Louisiana welcomed small insurers looking to make money fast. Then it all went bad.

But there was another key factor in nearly all of the failures, documents show, one that was squarely within the insurers' 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 — or sending as much cash as possible to affiliates, leaving less money on hand to pay claims and buy reinsurance.

"There is money to be made in insurance, even when it appears things are tough," 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 policies from Citizens, the insurer of last resort, and sometimes grant money to boot.

The state's embrace fueled rapid growth of the companies. It also tended to concentrate their policies in risky areas along the coast — 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, state guaranty association whose bills are ultimately picked up by taxpayers. 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 questions about Louisiana's strategy.

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 $476 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's not true of their affiliates. That makes it nearly impossible to tell whether the money paid to them was well-spent — or how much of it went to the company's principals or its investors.

"What's the purpose of these insurers?" Magor, of Weiss Ratings, asked rhetorically. "Is it really to offer a service that makes a reasonable margin on their policies and provide a service to policyholders and benefit from that?

"Or is it to extract as much money as possible during the good years and pray they don't have any bad ones? If they do, they can walk away with a little cash and be very happy anyway."

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't 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 "nobody was sucking money out of Southern Fidelity while I was there."

He blames the firm's 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's too hard to extract profits from a regulated entity.

"If the profit is in the insurance company, you can't get that money to stockholders," he said. "Regulators won't approve that. If you trust the government, you're a fool."

'Manipulated and deceived'

The increasing presence of companies that rely on affiliates doesn't by itself explain Louisiana's market crash. State regulators note that several firms with similar structures didn't 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 — 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' policies were often concentrated in risky areas.

And that had devastating long-term consequences. In the end, nearly three-quarters of the roughly 130,000 policies Citizens 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 — a rate that an insurance lawyer called "fatal," and far outside the norm.

The vast majority of the firm's policies were in Louisiana's coastal zone. The firm didn't 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' books after its collapse, they discovered the firm should have been under their supervision much earlier. The Insurance Department said the firm "misled, manipulated and deceived" 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' failure, "one of the largest in Louisiana's history of insurance," left the state with an "astronomical" volume of unpaid claims, the Insurance Department's 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.

'Them boys love to hunt'

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 "never lived in the plantation."

But his own lawyers claimed in a lawsuit that Graganella and his family lived there and "treated Oldfields as their personal residence" 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.

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's failure to inadequate premium rates and inability to get reinsurance, among other things.

The report didn't mention affiliate transactions. But it did mention the hunting lodge — pointedly. Investigators wrote that the property provided no income to the company, while costing nearly half a million dollars a year in maintenance alone.

"The department is examining whether [Southern Fidelity] took active measures to conceal these costs from (regulators)," 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.

"The plantation 100% funded itself," he said. "It was also a way that got a lot of Louisiana business, because them boys in Louisiana love to hunt, don't they?"

'Relatively few losses'

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's parent prepared to go public, it told investors it had a "unique opportunity" in Louisiana. And while it noted there were risks, the firm told investors that in the decade after Katrina, there had been "relatively few losses arising from tropical storm activity," which meant reinsurance was plentiful and cheap.

"Although 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," 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's claims to investors that hurricanes were rare — and that reinsurance was cheap and plentiful — 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 was out of business too.

FedNat's CEO, Michael Braun, blamed the failure of Maison's Louisiana business on "the unprecedented number of catastrophe weather events," along with a "hardening reinsurance market" for the company's 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's not ideal to have companies organized that way.

But Donelon, who left the insurance commissioner's post this week after 17 years in the job, said the state can't "micromanage" insurers' 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 — as opposed to overpaying affiliates — 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.

"It is easier to get money out of an (affiliate) than it is from an insurance company," Donelon said. "It's legal for them to operate that way."

Graganella, the former CEO of Southern Fidelity, agreed with that assessment. He said he structured the company with the affiliate model precisely because it's easier to reward investors that way.

"People that run companies deserve a yield on the profit because they invest money and work their asses off," Graganella said.

Donelon noted that many firms that later failed might have had a "couple million dollars more" of capital available to buy reinsurance or pay claims if it wasn't 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's 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.

"When there are no storms, you have years of growth, everybody looks like a superhero," Cantilo said. "At some point, that house of cards will collapse."

Printing money

Accounting guidance followed by Louisiana regulators say affiliate transactions are "subject to abuse" because they're not arm's-length transactions: The companies are essentially doing business with themselves.

Watching such transfers is an "area of emphasis" 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 "siphoning money" 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't 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.

"The fear is that if this type of structure isn't allowed, these companies don't exist," Guerin said. "If they don't exist, who's going to step in and write the policies they were writing?"

Four of the current top 20 home insurers in the state use the affiliate model.

Guerin said the agency's focus now is on making sure all insurers in Louisiana have adequate reinsurance. He said nothing will prevent further insolvencies if there's another hurricane at the scale of Ida.

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.

"When you're giving 80% of your premium to reinsurers, and you're giving 40% to (affiliates), there's just not a lot left over," he quipped.

Birnbaum believes the affiliate structure contributed "immensely" to the problems in the property insurance market in Louisiana and Florida.

Such smaller insurers have found a way to "print money," 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 — the only thing that could protect these firms — is so volatile, he said.

Sustainability may not be the point, however.

"The executives and parent (company) walk away," Birnbaum said. "The taxpayers are on the hook. ... But the executives continue to make their money."

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