Looters and Thieves Playing Insurance Lotto


A young dealmaker who fashioned himself to be a fusion of Jordan Belfort and Warren Buffett decided to buy a few insurance companies, and use their marketable assets (known as surplus) to make himself some moe-nay.

This kid, Alexander Chatfield Burns, cheated his way under the A-head in the Wall Street Journal when his mini-empire collapsed around his head, while he made a hasty exit through Bellevue’s psych ward to Bray’s Island Plantation near Charleston, South Carolina.  And he’s only 28 years old.

How did he pull it off?

First, there’s nothing wrong with buying insurance companies, especially if you can identify the ones with lots of surplus, who aren’t particularly good at making a profit on premiums.  Warren Buffett built an empire on GEICO’s back.  It’s no secret that using OPM* to leverage purchases yields a higher return than throwing your own cash into a deal.

But there’s a public interest at work with insurance companies.  People buy insurance to protect against losses, and therefore when losses occur, they expect their insurer to pay up in claims.  This is why surplus is invested in stable, marketable securities like blue-chip stocks and low risk bonds.

Hucksters and charlatans abound in the world (emails from Nigeria promising $1 million if you’d only pay a few thousand in “administrative fees”), but America is supposed to have protection against this kind of thing, right?  Right?

I’ve spent the better part of the last two decades dealing with insurance executives, regulators, and their ilk.  There’s a lot of top-notch people in the industry, but there’s also some bottom-feeding shysters, and a whole lot of newbies with cash who’d love to make a fortune in insurance.

Newbies with cash is really the problem.  I’ve seen a guy come in, start an insurance company out of pure chutzpah and balls, using other people’s money, and do every possible thing wrong.  Wrong as in illegal, corner-cutting, regulator-baiting stuff like staffing call centers with people who don’t happen to be licensed agents.  I’ve seen the regulators some in and finally shut the operation down, bar him from running it, and only allow the company to do business when the problems are fixed, with new executive leadership (and they’re doing well now).

The lesson here is that the newbie with cash thought that because he had his picture with the governor taken, and was pretty loose with his cash contributions, he’d get away with whatever he wanted.  In some states, this doesn’t work (Texas usually being one of them).  This kid, Burns, was only one step smarter than other hucksters:  he moved the domicile to Delaware and changed the company name, thus avoiding the peering eyes of the TDI.

As for Burns, his companies imploded right under regulators’ noses.

Regulators seized control of the two insurance companies last April. One in Delaware now is being liquidated, while the other in Louisiana has been sold.

Louisiana Insurance Commissioner James Donelon said his department “let [its] guard down” in approving Mr. Burns’s acquisition of Imperial Fire and Casualty, which it seized less than a year later. “We were just not aggressive enough in our scrutiny of this transaction.”

I am a fan of Federalism, and a proponent of the Tenth Amendment.  States have the right to regulate insurance, and the federal government doesn’t.  Companies like the now-defunct Freestone Insurance Co., and Imperial Fire & Casualty are casualties of the multi-state nature and uneven regulation of insurance.  In fact, insurance companies go insolvent, into receivership or liquidation more often than you might think.  One bad bet can sink a small company and if there’s no buyer, the state can come in and sell off everything.

But maybe it’s time for states to work together better.  On the commercial side, A.M. Best and Demotech rate insurance companies, but there’s really no pool of data or who-vetted-whom for regulators.  Having former insurance commissioners and governors on your board looks legit to most regulators, so states make all kinds of assumptions.

Regulators spend their time poring over The Travelers’ actuarial reports, GEICO’s impossibly convoluted auto rating, and Allstate’s property insurance peek-a-boo (in a state, out of a state), versus actually vetting people who run and own the plethora of small and medium-sized companies out there.

Buyers of insurance companies are supposed to undergo thorough background checks by state insurance departments to determine their competence, experience and integrity, according to regulators and consultants. As previously reported, the biographical information Mr. Burns filed separately with securities regulators contained exaggerations.

The Texas Department of Insurance was the first to vet Mr. Burns, who was 25 years old when his Southport Lane Management LLC applied in 2012 to take over a struggling workers’ compensation insurer, Dallas National Insurance.

As I said, TDI usually does a pretty thorough job (Louisiana, not so much).  But when you move the company, who is responsible?  Delaware says Texas is, and Texas shrugs.

Maybe it’s time for someone to step up and create a “big data” repository for people involved in insurance transactions.  You know, some mash-up of LinkedIn, Google and A.M. Best data.  Does it really take that long to see if someone’s actual experience matches their résumé, or if the securities they are using to back a purchase are real and marketable?

The federal government spends a thousand times more money and effort tracking down Obamacare violators, choking legal ammunition sales, and targeting 501(c)(4) investigations than they do protecting our insurance premiums from looters.  When insurance companies go belly-up, we all lose, because states have to kick in (tax dollars!) to cover those losses.

As the maxim goes:  an ounce of prevention is worth a pound of cure (when has any government taken that to heart?  But then again, I’m a cynic).

*OPM = Other People’s Money, as opposed to Elon Musk, Citicorp, and GM, who use Government Money.