Note: This visitor publish was ready by Kevin Connor for the American Policyholder Association.
For years, property insurance coverage firms in Florida paid out extreme govt compensation packages and inventory dividends, basically transferring income into insiders’ pockets as an alternative of making ready for future years of hostile underwriting experiences as most insurers do.
Now these identical firms are pointing to the price of fraud and litigation as causes for losses and charge will increase which appear to be a technique to divert consideration away from the affect of mismanagement and company greed. Some proceed to pay out beneficiant money dividends to shareholders at the same time as they file for substantial charge hikes, cease writing insurance policies in components of the state, or look to withdraw from the Florida markets altogether.
To compound the issue, a number of Florida insurers have failed, and knowledge as to why has not been launched to the general public. While the Florida Division of Financial Services is required to launch findings on why insurers failed, nobody appears to have the ability to get copies of those studies. Florida regulation requires the division to launch preliminary findings inside 4 months of being appointed as receiver and likewise a complete report as soon as proceedings have accomplished. One of the few closing studies obtainable on householders insurance coverage firms is concerning the failure of Sunshine State Insurance Company in 2014. The firm reported that as a consequence of an “accounting error,” it didn’t have the required reserves and was positioned into receivership. Sunshine State was later discovered to have shifted thousands and thousands of {dollars} in funds to its guardian firm and subsidiaries, in addition to giant govt bonuses whereas the corporate was on the verge of insolvency. An fascinating element of the required insolvency studies is that the division is required to do an evaluation of the effectiveness of the Office of Insurance Regulation’s oversight of insurance coverage firms which have later failed. Some have speculated that that is the rationale why these studies look like suppressed.
Little consideration has been paid to this facet of Florida’s insurance coverage market: Insurance executives lined their pockets for years as an alternative of working the businesses responsibly and increase enough reserves and at the moment are pointing the finger at customers, legal professionals, and roofers. We have seen questionable statistics typically repeated to assist this concept, however nobody has produced validation or verification.
Regulatory oversight is meant to guard towards insurance coverage firms being aggressively stripped of money and reserves, comparable to via limits on dividends. Florida’s regulators seem to have been inadequate in retaining insurance coverage firms from being run like private piggy banks or having funds in years when losses had been low.
The following are three examples of insurance coverage firms that presently write a major share of householders insurance coverage insurance policies in Florida and have paid out extreme compensation packages and dividend funds.
These firms are highlighted partially as a result of they’re publicly traded, which signifies that their compensation packages and dividend funds are disclosed and, partially, as a result of their payouts have been extreme.
The beneath usually are not complete analyses of the compensation and different enterprise practices of those firms or these of the trade as an entire. They are supposed to provide a window into a number of the methods during which prime insurance coverage executives in Florida have stripped money out of their firms with no eye towards long-term viability.
I. Heritage Insurance: Former chairman raked in $27 million in compensation and cashed in on $19 million in inventory in a single yr, averaged practically $10 million per yr in compensation
Heritage Insurance is a comparatively new property insurance coverage firm that was based in 2012 and had its preliminary public providing in 2014. After an preliminary interval of speedy progress, thanks largely to a sweetheart cope with the state of Florida and years with out main storms, the corporate has been experiencing vital losses over the previous two years, not too long ago stopped writing insurance policies in Florida, and is trying to depart the market. A latest Tampa Bay Business Journal headline says all of it: “Heritage Insurance can’t exit Florida’s property market quickly enough as losses mount.”1
Before these losses started mounting, the corporate paid outlandish sums to its prime govt – former chairman, chief funding officer, and co-founder Bruce Lucas.
Between 2013 to 2020, the corporate paid Lucas $78 million in compensation, a median of practically $10 million per yr, together with $27.2 million in 2015. This is greater than the CEOs of AllState, Progressive, and Travelers made in 2021, all of that are a lot, a lot bigger than Heritage. The smallest of those firms when it comes to market capitalization, Allstate, presently has a market cap 800 instances bigger than Heritage Insurance ($35 billion in comparison with $43 million). Even on the top of Heritage’s inventory value, in 2015, Allstate’s market cap was 40 instances bigger than Heritage and paid its CEO half as a lot.
Much of the compensation paid to Lucas was within the type of money – about $58 million of the $78 million complete, or 75%. This is a comparatively giant money share for an govt compensation package deal. It additionally signifies that Lucas was in a position to strip quite a lot of wealth out of the corporate earlier than its inventory value declined since he was not paid within the type of inventory.
