsurance and paying related companies they have little left for claims. Even in its first months of operation, state financial examiners said, American Keystone was structured to spend more than it collected.
  • Insurers have contracted so much of their work to unregulated sister companies that some are essentially shell operations with few employees. Homeowners Choice, for instance, pays one affiliate to negotiate reinsurance contracts and another to manage policies, and buys catastrophe protection from a third.
  • Lax state rules encourage executives to pay sister companies as much as possible. The Legislature barred regulators from requiring insurance affiliates to report their finances.
  • Even while complaining of losses, Florida insurers from 2006 through 2008 paid $38 million in bonuses and $32 million in other perks to 180 of their officers.

The state industry’s chief trade group, the Florida Insurance Council, defends internal deals as a way to provide quick returns to start-up insurance companies. Regulators bar insurance companies themselves from paying dividends to investors until they have been in business at least three years.

“Investors would simply not provide funding without generating some return each year as they are putting up money with a risk of total ruin,” said Sam Miller, vice president of the council.

Others say self-dealing increases the chances of ruin.

“The companies are taking profits out as opposed to keeping it for future losses,” said Frank Cacchione, CEO of TNC Management, a New Jersey company that sometimes audits insurers’ books for private reinsurers. “When the insurance company fails, they haven’t lost any money. In fact, they’ve made a lot of money.”


Most of the money redirected from insurers — $710 million in 2008 alone — goes to companies called managing general agents, or MGAs, which run insurers’ day-to-day operations.

Part of these fees pay legitimate expenses, such as agent commissions. But a yet-unpublished analysis by the Insurance Consumer Advocate, an independent state position created by the Legislature, found that Floridians pay 50 percent more for overhead costs than the national average.

Florida residents paid an average of $434 per policy toward insurers’ operating expenses, the analysis found. Across the nation, the average was $289.

And because MGA fees are set as a percentage of total premiums, when insurance companies get rate increases, the MGA fee also goes up. Regulators in December granted Olympus Insurance a 25 percent increase to cover reinsurance. The advocate’s office objected, noting Olympus already has one of the highest expenses of Florida insurers. The MGA would automatically receive $2 million of the $11 million rate boost for no added work.

“Do these functions cost more in Florida than the rest of the country? I don’t think so,” said Advocate Sean Shaw. “But somehow this is happening.”

The Florida Insurance Council defends MGA profits. After surveying some of its members, the trade association said MGA profit margins are only 3 percent to 5 percent of total premiums — an amount vice president Sam Miller said “is not considered excessive and does not involve a great amount of premium.”

However, calculating MGA profit as a percentage of MGA revenue — the traditional way of figuring business profit margins — shows MGA profit margins ranging from 25 percent to 50 percent.


Because Homeowners Choice, an insurer based in Clearwater, is publicly traded and must file financial reports with the Securities and Exchange Commission, it offers insight into how self-payments work.

Financial statements filed with insurance regulators show the insurer posted a $5.6 million loss for the first nine months of 2009.

“We did?” asked Jay Mahdu, the vice president of marketing and investor relations for the two-year-old company.

He was more familiar with Homeowners’ holding company filings with the SEC, which at the time showed a $10 million profit.

(Year-end reports filed earlier this month reported 2009 losses of $650,000 for the regulated insurance company and 2009 profit of $11 million profit for the holding company.)

“There is so much business in Florida that, managed well, you can do very, very well,” Mahdu said.

Homeowners Choice turned an insurance “loss” into a stockholder profit mainly in this fashion:

Homeowners Choice paid Homeowners Choice Managers $24 million (and $2 million more to others) in 2009 for management services that cost $15.4 million.

It paid $9 million to Bermuda-based Claddaugh for reinsurance, almost all of which was likely profit because, according to state regulatory filings, none of it was used to pay claims.

Homeowners concedes its profits come from itself, but says the money is pumped back into the insurer as capital contributions that allow it to offer insurance to more Floridians.

