by John Finotti
Updated 9 yearss ago
By early 1996, he had built the business he founded eight years earlier into the state's second-largest workers' compensation insurer, a powerhouse with more than $285 million in premiums. A 20-year veteran of the insurance business, Griffin spotted - and exploited - the potential of applying managed healthcare principles onto workers' comp. He saw the need, before other Florida workers' comp companies, to grow out-of-state and had positioned Riscorp to become a national player in the industry.
Griffin's vision had garnered him wealth, honors and influence. He netted $66 million in cash, and stock valued at more than $450 million, in February 1996 when he took Riscorp public. Later that year, Ernst & Young named him "Florida Entrepreneur of the Year " in its services category. He became a power broker in Sarasota, where he planned to leave his stamp on the city with a signature high-rise headquarters downtown, emblazoned with Riscorp's name and logo, the mythological beast called a gryphon - half-lion, half-eagle - that Griffin seems to view as his own imperial crest. Intended to represent intelligence and strength, with dominion over both earth and sky, the animal also was a legendary symbol of "superbia'' - arrogant pride.
A meticulously groomed man, Griffin also accumulated other trappings of the half-billionaire he had become: An ownership share in the new Tampa Bay Devil Rays major-league baseball team. A taste for fine wines. A gulf-front manse on Sarasota's Siesta Key. A condo in Vail, a home in the Bahamas, a skybox at Florida State football games and a Challenger corporate jet to ferry him around the country.
But in the two years after the IPO, the picture of Griffin's entrepreneurial success became a study in mismanagement and collapse. In 1997, as regulators puzzled over Riscorp's books and shareholders dumped its stock, the Florida Department of Insurance forced Riscorp to sell its insurance business. Today, the company is a corporate shell; Griffin was ousted as chairman and chief executive; he also has been indicted - along with four other former Riscorp executives - for illegal campaign donations.
At 49, Griffin awaits a trial that's scheduled to begin this month. On the advice of his lawyers, he's keeping his views on what happened to him and Riscorp to himself. Some say he blames the media - particularly the Sarasota Herald-Tribune, which covered the Riscorp story aggressively - and former competitors, some of whom prodded Insurance Commissioner Bill Nelson to go hard on Griffin and Riscorp. In Sarasota, where he tends his cherished collection of baseball cards and memorabilia and oversees a handful of real estate deals that includes a gourmet grocery store venture, Griffin can only watch as other companies validate his vision of the future of workers' comp. [See "Riscorp's Legacy," page 56.]
How did so much go so wrong so fast? There's little question that Griffin was well grounded in the workers' comp business. Florida, like most states, requires employers to provide medical benefits and lost wages to injured workers. Employers insure themselves against those costs by purchasing coverage from private insurers like Sarasota-based FCCI Mutual Insurance Co. and Riscorp, or from a state-sponsored assigned-risk pool. Some companies band together in associations that insure their members; and some individual businesses choose to self-insure.
By the time he founded Riscorp in 1988, Griffin had experience in all those sectors. A graduate of Florida State University, he worked as an analyst for the commerce committee at the Florida House of Representatives, where he specialized in workers' comp and health insurance issues. That led to jobs as a lobbyist for the Florida Insurance Council, a trade group, and for Associated Industries of Florida, a leading business-lobby organization that sells workers' comp coverage to its members. He also served as executive director of the state-backed fund that oversees insolvent workers' comp insurers. And he became servicing company president and self-insurance fund administrator at FCCI, the state's largest workers' comp insurer. He resigned in 1986 after a power struggle with the FCCI board of directors. "The board wanted to execute more control than I could handle,'' Griffin told Sarasota magazine in 1996.
Indeed, Griffin, while preferring to operate out of the spotlight, can be brusque and confrontational. In Sarasota, he kept a low public profile, but wasn't averse to butting heads with civic leaders or other business people. Notoriously thin-skinned; he was used to getting his way. "I've always had a problem with accountability,'' he told the magazine in reference to his conflict with FCCI's board of directors.
