Paige St. John Chronicles the Rise and Fall of American Keystone Insurance: How Insurance Regulators Put Homeowners At Risk

Apr 21, 2010

The following article appeared in the Sarasota Herald-Tribune on April 18, 2010:

American Keystone was backed financially by a Sarasota man who had been banned by the insurance industry, but still managed to win a license to sell policies. Florida’s top insurance regulators suspected convicted felon William Griffin was involved in the company, yet repeatedly overruled their own staff’s suggestions to restrict or close down the company. Ultimately, American Keystone failed, but only after regulators put thousands of homeowners at risk by allowing the unsound insurer to operate through the 2009 hurricane season.


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By PAIGE ST. JOHN, staff writer

For most of 2009, American Keystone was an empty promise.

The Florida company insured some 70,000 homes and condominiums worth $12 billion with just a few hundred thousand dollars in operating cash.

At the height of hurricane season, Keystone was so low on money the Florida Office of Insurance Regulation deemed it “injurious to its policyholders and to the public.”

Had a hurricane arrived, thousands of Floridians would have found themselves with worthless policies.

But the state agency did not shut Keystone down.

Records sealed from public view for nearly a year show regulators chose to allow Keystone customers to unknowingly gamble through an entire hurricane season.

The delay bought Florida regulators a chance to orchestrate a “soft landing” instead of an abrupt collapse and gave Keystone’s investors a chance to search for a buyer. Meanwhile, company insiders continued to pay themselves hundreds of thousands of dollars in salaries and consulting fees.

A yearlong Herald-Tribune investigation found that allowing struggling insurers to remain in business has become an alarming part of how Florida regulators cope with the state’s ongoing property insurance crisis.

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Eager to replace national carriers fleeing the state and to reduce government-sponsored coverage, regulators have bet Florida’s future on companies they know are shaky. They allowed at least four insurers on the verge of failure to write policies through most of 2009, the Herald-Tribune found.

What’s more, regulators have awarded licenses to would-be insurers that had no funding, to individuals who had dubious credentials and, in the case of Keystone, to a business started by a felon banned from the industry.

In the past three years, state regulators have encouraged unproven companies to take on dangerous amounts of policies, and steered more than 200,000 homeowners into companies so weak they were already required or close to being required to improve their finances.

When these overextended insurers became unsound, Insurance Commissioner Kevin McCarty’s office took extraordinary steps to keep them open. In lieu of cash and sound investments that could be used to pay claims, regulators sometimes counted questionable assets, including IOUs, real estate and tax credits.

The Herald-Tribune found evidence of these practices in five of the seven instances in which companies foundered last year.

The full details of how regulators handled those insurers remain sealed within confidential regulatory records. The exception is Keystone, whose closure is documented in thousands of pages that became public when the company was forced into liquidation last fall.

The records show Florida insurance regulators will grant a failing insurer great latitude, giving it chance after chance to stay open while customers remain at risk.

For months, Florida’s top insurance administrators failed to heed warnings from their own financial experts and aided Keystone when they knew it was essentially bankrupt. And they allowed the crippled insurer to keep renewing policies.

Not once did homeowners receive a warning of their peril.

“I hate to say it, but that’s what the state of Florida allows is this crap,” said Michael Clarkson, a Clearwater insurance agency owner who tried unsuccessfully in 2008 to call regulatory attention to Keystone.

Administrators at the Office of Insurance Regulation say they do their best under difficult circumstances.

They believe it is more damaging to suddenly close a company and dump large numbers of policyholders back onto the state than it is to let a failing company take a year to silently wind down while seeking a buyer.

Regulators say they are trying to more aggressively go after weak companies but also say legal hurdles to shut down a company are steep.

“We look back like everybody else and try to see if there’s more we can do, if there’s something we didn’t do right, if there’s something more we could have done,” said Deputy Insurance Commissioner Belinda Miller. “In retrospect, would any of these companies have been licensed? No. Not if we knew then what we know now.”

Even so, Miller’s staff argues homeowners were at minimal risk. They point out that even the most frail insurers are backed by reinsurance policies designed to pay the vast majority of claims after a hurricane. And even if insurers fail, homeowners who lose coverage are able to collect from Florida’s insurance solvency fund.

But that taxpayer-supported fund covers only the first $500,000 in losses, leaving owners of larger homes unprotected. One in three home policies sold by Keystone exceeded this cap.

And records show the reinsurance coverage that regulators rely on does not always exist.

Keystone, for instance, canceled chunks of its coverage in 2009 and carried almost no protection for two storms, creating the potential to put billions of dollars of storm losses back onto Floridians.


When American Keystone was created in 2006, it was a godsend for state regulators.

The Office of Insurance Regulation had just shut down the insolvent Poe Insurance Group, leaving 320,000 policyholders without coverage. National carriers were fleeing the state en masse.

American Keystone offered to take on some of the least desirable of that business, first directly from Poe and later from Citizens Property Insurance, the state-run insurer of last resort for more than 1 million Floridians.