“We haven’t taken any money out,” Mahdu said. “It’s all about growth for us.”

Homeowners has issued no dividends to investors, but three company directors collected $1.4 million by charging for services through their own private ventures.

In 2008, Homeowners Choice paid $400,000 to lease its computer billing system from a software company owned by Paresh Patel, founder of Homeowners Choice. The contract requires that Patel’s insurance company is the firm’s only client. Patel was also paid a total of $525,000 in bonuses for the past two years.

Another owner/director, developer Gregory Politis, leases Homeowners part of the third floor of a Clearwater office building he owns, for $150,000 a year. And in 2008, Homeowners paid $643,000 for legal services from the firm of another director, Martin Traber.

Mahdu said the many Homeowners Choice subsidiaries are the artificial construct of corporate attorneys.

“There is no such thing as the division. A Homeowners employee is a Homeowners employee,” he said. “At the end of the day, we live and die on the bottom line. It doesn’t matter which entity posts a profit or loss.”


One way insurers move money out of the regulated business is by forming their own reinsurance companies. Essentially, they sell insurance to themselves.

In 2007, one of the reinsurers with which United Property and Casualty did business was a Grand Cayman Island reinsurer called Caymaanz.

What made the transaction stand out was how much United paid for reinsurance from Caymaanz.

In return for $6.5 million in storm protection, the Florida property insurer paid Caymaanz $6.5 million — $5.5 million for the coverage and $1 million for the purchase of Caymaanz stock.

If there had been a hurricane, United would have gotten back essentially what it paid in. Without a storm, Caymaanz and its owners walked away with an untaxed, unregulated profit. Don Cronin, chief executive of United, said he did not remember what United made on the deal.

One of the Caymaanz owners was also a United director. Florida incorporation records show Caymaanz is owned by a Tampa workers compensation insurer named Sunz. One of the Sunz Group directors, according to the records, was Ocala horse feed manufacturer Greg Branch — at the time also the chairman of United Property and Casualty.

United did not report the transaction as an affiliated purchase because, said Cronin, “it didn’t meet the technical definition.”

No-risk reinsurance deals in which firms basically pay up front what they expect to collect were at the root of former New York Attorney General Eliot Spitzer’s financial fraud investigations of the insurance industry in 2007. In the aftermath, regulators adopted restrictions on such deals.

Cronin said the Caymaanz contract passed that test because it also included prepaid coverage for a second hurricane. Under the right conditions, Cronin said, United could have collected $13 million, twice what it paid for the coverage.

He would not say who arranged the transaction, but said Branch, chairman of United’s board and chairman of Sunz’s reinsurance committee, abstained from the board vote approving it.


While it is common for Florida-only insurers to do business with themselves, Hillcrest Insurance did a deal with its founder that cost policyholders.

In early 2009, according to filings with the National Association of Insurance Commissioners, Hillcrest Insurance bought $600,000 in bank stock from the insurance company’s founder, Vernon D. Smith.

Seven months later, the stock — in a banking group that Smith owned — was written off by the insurer as worthless.

The purchase is noted in the quarterly NAIC financial filings. Hillcrest’s March 31 report to regulators identified Smith as the “vendor” who sold it the stock, while other filings describe the shares as coming from a company director.

Smith did not return phone calls to his home. Neither did his daughter and son-in-law, who serve as Hillcrest’s chairman and CEO.

They formed Hillcrest in 2005, with 90 percent of its ownership coming from a family trust that state incorporation records show Vernon D. Smith controlled.

Smith was regarded as a pillar of Florida’s community banking scene. Over decades he had organized three different “Riverside” banking groups with branches stretching from St. Augustine to Cape Coral. He was a major donor for Indian River Community College, owner of a small newspaper chain and adviser to the Florida Highway Patrol.

But at the time of the stock purchase, Smith’s Riverside banking empire was in trouble. One group was beset by financial rating downgrades and bad loans, another was closing offices, and the third was seized by the FDIC.

