Three ways Louisiana’s failed insurers set off regulators' alarm bells – or should have

In the years after Hurricane Katrina, Louisiana welcomed small, regional insurers to fill in the gaps left by bigger insurers that fled the storm-prone southern part of the state.

The state handed the companies huge batches of policies from the insurer of last resort, Citizens, and gave many of them grant money as well. Meanwhile, the insurers were making a series of decisions that raised red flags – or should have.

Starting in 2021, a dozen insurers failed in Louisiana. That put more than 40,000 people in the unenviable position of trying to get the money they were owed from a slow-moving guarantor. Thousands are still waiting. Even more were forced back onto the rolls of Citizens to pay higher premiums.

Here are three examples of questionable behavior by insurance companies that would later fail.

'Deceiving' loan

According to lawyers for the Louisiana Department of Insurance, Americas Insurance Co.'s failure was one of the largest in the state's history. And, state regulators argue, the firm should have been put under their supervision long before it went under.

The company's policies were heavily concentrated in the path of Hurricane Ida, belying a key tenet of the insurance business – diversifying risk. Like other failed companies, Americas grew its premiums rapidly.

But those aren't the reasons regulators said Americas should have been in state supervision.

Instead, the Insurance Department's lawyers say the company "misled, manipulated and deceived" regulators by taking out an $8 million loan to pay off long-running debts. Those debts dated to years earlier, when First NBC Bank – itself a colossal failure – loaned it money. The problem: Americas wasn't forthcoming with regulators that it had pledged all of the company's assets to cover that loan, according to the state.

"Because of defendants' gross negligence, if not intentional conduct, (Americas) was still operating on Aug. 29, 2021, when Hurricane Ida hit Louisiana," the state's lawyers wrote. "Had the actual and accurate terms and impact (loan) been truthfully disclosed to regulators, (Americas) would have been placed under the control of an insurance receiver before it faced any significant claims from its policyholders and creditors that it could not pay."

Americas executives, through attorneys, denied misleading regulators, saying they were forthcoming about the terms of the loan. Former CEO Ray Pate and executive Alexander "Chip" Blondeau also said they relied on the expertise of independent accountants and lawyers in striking the deal. They say the company, like others, failed because of catastrophic weather events.

The state is now seeking to claw back potentially tens of millions of dollars from the firm and its executives to pay off the claims Americas couldn't.

Hunting for business

Southern Fidelity, another of the companies that later failed, made a curious decision to buy a sprawling hunting lodge in the rural outskirts of Tallahassee, Florida in 2014.

Then-CEO James Graganella said at the time that the property, called Oldfields, would host company retreats, employee horseback riding and board meetings. And, he reasoned, it would grow in value over time. The company bought it for $5.7 million, and it included a 6,800-square-foot home, quail courses, bird dogs, horses, a guesthouse, duck ponds and fishing lakes, according to a Wall Street Journal report.

While Graganella told The Times-Picayune he never lived in the property, his own lawyers wrote in a lawsuit that he and his family used the property as a "personal residence" for years.

Graganella defended the purchase in an interview, saying its value appreciated over time.

But Florida officials, who probed the firm after its collapse, raised concerns about the hunting lodge.

"The property produced no income to the company," the Florida Department of Financial Services wrote in an initial insolvency report. "The total maintenance of the property exceeded $485,000 per year, " adding that regulators were trying to determine whether Southern Fidelity "took active measures" to conceal the costs of maintaining the lavish property from them.

Graganella denied hiding payments for the property and said he was forthcoming with regulators.

Shaky ground

Louisiana regulators were already wary of another firm, Lighthouse Excalibur Insurance Co., when the 2021 hurricane season began.

So wary, in fact, that the Department of Insurance took the firm to court and put it into conservation – a process that sometimes leads to a state takeover or liquidation of an insurer.

The action was prompted in part by a state probe of Lighthouse's books. State regulators wrote in an examination of the company that Lighthouse wouldn't turn over its budget or minutes from its investment committee. The state then discovered there was only one person on that committee: the CEO, Patrick White.

"It is recommended that [Lighthouse] put processes and procedures in place to keep minutes of all committee meetings," the report said. "Further, as a best practice, it is recommended that (Lighthouse) have more than one person on its committees."

When Donelon took the firm to court to put it in conservation, he said Lighthouse was losing $6.6 million every month and putting customers at risk.

But two months later, the state released Lighthouse from state supervision after company officials claimed they had lined up investment dollars that would only materialize if it wasn't in conservation. Ida hit two weeks later. By March 2022, Donelon was back in court, taking over the company for good. It is now in liquidation.

Stewart Guerin, head of financial solvency for the Department of Insurance, said Lighthouse failed to honor its part of the deal, which required it to maintain a certain level of capital compared to its risk. When Donelon went to court the second time, in 2022, Lighthouse still hadn't turned over its 2021 financials, state records show.

White, the company's CEO, said the examination of the company was muddied by remote meetings because of COVID. He said the firm added more people to its investment committee to correct the state's finding.

White said he believed the company was going to survive Ida, through its reinsurance "tower" that provided a backstop to claims, for months after the storm.

"By March, we realized it was much larger than our reinsurance tower. That's when the insolvency occurred," he said.