Griffin had no trouble recognizing opportunity when it knocked, however. State legislation in the mid 1980s had made it difficult for big national workers' comp insurers such as Liberty Mutual to make a profit, and they had begun fleeing the state. By the late 1980s, Griffin saw a hole in Florida's workers' comp market. In 1988, he persuaded the Florida Chamber of Commerce to form a self-insurance workers' comp fund that he would administer through a services firm he called Riscorp. The deal was win-win: The chamber boosted its statewide membership by selling workers' comp policies; in the fund's first year, about 250 employers joined; by 1991, the fund served 3,800. For his part, Griffin collected fees for marketing the policies and handling claims.
In January 1995, he took another step, buying the chamber's fund, now Commerce Mutual, and folding it into Riscorp. At the same time, Griffin made Riscorp the first workers' comp insurance company in Florida to convert from a mutual company - owned by its policyholders - to a stock insurance company, in which Griffin was the sole shareholder. He paid himself handsomely, hauling in $6.3 million in salary and bonus in 1995.
By the beginning of 1996, Griffin was ready to take Riscorp public. The February initial public offering made him wealthy and provided the company with the capital to fuel his plans to expand beyond Florida's borders. Griffin believed that by eliminating the risks of operating in just one state he could propel Riscorp to the front of the workers' comp pack. "We're going to build a fence the competitors won't be able to jump," he told one former associate.
Integral to Griffin's strategy was a managed-care system the company had developed. By mimicking the practices of healthcare insurers - directing injured workers to doctors with whom Riscorp had contracts, for example - Riscorp hoped to keep a lid on its claims costs. One feature of the system was a toll-free, 24-hour hotline called First Call that helped steer patients to Riscorp healthcare providers. "It seemed to us their managed-care capabilities were far better than what we saw anywhere in the U.S.," says Stanley Zax, chairman and chief executive officer of Zenith Insurance Company, the California-based workers' comp insurer that eventually bought Riscorp's insurance business. "They were ahead of their time."
Wall Street swooned over the managed-care approach. At the IPO, investment bankers, led by Smith Barney, valued the company at $19 a share - 38 times the company's 1995 earnings. By comparison, shares of similar workers' comp insurance companies were trading at 13 to 15 times earnings. Smith Barney even assigned one of its healthcare analysts, rather than an insurance analyst, to track and report on Riscorp. The three lead underwriters - Smith Barney, Montgomery Securities and Piper Jaffray - issued buy recommendations on Riscorp stock, and by May 2, 1996, shares hit a high of $24.50. For taking Riscorp public, the underwriters collected $13.5 million in fees and commissions.
Griffin, who drew $1.6 million in salary and bonus in 1996 as Riscorp's CEO, wasn't bashful about profiting from his company in other ways. At one time, Griffin-controlled companies cleaned Riscorp's headquarters building and leased the company six computers, a parking lot and an aircraft. Another Griffin enterprise brokered Riscorp's reinsurance deals. All told, those Griffin companies collected about $2.3 million a year in fees and leases.
The good times
With $128 million from the public offering in the company's coffers, Griffin put Riscorp on the acquisition trail. Riscorp had already bought an Oklahoma company, Self Insurors Service Bureau, in 1994. And in the seven months after the IPO, Riscorp paid a total of $30.7 million for four more companies and gained control of five self-insurance funds, expanding its workers' comp business into Alabama, Georgia, Kansas, North Carolina, South Carolina and Virginia. The company also entered into a joint venture with Blue Cross and Blue Shield of Illinois to underwrite and sell managed care workers' comp insurance. In one year, Riscorp diversified its formerly all-Florida business so that 24% of premiums were coming from outside the state.
The executives that Griffin picked to steer all that growth were energetic, loyal and ambitious. But several of Riscorp's key players had little experience managing a publicly traded insurance company, and Griffin provided stock options and other incentives that put a premium on growth, not caution. One example: Thomas S. Hall, the Riscorp executive directing the acquisition binge, was paid a bonus based on the number - not quality or performance - of the companies he reeled in. Hall, senior vice president of corporate development, got $50,000 for each state in which an acquired company showed a profit. In 1994, for example, Riscorp's purchase of Self Insurors, which proved to be an underachiever, netted Hall a bonus of $280,000, in addition to his $153,500 salary.
Hall had held a similar position at Jacksonville-based Transmark USA, the parent of Guarantee Security Life Insurance Co., which became the biggest insurance company failure in Florida history when it collapsed in 1992 amid allegations of financial fraud. Hall was never charged with wrongdoing in the Guarantee debacle. He had a reputation, however, for overpaying for acquisitions.