It was in that environment that Hillcrest reported to the National Association of Insurance Commissioners that it paid $600,000 for 4,000 shares of stock in Riverside Banking Co.

By September, the insurance company wrote off that purchase, declaring the stock worthless. The company’s filings show the write-down contributed to a $680,000 loss that September. To pay its bills, Hillcrest pulled money from its policyholder surplus, reducing the amount of money set aside to pay future claims.

The Herald-Tribune also attempted to reach Smith and his family through their insurance company, without success. There is no Hillcrest office to contact. The company pays the Tower Hill insurance group to run its business.

“We’re what you call a ‘virtual operation,'” said Hillcrest chief finance officer William Thompson, who earns his $172,000 salary working from Tallahassee.

Subsequently, on Dec. 21, Hillcrest sold the shares to a charity. The reported buyer, Big Brothers Big Sisters of St. Lucie, paid $1,000.


Florida homeowners are still paying the $810 million bill for the failure of the Poe Insurance Group, the costliest property insurance failure in state history.

State investigators now believe the bailout was made worse by executives grabbing tens of millions of dollars before regulators could close the deteriorating company.

They did it by funneling money into unregulated sister companies, steering the money to investors and owners instead of to homeowners, according to allegations laid out in a civil court case filed by Florida Insurance Receiver’s office in Leon County Circuit Court.

Over four years, through what the court complaint alleges was a “fraudulent scheme,” Poe founder and former Tampa Mayor William Poe Sr. received more than $30 million. Another $1 million went to his nonprofit foundation.

In addition, instead of paying hurricane claims, Poe’s managing agency paid off $25 million in debt for which Poe was personally liable and kept $35 million in premium fees it did not earn, the complaint states.

That money could have helped thousands of Poe customers left with worthless insurance after the 2004-05 hurricane season and forced to seek payment through a state solvency fund. Instead it enriched company insiders or softened their financial losses, the state argues.

Attorneys for the Poe family would not comment, citing pending litigation. But statements made in court show that while they contest the allegation of fraud, they do not dispute the amounts taken — just whose money it was. They contend the family put most of what was not eaten up by taxes back into the insurer.

“There is no insurance company monies that ever went to the Poes,” attorney Harley Reidel said in a court hearing last year.

The Poe family has responded by filing for bankruptcy protection and seeking federal court orders barring the state from pursuing its claims in circuit court.

The insurers left behind $1.5 billion in policyholder claims and less than half the money needed to pay those bills. Florida consumers are on the hook for the rest, as fees on their own home premiums from the Florida Insurance Guaranty Association.


Florida’s Office of Insurance Regulation polices almost every aspect of the insurance industry.

But when it comes to following the money paid to affiliates, the OIR is largely benched.

Lawmakers intentionally made it so.

Like most states in the mid- 1990s, Florida adopted model laws aimed at regulating how insurers use managing companies called MGAs.

But in Florida, the Legislature added words excluding the most common kind of managing agent in the state, those controlled by the insurance company’s owners.

So there are laws that require managing agents to charge a fair rate and allow regulators to audit their books, and laws that impose penalties for violators.

But those laws do not apply if the insurance company owners form their own MGA and charge themselves for the services.

“Enabling insurers to have wholly owned MGAs operate without oversight, that’s what I see is the problem,” said Shaw, the insurance consumer advocate.

Florida’s insurance industry trade group says regulators and insurers have worked out a compromise — inserting language into management contracts that stipulate regulators have a right to look at certain financial reports.

Officials at the Office of Insurance Regulation refused to say how often they conducted such reviews, contending it was a “legal research question” the agency did not have resources to answer.

At least twice, the agency has ordered insurers to reduce their MGA fees. In the case of First Home, affiliates were also ordered to return $1.3 million in management fees.

On Tuesday, Southern Oak was ordered to show why it should not be required to return $10 million in “excessive profit,” a portion of the $35 million in profit regulators said the MGA made off the insurer since its inception in 2004.