Table I: Bruce Lucas Compensation from Heritage Insurance, 2013-20202
Additionally, Lucas bought substantial preliminary Heritage shareholdings the yr after the corporate’s IPO. Over the course of 2015, Lucas bought practically $19 million value of inventory, greater than half of his complete holdings on the time. The inventory value on the time averaged $22 and hit its all-time peak throughout this era. It is presently buying and selling at $1.65. If Lucas had held onto his stake fairly than promoting it, it could be value simply $1.4 million, 93% lower than what he bought it for in 2015.
Lucas’s $27 million compensation package deal in 2015 made headlines, partly as a result of the corporate requested a 15% charge hike in 2016.3 But Lucas was in a position to promote the $19 million in present shareholdings quietly (and in accordance with a plan agreed upon with the corporate in March 2015 to keep away from insider buying and selling costs4). The inventory he bought was principally paid again to him, once more, by the corporate, as a part of the $27 million pay package deal: he bought 850,000 shares from March via July of 2015 and acquired 750,000 shares from the corporate in November 2015.
Table II: Bruce Lucas’ $19 million in Heritage inventory gross sales (2015)5
Lucas stepped down with impeccable timing in November 2020, simply as storm-related losses started choosing up. Since he stepped down, the corporate has reported seven straight quarters of losses, together with a $48 million loss within the third quarter of 2022.6 The firm’s inventory value is down about 85% since he left the corporate.
Support from the state of Florida was key to Heritage’s progress in its early years. In 2013, when Heritage was nonetheless a startup and Lucas was nonetheless Heritage CEO, Heritage was in a position to purchase $52 million in insurance policies from Citizens in an uncommon deal that didn’t undergo the usual approval course of. Florida lawmakers questioned whether or not the corporate had acquired favorable therapy as a consequence of its $110,000 in contributions to then-Governor Rick Scott.7
In a latest podcast interview, Lucas described how essential this was for the corporate’s progress and subsequent preliminary public providing: “We had a lot of things happening that were very positive. We had Citizens Insurance, which is the state-run insurer, had 1.5 million policies and they’d let you come and just cherry pick whatever you wanted, right? Just take it out. So you could instantly get hundreds of millions in revenue…”8
In the identical interview, Lucas bragged that “by every metric, when you look at Heritage, it was an absolute home run,” and that it booked a revenue yearly he was chairman, together with $500 million in pre-tax income.9
Lucas didn’t tackle the mounting losses the corporate has skilled since his departure.
Lucas had been a chapter lawyer for Enron and a hedge fund supervisor previous to founding Heritage. He is now the CEO of Slide, an insurance coverage know-how startup. The firms have a proper partnership, which Lucas referred to as “phenomenal” in the identical podcast cited above. He cited it as a vital purpose Slide was in a position to elevate $105 million in a Series A fundraising spherical.10
Florida regulators awarded Slide Insurance $400 million in insurance policies from St. Johns Insurance after that firm went bancrupt earlier this yr. The transfer got here below fireplace to the purpose the place trade insiders spoke out towards it publicly, arguing that the corporate had acquired a sweetheart deal.11 Slide and Heritage gave a mixed $190,000 to Florida CFO Jimmy Patronis in 2022.
Despite its present woes, Heritage had till not too long ago continued to pay a considerable dividend of $0.06 per share per quarter, or $0.24 per yr. This quantities to almost $7 million a yr and a dividend yield of roughly 15% (which means that 15% of its market capitalization was paid out as dividends on a yearly foundation). The firm elected to not make a dividend cost in August 2022.
Lucas made far more cash than different prime executives at Heritage throughout his time there, although they nonetheless acquired substantial pay packages. Richard Widdicombe, President and CEO throughout Lucas’s time as chairman and chief funding officer, made $7.6 million in 2015, and routinely made $3 million per yr, a lot of it paid in money.
II. United Property & Casualty / United Insurance Holdings Corp: $10 million in dividends every year, together with $4 million in dividends to CEO
United Property and Casualty, the principle working subsidiary of United Insurance Holdings, is presently within the means of withdrawing from and winding down its enterprise in Florida, Louisiana, and Texas. Its inventory is now buying and selling at simply $0.33 per share, down from $22 in 2018 and a excessive of $27 in 2015. Recent press studies counsel that Hurricane Ian has pushed it to the brink of failure.12
UPC’s guardian United Insurance Holdings Corp., continued to pay a $0.06/share quarterly dividend, greater than $10 million a yr, at the same time as its inventory value slid dramatically. It lastly stopped declaring dividend funds within the second quarter of 2022.13 Its present market capitalization, $13.85 million, just isn’t far more than its dividend funds in 2021, $10.3 million.
