While Florida insurers claimed to be losing money in the wake of hurricanes Irma and Michael, their parent companies and affiliates were making billions of dollars, according to a study obtained by the Herald/Times.
The start of the state鈥檚 insurance market meltdown came on the heels of those two storms between 2017 and 2019, as companies justified big rate increases to cover their losses.
But those financial hardships don鈥檛 tell the full story, that has never been made public and was released to the Herald/Times after a two-year wait for public records.
The report, the most in-depth dive into the byzantine finances of Florida鈥檚 homeowners insurance market, reveals that as the insurance market was ailing and companies were losing money, executives distributed $680 million in dividends to shareholders while diverting billions more to affiliate companies.
Executives with most Florida-based insurers were removing so much money from their companies that they violated state regulations, the study鈥檚 author concluded.
The result left some insurers financially weaker 鈥� and potentially unable to pay claims 鈥� heading into the depths of the state鈥檚 insurance crisis.
State lawmakers never saw the report.
The state鈥檚 then-insurance commissioner and Gov. Ron DeSantis focused on legal reforms making it harder to sue insurers.
And regulators have not repeated the study since, despite .
The findings are a 鈥渟moking gun鈥� that confirms what , said Doug Quinn, executive director of the watchdog American Policyholder Association.
鈥淭hese companies are crying poverty in order to raise premiums or justify insolvency: 鈥業t鈥檚 litigation, it鈥檚 fraud,鈥樷�� Quinn said. 鈥淭his is money shifting from their left pocket to the right, and crying poverty while their right pocket bulges.鈥�
State regulators say the insurance market is different today. In recent years, Florida Insurance Commissioner Mike Yaworsky . This year, he鈥檚 asking lawmakers to change how insurers pay affiliates.
While the report is an incomplete picture of insurers鈥� money, Florida鈥檚 Office of Insurance Regulation said in a statement, the study affirms that the reforms the office wants are warranted.
But Paul Handerhan, founder of the trade group Federal Association for Insurance Reform, whose members include insurance companies, disputed the idea that executives were deliberately moving money around.
鈥淭his notion that they鈥檙e fleecing their policyholders and offshoring the money to their affiliates is just not happening,鈥� Handerhan said. 鈥淣one of these guys did this as a strategy.鈥�
READ MORE: Will a lower insurance rate lead to lower premiums for Florida homeowners?
Two-year wait
During debates in the Legislature over how best to respond to the insurance crisis between 2018 and 2023, some lawmakers asked what role affiliate companies played.
Rep. Hillary Cassel, R-Dania Beach, said lawmakers and observers had a lack of data about affiliates, known in the industry as 鈥渕anaging general agents,鈥� when they were voting on legislation.
鈥淎ll of us informed on the issues knew [managing general agents] were a problem,鈥� said Cassel, a former lawyer for insurance companies who now sues them.
The Office of Insurance Regulation said in a statement that the study was not given to lawmakers because it was 鈥渘ot a formal examination report.鈥� It was produced months before lawmakers met in emergency legislative sessions in 2022 and left in a 鈥渄raft鈥� status.
"Our office does not release every internal analysis of companies to the Legislature,鈥� the office said.
The Herald/Times requested the report in November 2022, but the office did not turn over the executive summary until December 2024.
The affiliate structure is nothing new in Florida.
Profits of insurance companies are limited by regulators to about 4.5 percent 鈥� hardly enticing to investors, considering the risk of hurricanes.
However, insurance executives in Florida have used financial workarounds to reward investors and themselves.
While the profits and executive compensation of the insurance company are capped, the profits of affiliate and parent companies are not.
So executives create sister companies that charge the insurance company for basic services, such as claims handling, underwriting, accounting and issuing policies. (Large national insurers typically handle all of those services internally.)
Arrangements between insurance companies and affiliates must be approved by the state, and regulations say they must be 鈥渇air and reasonable,鈥� which isn鈥檛 defined in state law.
Company structures can appear like a spiderweb of entities. When FedNat Insurance went insolvent in 2022, it was .
When Southern Fidelity Insurance dissolved that year, it was , and its holdings included a hunting lodge maintained at a cost of $485,000 per year. State officials were investigating whether the company 鈥渢ook active measures to conceal these costs鈥� from regulators, according to an October insolvency report.
Most insurers in Florida have similar arrangements, which are enormously lucrative for some executives who were the .
But this type of setup can be easily abused and requires greater regulatory scrutiny, according to the .
That鈥檚 because the owner of the insurance company also owns the affiliates, creating an incentive for executives to overcharge the insurance company for services.
A deeper look
Such abuses have been repeatedly found by state officials as the reason why companies go insolvent. In one 2009 insolvency, auditors wrote that executives were 鈥渟tripping the company of cash鈥� as it was going out of business. The ratings agency AM Best last year found that affiliate relationships were the third-leading cause of insolvencies nationwide between 2000 and 2022, .
Still, it鈥檚 unlikely Florida regulators knew the full scope of insurance money-shifting arrangements until 2021, when lawmakers to demand more information from insurers and affiliates.
Using that power, the state鈥檚 then-commissioner, David Altmaier, paid a Connecticut-based consultant nearly $150,000 to parse through the information the companies provided. Several companies turned over incomplete data, according to the study.
Between 2017 and 2019, the insurers in the study (minus a couple of outliers) showed a net loss of $432 million.
Their affiliate companies showed a net income of $1.8 billion.
With all 53 companies included, the industry recorded $61 million in net income, and affiliates made about $14 billion in net income, according to the study. Those figures likely include national carriers that also provide auto insurance.
that the affiliates of Florida-based companies were profitable even after they injected $485 million back into the insurers and waived $208 million in fees during the three years, steps made to help keep the insurers afloat.
In the author鈥檚 opinion, 19 of the 30 Florida-based companies that provided data were paying fees to their affiliate companies that were 鈥渘ot fair and reasonable.鈥�
The numbers in the study are 鈥渆ye-popping鈥� and raise questions about why regulators would allow such financial arrangements, said Birny Birnbaum, executive director of the Center for Economic Justice and a former chief economist at the Texas Department of Insurance.
"It鈥檚 unclear why [the Office of Insurance Regulation] isn鈥檛 doing anything about it,鈥� Birnbaum said.
Regulators this year are asking lawmakers to define 鈥渇air and reasonable鈥� to include the actual cost of the service provided, the overall health of the insurer and how much in dividends were paid out. Regulators asked for that in 2023 , claiming it would 鈥渦pset the apple cart鈥� of Florida鈥檚 insurance industry.
The office鈥檚 proposed legislation would also require fees to affiliates be paid in dollar amounts, instead of percentages. Affiliates will typically charge the insurance company fees of between 20% and 34% of premiums, which results in more money for the affiliates when premiums go up.
The office has canceled or modified some companies鈥� agreements. In 2023, for example, one company鈥檚 contract with an affiliate was canceled after regulators discovered that the affiliate was charging the insurer additional fees on top of the cost of the services being provided, according to the office.
READ MORE: FEMA to Florida cities hit by hurricanes: Rebuild higher or lose your flood insurance
This article originated appeared in the and the .