Southern Oak CEO Tony Loughman said those profits were “consistently” invested back into the insurance company. Annual financial filings show Southern Oak paid $72 million to its managing agent since 2004, returning only $12.6 million.

A second order, signed Friday, allowed Southern Oak to keep its MGA commissions as they are, but to return a portion of them if the insurer loses money.

The fees OIR sought to restrict were approved by the agency in 2004 — when the company was launched by a former candidate for governor, Stephen Pajcic, a prominent Democrat who also owns a Jacksonville law firm — and again in 2005 and 2007.

In interviews, the state’s insurance solvency chief said that in the past, her office did not look at the flow of secondary profits through affiliates, because it allowed company owners to pay off their own loans used to start the insurer.

Allowing these profits “facilitated more capital to our marketplace” said Robin Westcott, solvency director for the agency’s property insurance division.

OIR is now paying more attention because, she said, “it can be manipulated to take money out of the companies.”


Sarasota Herald Tribune:  March 14, 2010

As rates rose, perks and pay kept flowing

By Paige St. John

For years, as Florida property insurers complained of losses and drove the cost of insurance to record highs, they continued paying executives and investors millions of dollars in bonuses and other perks.

In 2009, Universal Property & Casualty led the state in paying out profits. It gave its founders, Bradley Meier and Sean Downes, a combined $8 million in bonuses.

They and their relatives also got two-thirds of a $22 million stock dividend payout. The same year, Universal successfully argued it needed $93 million in rate increases.

The company recently withdrew a request to raise premiums an additional 29 percent in some coastal areas. State records show Universal’s average premium has increased 40 percent since 2005.

The publicly traded company would not discuss executive salaries, bonuses or dividends outside its formal Securities and Exchange Commission filings, Downes said in written responses.

The Herald-Tribune examined three years of financial disclosure forms from more than 40 companies that filed executive pay information with the Florida Office of Insurance Regulation. The documents show that from 2006 through 2008, Florida property insurers awarded more than $38 million in executive bonuses and $32 million in other perks, while paying $79 million in dividends to their holding companies.

In that same time, Florida homeowners saw rates increase an average of 35 percent, with premiums doubling and tripling on the coast. Regulators have approved rates as high as $7,890 to insure a $150,000 house in Palm Beach.

In 2007, the year after insurers as a whole won the largest rate increases in state history, the average executive bonus grew 46 percent. In heated confrontations at rate increase and special state Senate “accountability” hearings the following spring, lawmakers accused Florida insurers of pocketing money.

“I just wonder what was it about your customer, what was it about the citizen of Florida, what was it about their financial hardship, what was it about their suffering, that was unable to get your attention,” Sen. Jeff Atwater, now Senate president, asked of insurance executives.

Though the average bonuses decreased the following year, they remained nearly 13 percent higher than in 2006. Filings showing 2009 bonuses are not yet available.

Firms claiming losses paid more on average than profitable insurers. The average reported executive pay at 19 companies that lost money in 2008 was $227,000. At 21 profitable insurers it was $189,000.

In fact, some of the top paid Florida insurance executives ran companies that ultimately failed because of financial problems.

Edison Insurance President David Howard received a $140,000 bonus the year before the company ran short of money and was forced to sell. His total reported pay in 2008, $440,000, made him one of the highest paid property insurance executives based on the amount of capital the company had.

The bonus reflected Edison’s early profitability in 2007, Howard said. With the insurer struggling in 2009, Howard said, “I cut everyone’s pay, including my own.” His salary for 2009 fell to $275,000.

Just behind Howard on the 2008 pay scale was American Keystone’s Bruce Howson. Keystone was closed by regulators in late 2009 when regulators discovered the company could not pay its bills, including the cost to secure reinsurance to protect policyholders from hurricanes.