United Insurance CEO Daniel Peed is paid a comparatively low wage (he made $180,600 in 2021),14 however he owns 40% of the corporate’s frequent inventory. This signifies that the corporate has been paying him $4.2 million per yr in money since 2017, when the corporate was shaped out of a merger. He doesn’t look like reinvesting that within the firm by buying extra inventory.
Greg Branch, a longtime director and former chairman, additionally has a large stake within the firm and is making about $550k a yr in dividend funds. Branch was non-executive chairman and CEO of a predecessor firm and had a really beneficiant compensation package deal when he served in that position.
The beneath desk exhibits estimated United Insurance Holdings dividend funds to Peed, Branch, and all administrators and officers as a gaggle. Notably, the corporate is majority-owned by administrators and officers. Payments to executives and administrators are estimated based mostly on the variety of shares they personal in line with the proxy assertion for that yr.
Table III: United Insurance Holdings Dividend Payments, 2017-202115
Peed solely turned CEO in 2020 however had joined the corporate as vice chairman in 2017 when United and the corporate he had been operating/owned largely, American Coastal, went via a merger. Peed had remained CEO of one other firm, AmRisc, which is partially a subsidiary of Truist (previously BB&T), and gives underwriting providers to American Coastal. Peed additionally owned practically 8% of AmRisc. Until not too long ago, United paid AmRisc commissions of about $100 million a yr.16 Peed stepped down as AmRisc CEO in December 2018 and divested his stake. UIHC continues to rely upon AmRisc (significantly for business residential) for underwriting/agent providers. Peed’s insider relationship with AmRisc raises questions of profit-shifting, although additional evaluation is required.
III. Universal Property & Casualty / Universal Insurance Holdings: Massive pay packages of $14-$25 million for its former CEO, $25 million in dividends every year
Universal Insurance Holdings’ primary working subsidiary, Universal Property & Casualty, is Florida’s largest property insurance coverage service. The firm’s monetary situation has declined considerably over the previous yr: it posted a lack of $48 million within the fourth quarter of 2021, year-over-year decreases in internet revenue within the first two quarters of 2022, and a internet lack of $72 million for the third quarter of 2022.17 Its third-quarter loss was pushed by an estimated lack of $1 billion ensuing from injury brought on by Hurricane Ian.
Universal’s inventory is now buying and selling at $10.99 per share, down 40% from its January 2022 inventory value and down 77% from its 2018 peak of $48.55.
Executive compensation packages at Universal had been extraordinarily inflated for a few years. Its former CEO, Sean Downes, acquired annual compensation packages that reached as excessive as $25 million (in 2015), totaled $107 million, and averaged $13.7 million throughout his time as CEO. Downes has continued to obtain compensation in 2020 and 2021 in his position as govt chairman. Much of this compensation was paid in money, together with $17 million in wage and $38 million in non-equity compensation.
As mentioned above within the part on Heritage and Bruce Lucas, these compensation quantities are greater than CEOs at giant insurance coverage firms which are many instances the dimensions of Universal.
The desk beneath exhibits Downes’ compensation packages for his years as CEO (2013-2019) and govt chairman (2020 and 2021).
Table IV: Sean Downes’ Compensation as Chairman and CEO and Executive Chairman, 2013-202118
Notably, Downes took over as CEO in 2013 after its prior CEO, Bradley Meier, stepped down. That yr, the corporate had been fined for numerous vital violations, together with improper delays and denials.19 Meier’s compensation packages additionally bumped into the thousands and thousands.
The present CEO of Universal is Stephen Donaghy. Donaghy’s compensation packages as CEO have been considerably decrease than Downes, however are nonetheless vital, together with $3.3 million in 2020 and $3.5 million in 2021.
Much like Lucas, Downes bought a considerable quantity of Universal inventory through the years, together with over a million shares from 2013-2018, throughout a interval when few main storms hit Florida, and Universal inventory was surging. Downes cashed in on an estimated $19 million value of inventory throughout that interval and has bought an estimated $29 million value of inventory since 2007.