There was a catch. Regulators knew from the start that the people and money behind Keystone had connections to Sarasota entrepreneur William Griffin, whose 1999 federal conviction for generating illegal campaign contributions had banned him from the insurance industry for life.

Documents submitted to the Office of Insurance Regulation show the company was run by Griffin’s son-in-law, controlled by Griffin’s family trust and business associates, employed some of Griffin’s friends, and was funded by a loan from a Griffin-created holding company formerly named Riscorp of Florida.

OIR solvency chief Robin Westcott required Griffin’s son-in-law to step down as an officer of Keystone, the limit of what she said she could legally do. She said Griffin’s own involvement in Keystone was never more than a suspicion.

“I know my supervisor, my chief analyst, came in and said, ‘We’re not real sure. … ‘” Westcott said.

Griffin provided a slightly different account. Department of Financial Services documents show he told a state fraud investigator he was a major investor in Keystone, but said his participation was “supervised and approved by state regulators and his attorney, therefore he thought his involvement was lawful.”

For all the issues Griffin’s involvement raised, Keystone offered Florida insurance regulators serious benefit.

The company proposed to take on the most toxic, untouchable hurricane risk in Florida: coastal condominium associations abandoned to Citizens Property Insurance.

The policies represent thousands of dollars each in premium, and millions of dollars of concentrated risk in perilous locations. More than 70 percent of that business in Florida sits in the government-run Citizens. No private carrier will take it.

Regulators knew Citizens did not have the cash to pay those policies if a major storm struck. Floridians would likely wind up paying billions of dollars for a bailout.

Keystone was the first – and so far only – carrier to offer to take over these policies from Citizens.

“So the pressure for us: Is there a way for us to allow takeouts?” said Westcott. “I think that was the reasoning on this. This company did have the reinsurance to do this.”


Twice, Westcott agreed to move chunks of Florida condominium policies into the newly formed Keystone.

Agency correspondence files obtained by the Herald-Tribune show she did it despite objections and warnings from insurance regulation staff and officials at Citizens.

In April 2008, the manager of Citizens’ policy assumption program, Lee Stuart, complained OIR was forcing Keystone’s approval even though the company had missed four of five deadlines in the application process.

Stuart warned that policyholders should not be turned over to a company unable to meet simple bureaucratic requirements.

He was overruled. Westcott cleared Keystone to take over coverage of as many as 718 condominium associations, representing an estimated 47,000 residences.

Almost immediately, Keystone sought a second round of condominium policies from the state. Financial experts working for Westcott expressed alarm at the company’s shrinking surplus and its chronic losses. The insurer was operating with only $500,000 more than it needed to avoid losing its license.

“As I said before, I’m concerned,” analyst Carolyn Morgan wrote to Westcott on July 1, 2008. “This company has no room for error.”

The following day, OIR analyst Jay Ambler finished his own review of Keystone’s deteriorating financial condition and raised the insurer’s risk level.

Ambler’s official report ended with a recommendation that Keystone’s request for more state-provided policies be denied.

A day later, July 3, Westcott approved the takeout, citing the company’s promises to buy reinsurance.

The Herald-Tribune obtained a copy of Ambler’s original report. A subsequent version no longer included the call for a denial.

“Maybe he changed his mind,” said Miller, the deputy insurance commissioner. “I don’t think it’s a fair characterization that we weren’t listening to staff.”

Keystone’s financial situation only grew worse.

Financial statements subsequently filed with state regulators show the company’s condition deteriorated rapidly from July to November 2008. Its surplus fell below the legal minimum to $3 million, a level that had it been revealed at that time would have put the company out of business.

Keystone responded with an aggressive plan for growth. Sales fliers circulated by agents show the company offered to insure high-risk condominium associations in some of Florida’s riskiest locales at below-market prices. It lured in thousands of new policies worth millions of dollars in premium, doubling the risk it carried, and doubling the number of Floridians in jeopardy.

Insurance experts say such pricing is a hallmark of desperation to generate cash.

“This is scary, because all of us will basically pick up the tab again while several whom become wealthy will hardly care,” Clearwater agency owner Michael Clarkson wrote in a Dec. 4, 2008, warning to regulators at three state agencies.

Clarkson forwarded to the OIR copies of what he said were Keystone’s unscrupulous offers, deals to cover risky properties at rates as much as 40 percent below what residents would have to pay elsewhere.

The papers landed on Miller’s desk. Files show she asked Westcott to investigate. “Please find out what American Keystone is up to,” she wrote.

“We are looking into this,” an aide replied.

There is no further record of a review.

When asked if such a review was conducted, Westcott would only say there are many internal discussions not reflected in agency records, and that those regarding Keystone were numerous.


As American Keystone’s finances got worse, the Office of Insurance Regulation could have quickly stepped in to try to close the company.

But the OIR, which is responsible for protecting consumers from dangerous insurers, rarely takes that step.

In December 2008, Keystone still lacked the $4 million state law requires insurers to set aside at all times.