Records show Howson received about $540,000 to run a company with seven employees, as well as $400 a month in car expenses. State regulators digging through Keystone’s books as it failed in 2009 reprimanded the insurer for failing to cut expenses.

“We see no economy, no conservation,” said James Pafford, a financial examiner with the OIR.

Seven carriers that reported losses on their underwriting activity in September 2009 financial filings paid $52 million in stockholder dividends this year and last.

Sarasota-based Gulfstream had a $200,000 loss in its insurance operations in 2008 yet paid $2.5 million to its holding company. It paid another $2.5 million dividend in 2009. The money did not go to investors but to pay down debt and avoid high interest charges, said CEO Mitch Sattler. “It was a good business decision to relieve stress on the corporation,” he said.

Universal in 2008 paid out $23 million to its holding company despite earnings of only $15 million, drawing $4.6 million out of policyholder surplus to make up part of the difference.

The four Tower Hill insurers paid out a net $10 million to their parent company in 2008 and 2009 despite losses of nearly $24 million over those two years.

The actual amount of bonuses and other perks paid by insurers is likely more. Only Florida-based insurers are required to report executive pay to state regulators. And those reports are often incomplete. It’s left to the insurer whether to report only the part of the salary attributed to the insurance carrier or the executive’s entire check.

American Keystone, for instance, reported a $295,000 salary for Howson. Full payroll records that were made available after the company failed show Howson’s compensation was closer to $540,000, with much of it being paid by affiliated companies.

Homeowners Choice told state regulators it paid CEO Francis McCahill $103,000, though it reported to stockholders he received more than three times as much.

And some insurers report no executive salaries at all.


St. Petersburg Times:  February 24, 2010

Seeking a glide path, not a crash

By Jeff Harrington, Times Staff Writer

Here’s the state of Florida’s star-crossed property insurance market after several years without any major hurricanes: Three Florida property insurers went insolvent this past year. Forty-four of the state’s top 73 property insurers are losing money. Major players like State Farm are dropping tens of thousands of policies statewide. Regulators have approved double-digit rate hikes. Citizens Property Insurance, once the state-run insurer of last resort, is turning into the first resort for some property owners worried about the financial stability of smaller, Florida-based private companies. • Meanwhile, elusive as ever is finding a long-term solution to covering the risk of a state that has more coastal exposure to hurricane damage than any other in the country.

Just imagine if Florida has a major hurricane to truly get insurers riled up and moving out.

“I believe the Florida property market is in a perilous position,” said Bill Gunter, chairman of the Florida Association of Insurance Agents. “Now is the time that Florida insurers should be building reserves for future claims and (most insurers) are losing money. … Our agents are increasingly concerned about how to advise their clients.”

Tackling property insurance has been a perennial task of Florida legislators with mixed and often conflicting results.

At one point, Florida legislators pushed to make Citizens Property charge the highest rates in the market to push down its policy count. Then, the state-run company’s mission changed to become more competitive with the marketplace and its rates were frozen for three years. Last year, the Legislature approved a plan to let Citizens gradually raise rates 10 percent a year on a “glide path” to eventually becoming more “actuarially sound.”

Last year was highlighted by State Farm’s pronouncement that it was pulling out of Florida, only to change its mind at year-end after striking a deal with the state to raise rates an average of 15 percent and drop 125,000 of its higher-risk policies.

High on the agenda of legislative leaders this year is making moves to keep insurers happy and staying in Florida. Translation: letting them charge higher premiums and trying to strengthen the state’s hurricane catastrophe fund.

The pathway to higher rates could take several forms, from reducing coverage to restricting the discounts given to homeowners who take steps to shore up their homes to giving insurers greater leeway to pass on the costs of higher reinsurance (added layers of insurance that insurers buy in case of catastrophic losses).

Sam Miller, executive vice president of the Florida Insurance Council, said the state’s property insurance system would need a major overhaul to raise rates to a sustainable level. But he doesn’t see that happening in Tallahassee imminently.

