BusinessReport.com

John Wortman might be the only CEO you’ll ever meet who wants to lose as many customers as possible.

He runs Louisiana Citizens Property Insurance Corporation, the nonprofit state-backed insurer of last resort for residents and business owners who can’t get property insurance in the private market. Citizens has about 125,000 policies; the smaller that number gets, the less exposure taxpayers have the next time a hurricane hits.

Wortman has run private insurance companies and the consulting firm Wortman Capital Associates in Florida. When hired to head Citizens in April 2007, he took over an organization that couldn’t balance its books or submit reliable numbers for an audit, thanks to an expensive software system that didn’t work. Former CEO Terry Lisotta is accused of theft for spending funds from Citizens and two other state insurance groups on his daughter’s prom party, hunting trips and other personal expenses.

Today, Citizens faces multiple class-action lawsuits; some say the company didn’t handle Katrina and Rita claims in a timely fashion, and another alleges it failed to pay contractor overhead when required. The suits could end up costing hundreds of millions of dollars.

Now the good news: Citizens can at least balance its checkbook, and state efforts to encourage a healthier private insurance market have had some success shrinking Citizens to pre-Katrina levels.

“There will probably always be a Louisiana Citizens,” Wortman says. “My goal is to get it to 100,000 policies. We would truly be a residual market then.”

1. So how did you get this job?

I’m at my desk in Florida one day and answered my phone and the commissioner said, “John, my name’s Jim Donelon, and I’m the insurance commissioner in Louisiana. I got your name from some people in Chicago, and they say you do messes. Could you come over here and talk to me about a mess?” The books hadn’t been reconciled in three years.

2. How did Citizens get to be such a mess?

It was just lack of insurance experience. And then the [2005] storms hit; when the emergency hits, the organization turns tactical. You have everybody report to work in the morning, and say, “Our mission is to settle claims and issue policies. When we can’t stand up any more, we’ll go home and come back the next day and do it again.” The work where you build the methods and procedures just didn’t get done. We’ve tried to put a focus on building proper controls in the organization.

3. Why was a faulty software system put in place?

The company that built the system [Strategic Business Solutions] had done a small job for PIAL [Property Insurance Association of Louisiana, which ran Citizens at the time], and they added this project to build a policy management system from the ground up. I don’t know why the decision was made to build it from scratch, but they had a relationship with this company from the other project. This thing has cost us over $15 million over those four years. If I do some simple math, that’s about 17 full-time people at $100 an hour working to build a single state insurance processing system that doesn’t work.

4. How have things changed since?

Historically, Citizens outsourced everything. PIAL was engaged to build a system and hire multiple service providers. In August of 2007, we made the decision to separate from PIAL and take over the management functions ourselves. We hired some experienced insurance people to help us with the process, and I think we’ve made some improvements. Our 2005, 2006 and 2007 financials are all complete and audited. The 2008 financials were completed and filed on time, and they’re going through the audit process as we speak. We do have monthly budgets, we do monthly analysis of our performance to clients. We’ve done our May financials, so we’re current.

5. Where does Citizens stand on dealing with Katrina and Rita?

Katrina was 65,000 claims and Rita was about 15,000 claims. We still have a couple thousand open, plus some class-action lawsuits that are open, so we’re working hard to get rid of those. We have a program called “Retire the Ladies: Katrina and Rita.” We’re trying to put that stuff behind us.

6. What about Gustav and Ike?

We made it through Gustav and Ike without an assessment. We had about 51,000 Gustav claims and about 4,000 Ike claims. We’ll spend about $325 million on Gustav. We did have reinsurance in excess of $200 million, and we took care of that without an assessment on policyholders or the industry. We’ve closed 99% of the Gustav and Ike claims.

7. How does the condition of the bond markets affect Citizens’ ability to pay off that $1 billion debt?

We had $700 million in fixed interest-rate bonds, and $300 million in auction-rate bonds. The reason the auction-rate bonds were done is the interest rates were very low and the auctions were very popular, and you could pay them off early without penalty. The logic was pretty good at the time, but then the auction-bond market just died. We replaced those with fixed interest-rate bonds, and that saved us about $1.5 million a month. The industry collects the assessment on policyholders, and once a quarter they send it to our bond trustee; it’s not co-mingled with our funds at all. And you, as a payer of the assessment, are then entitled to a tax credit on your state income tax. A lot of people aren’t taking that credit as they should.

8. Why wasn’t the incentive program more successful? [Only about $30 million of a $100 million incentive fund meant to lure in new property insurers was claimed.]

Other people came in and participated in the takeout program [to take policies out of Citizens] but didn’t want to be bound by the rules of the incentive money. I think it was successful. I think it played well to the industry that the state was willing to help the private sector.

9. Citizens is facing five class-action suits. How much might those cost? Might they lead to more assessments?

The judge in the Jefferson Parish class action has issued a judgment of $92 million. Obviously, we’re going to appeal that. We’ve had some settlement talks on the suit in Orleans Parish. If everything turned out to be the worst case, my guess would be we would negotiate some settlements in the $150 million range for everything. It wouldn’t be a big assessment. My guess is we would have to raise about $20 million a year, which would cost about another 1% or 2% on the policy premium. So today the assessment is 5%; it would have to go to 6% or 7%.

10. What happens if we have another bad storm?

We think we could take a half-billion dollar storm without any kind of assessment. Gustav was over $300 million. Katrina is going to cost about $1.3 billion. But if Katrina hit today, it would be less than a billion dollars [due to factors like improved levees, tougher building codes and fewer people living in vulnerable areas]. If we had another Gustav, we could take it without an assessment.