To stay in business, it sought permission to count two unusual assets: a $1 million IOU from an affiliated company, and a Sarasota medical office building owned by William Griffin, the man banned from insurance.

The 40-year-old building was priced by Griffin at $2.6 million but carried $1.3 million in debt. The value of the building exceeded state limits on the amount of surplus an insurer can tie up in real estate.

In addition, the building was parked in one of the most depressed real estate markets in the country, presenting a liquidity challenge if Keystone actually needed to sell the building to pay claims.

OIR staff noted both negatives. Nevertheless, their superiors agreed to allow the assets, which freed Keystone to write even more policies.

Despite having doubled the amount of premium it collected, Keystone continued to lose money, and its steps to appear solvent became riskier.

By April 2009, the insurer told regulators, it began to drop some of the reinsurance coverage it had bought to help pay future hurricane claims.

OIR held off aggressive action while company officers promised they were overseas seeking new investors in London.

But Westcott’s staff expressed doubts.

“Given the company’s performance and approaching storm season the analyst cannot believe this is a possibility,” department staff wrote in the OIR’s April 2009 supervisory plan for the troubled insurer.

In July, regulators discovered Keystone had less reinsurance than it had stated, and that its finances were in worse shape than previously revealed.

A later report from an independent consultant hired by the state to review Keystone’s contracts showed that by July the insurer had no protection for tropical storms that caused less than $11 million in damage, and even less protection if a second storm struck that same year.

Regulators began an order to suspend Keystone. Westcott edited the draft agreement, penciling in her own words declaring Keystone “hazardous or injurious to its policyholders and to the public.”

On Thursday, July 29, the Office of Insurance Regulation issued that order suspending American Keystone, demanding it stop writing policies and giving it five days to tell existing policyholders they were in danger.

But the agency never acted on the order.

By the following Monday, OIR lawyers were drafting a new, confidential order to vacate the suspension and keep Keystone in operation under state supervision.

The cause was Keystone. Miller said the company over the weekend had objected to the suspension but agreed to close down voluntarily by the end of 2009. Instead of initiating what could become a tough legal battle, Miller said, her agency accepted Keystone’s proposal and made secret plans to move all Keystone storm victims into a state bailout fund should a storm strike.

As a result, Keystone – which regulators said at the time met the statutory definition of “impaired” – continued writing policies. That appears to violate state law, which makes it a felony for an impaired insurance company to sell or renew policies.

Despite the law, Keystone continued to accept homeowners’ renewal checks, a source of income needed to pay the company’s daily bills, including checks to Keystone’s sister companies and a host of consultants with ties to Griffin.

Internal OIR memos show regulators at least three times noted the ongoing renewals, sometimes with surprise, and sometimes with disagreement about whether the practice should continue.

Yet they did not stop it.

It was not until Sept. 29 that Miller ordered Keystone to stop renewing policies, as the agency began its own steps to close down the insurer.

Keystone was shuttered Oct. 9 by court order.

Some 7,600 policyholders, homeowners and associations representing an estimated 70,000 families, had 29 days to find replacement coverage.

In the course of the shutdown, Westcott’s staff would conclude in internal correspondence that American Keystone should have been declared insolvent nearly a year earlier.

The company had survived only through what Jim Pafford, an OIR supervisor of the financial analysts handling Keystone, called a series of “creative solutions” to “prop up” the company’s paper balances.

“They should not have been writing since November of 2008,” he wrote.


Rather than recognize American Keystone as a failure, the Office of Insurance Regulation focused for months on the chance it could survive or find a buyer.

Regulators argue that strategy is best for consumers – and for Florida taxpayers.

If a struggling company finds a buyer, policyholders can keep their coverage with few noticeable differences. If no buyer is found, regulators prefer an orderly withdrawal that might allow other companies to assume at least some policies by the failing insurer.

Secrecy is key. “The minute you tell everybody this is going down the tubes, the book (of business) is gone, and there’s nothing to sell,” Westcott said.

The worst outcome, regulators say, is an immediate shutdown that dumps policyholders into already stretched government insurance programs.

“It’s our job to say how can this be best accomplished in the marketplace that is least disruptive to the policyholder,” Westcott said.

In the case of Keystone, regulators said, they believed the company had a chance to find a buyer. And it was easier to have a slow shutdown with the company’s cooperation than a quick one against the company’s will, Miller said.

In fact, she contends the legal hurdle to shut down a company is so high it is nearly impossible to force an insurer to close against its will. As a result, companies like Keystone are given time to wind down if they sign settlement agreements that require them to close.

“To say we keep the company in business is not a fair characterization,” Miller said. “We were putting them in a position to take policies out. We were taking it apart at that point.”

Even so, Miller said her office has been taking more aggressive oversight in recent months because so many owners are draining capital out of their insurance companies.

She said the agency is reviewing companies’ financial arrangements more closely and is more apt to order owners to infuse cash into flagging companies.

She also said the OIR is no longer willing to divert large numbers of homeowners covered by Citizens into new insurance companies, a practice that helped some questionable companies instantly generate business.

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