“We recognize you can only do so much politically, but we need to do as much as we can,” he said.

Among the issues that the House and Senate are expected to tackle:

Mitigation discounts

A program to offer discounts to property owners who shore up their homes has sparked controversy. Supporters say it encourages homeowners to mitigate their houses from storm damage and properly rewards them, Detractors say it is difficult to monitor, open to fraud and costly.

Many insurers seeking rate increases have cited the rising cost of giving mitigation credits as depleting their premiums.

“It’s more than a premium issue; it’s a safety issue,” said Don Cronin, CEO of United Insurance in St. Petersburg. “If people really believe their homes are protected to a Cat 3 storm and they’re not, it could affect their decision whether to evacuate.”


Rep. Bill Proctor, R-St. Augustine, and Sen. Mike Bennett, R-Bradenton, are renewing their call to deregulate the insurance industry. The measure was vetoed by Gov. Charlie Crist last year and some insurance industry lobbyists have expressed doubts it will pass in its pure form.

Consumer advocates have opposed deregulation – eliminating the role of regulators in approving rates – saying it would trigger a big spike in rates.

Bill Newton, executive director of the Florida Consumer Action Network, thinks the more likely scenario is insurers gravitating toward a plan that lets them raise rates 10 percent a year without regulatory intervention.

But he holds hope that even that option could be politically untenable in an election year. “Letting rates rise certainly doesn’t sound very consumer-friendly when we already have the highest rates and the market in property insurance is very soft” after several hurricane-free years.

To bolster his contention that insurers are overstating the threat, Newton pointed to flawed, short-term computer models. A recent report from risk management firm Karen Clark & Co. indicated the active hurricane seasons of 2004 and 2005 were incorrectly used by insurers as a harbinger of a continuing trend through the decade.

Near-term hurricane models used by insurers had predicted storm damage ranging from $48.8 billion to $54.6 billion between 2006 and 2009. Instead, storms caused about $13.3 billion in damage over that time frame.

Florida regulators do not allow short-term models in setting rates.

Public adjusters

Insurers say the increase in public adjusters (who represent the interests of property owners in settling claims) has come in tandem with the reopening of numerous claims from earlier hurricanes.

Claims can be reopened up to five years after a hurricane which, the Florida Insurance Council maintains, is the reason why 2005’s Hurricane Wilma has risen to become the state’s third most expensive hurricane on record. The council wants to limit how public adjusters solicit business and change the five-year statute of limitation for filing a claim to as little as two years.

Replacement costs vs. actual cash value.

Look for legislation that would no longer require replacement cost value for a roof more than 20 years old. Insurers also may get clearance to pay actual cash value at the time of loss and then the full replacement cost after receiving an executed contract for damage repair.


Not since 2003 has there been such a concerted effort by the insurance industry for a fraud bill.

Insurance fraud issues involving hurricane mitigation discounts and sinkhole claims could be part of a broader bill focused largely on auto insurance fraud.

In seeking higher auto rates, insurers are blaming a surge in staged accidents and questionable claims in Florida. They are pushing for a bill which, among other elements, would allow the forfeiture of property used in a felony. “Property” would include not just cars but also clinics used for insurance fraud.

Consumer watchdog

Senate leaders are working on a draft bill that also includes some consumer-oriented provisions. One provision would allow the Insurance Consumer Advocate to intervene as a party in administrative state hearings and other insurance department proceedings; another would require the Office of Insurance Regulation to refine or re-create entirely its “Shop and Compare” Web site to give consumers information about price comparisons, complaints and financial strength of insurers.

Legislators are also eyeing expanded powers for the Office of Insurance Regulation. With rising concern over the solvency of smaller insurers, OIR may be authorized to require cancellation of some or all of a financially troubled insurer’s policies within 45 days notice.

Times/Herald staff writer John Frank contributed to this report. Jeff Harrington can be reached at or (727) 893-8242. Follow him on Twitter at