The beneath desk exhibits these estimated figures. The worth of inventory bought is calculated through the use of an estimated inventory value for every given yr, which is the common of the excessive and low inventory value for that yr. Determining the precise worth of Downes’ inventory gross sales on the time of the sale is feasible however would require discovering the worth for every of the 77 transactions.
Additionally, the desk beneath solely captures gross sales of inventory – another sorts of disposals of inventory, together with presents, had been excluded for the aim of simplicity. A extra complete evaluation would probably produce the next complete.
Table V: Sean Downes Stock Sales and Estimated Value, 2007-2022***20
Notably, Universal additionally pays a considerable dividend every year, about $25 million every year. These funds have totaled practically $208 million since 2013, the yr Downes turned CEO. Downes himself has been paid an estimated $14.4 million in dividends since 2013 – between $1 and $2 million per yr. Directors and officers as a gaggle have been paid an estimated $24.4 million.
Despite its present monetary woes, Universal continues to pay its dividend and has proven no indicators of suspending its dividend cost.
Table VI: Universal Insurance Holdings Dividend Payments, 2013-202121
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1 https://www.bizjournals.com/tampabay/news/2022/11/10/clearwater-property-insurer.html
2 Sources: Proxy statements for Heritage Insurance obtainable on EDGAR: https://www.sec.gov/edgar/browse/?CIK=1598665&owner=exclude
3 https://www.palmbeachpost.com/story/news/state/2016/06/27/rate-hike-greedy-insurance-ceo/6881037007/
4 See footnote 1 for an evidence of the plan: https://www.sec.gov/Archives/edgar/data/1552968/000089924315001146/xslF345X03/doc4.xml
5 Sources: Form 4s filed by Bruce Lucas in 2015, obtainable on EDGAR: https://www.sec.gov/edgar/browse/?CIK=1552968
6 https://www.bizjournals.com/tampabay/news/2022/11/10/clearwater-property-insurer.html
7 https://www.insurancejournal.com/news/southeast/2013/09/27/306476.htm
8 https://alejandrocremades.com/bruce-lucas/
9 https://alejandrocremades.com/bruce-lucas/
10 https://alejandrocremades.com/bruce-lucas/
11 https://www.insurancejournal.com/news/southeast/2022/03/07/657010.htm
12 https://www.bizjournals.com/tampabay/news/2022/11/18/uihc-property-insurance-florida.html
13 https://www.sec.gov/ix?doc=/Archives/edgar/data/1401521/000140152122000112/uihc-20220630.htm
14 https://www.sec.gov/Archives/edgar/data/1401521/000140152122000020/uihcproxy2022.htm
15 Source: Proxy statements for United Insurance Holdings Corp filed with the SEC and obtainable right here: https://www.sec.gov/edgar/browse/?CIK=1401521&owner=exclude
Note: Dividend funds to Peed, Branch, and executives and administrators as a gaggle are estimated based mostly on the variety of shares they personal in line with the proxy assertion.
* It is tough to estimate dividend funds to Peed in 2017, because it was the yr of the merger.
16 https://www.sec.gov/ix?doc=/Archives/edgar/data/0001401521/000140152122000010/uihc-20211231.htm
17 https://www.insurancejournal.com/news/southeast/2022/04/29/665320.htm https://news.ambest.com/newscontent.aspx?refnum=245432&altsrc=23
18 Source: Proxy statements for Universal Insurance Holdings Corp filed with the SEC and obtainable right here: https://www.sec.gov/edgar/browse/?CIK=891166&owner=exclude
19 https://www.insurancejournal.com/news/southeast/2013/10/09/307620.htm
20 Source: Insider transactions for Sean Downes, obtainable right here: https://www.sec.gov/cgi-bin/own-disp?action=getowner&CIK=0001287040
*** Note that worth is estimated through the use of an estimated inventory value for every given yr, which is the common of the excessive and low inventory value for that yr. Determining the precise worth of the inventory gross sales would require going via the 77 Form 4s that these gross sales are reported on to search out the sale value for every transaction. Downes’ Form 4s can be found right here: https://www.sec.gov/edgar/browse/?CIK=1287040
21 Source: Proxy statements and 10-k’s for Universal Insurance Holdings Corp filed with the SEC and obtainable right here: https://www.sec.gov/edgar/browse/?CIK=891166&owner=exclude
Note: Dividend funds to Downes and executives and administrators as a gaggle are estimated based mostly on the variety of shares they personal as reported in that yr’s proxy assertion.