Another Griffin hire, James A. "Tony" Malone, was 34 years old and had been director of risk management for Kentucky Fried Chicken before he joined Riscorp in 1990 as vice president of operations. Malone, a bright, promising manager and gifted public speaker, was able to rouse Riscorp's troops, but lacked seasoning in the insurance business, say former employees. Within three years of joining Riscorp, Griffin had promoted Malone to president and put him in charge of running day-to-day operations.
Griffin, meanwhile, had begun making fewer and fewer appearances at the office. Immediately after Riscorp's IPO, for example, he took an extended vacation in the Mediterranean. Former employees say it was not uncommon for Griffin to spend as few as three days a month in his 11th floor office.
Another crucial Griffin decision eliminated one of the few top Riscorp executives who had worked at a big, publicly traded company. A few months after the IPO, Griffin removed Riscorp's chief financial officer, Edward Hammel, who had eight years' experience in the finance department of Reliance Group Holdings Inc., a publicly traded insurance holding company controlled by savvy New York financier Saul Steinberg. Hammel had argued with Griffin and other top execs over a number of issues, including the wisdom of some of Hall's acquisitions.
To replace Hammel, Griffin appointed one of his young prot?g?s, Richard A. Halloy, a certified public accountant who had never worked at an insurance company before joining Griffin in 1994 to oversee Griffin's personal investments and real estate holdings. Halloy had briefly owned a real estate brokerage and management firm bearing his name in Tampa and was vice president and CFO of Beacon Homes, a New Port Richey home builder that ceased operations in 1993. Halloy left in the early 1990s.
Problems dogged Riscorp almost from the beginning of the 1996 acquisition drive. Shortly after Halloy was named chief financial officer in June, the company's treasurer and corporate controller both resigned. Then, in October, Nelson's insurance department ordered an 11% cut in workers' comp rates, denting the company's growth projections. That same month, Riscorp confirmed that one of its subsidiaries, Riscorp Management Services, and several key executives had been subpoenaed by a federal grand jury looking into state campaign contribution violations. Federal prosecutors say that between 1990 and 1996, Riscorp executives illegally funneled almost $400,000 from Riscorp and Griffin-controlled companies to candidates, through wives and relatives of company executives. Among the recipients of the largest donations were former Insurance Commissioner Tom Gallagher, Commissioner Bill Nelson and state Sen. Katherine Harris of Sarasota.
There was more trouble. The company reported a 72% drop in third-quarter earnings, due in part to a $3 million write-off related to the purchase of Self Insurors. The steady stream of bad news bludgeoned Riscorp's stock, and by mid November, Riscorp shares traded below $4, more than 80% off their lofty heights of six months earlier. Alarmed by the precipitous decline in value, shareholders sued Riscorp and the investment banks that underwrote the IPO, claiming they had misled investors about the company's financial situation.
Meanwhile, a lack of adequate financial controls was pushing Riscorp closer to the edge. According to former executives, while the company bought new information technology for its claims administration and sales and marketing departments, it hadn't invested in financial and accounting systems that could keep up with the insurer's rapid growth. And in March 1997, a scant 13 months after the IPO, Riscorp executives found themselves struggling round-the-clock to prepare audited 1996 financial statements required by the Securities and Exchange Commission. As the March 31 deadline neared, it became apparent the company simply didn't have reliable financial data. Accountants from Riscorp's independent auditor, KPMG Peat Marwick, packed their portable computers and spreadsheets and left in disgust. Halloy, the man in charge of managing Riscorp's finances, left to attend the Masters golf tournament in Augusta.
On May 19, A.M. Best & Co., the influential insurance rating firm, downgraded Riscorp's insurance rating to "weak." The National Association of Securities Dealers Automated Quotation system, or NASDAQ, removed Riscorp's stock from its electronic market. Acknowledging the obvious, Griffin and Riscorp's outside directors - Miami businessman Walter L. Revell and retired Florida Power executive George E. Greene III - realized the company needed outside help. So did insurance regulators, who found - once they got accurate data - that Riscorp had been overstating its net worth as far back as 1995. "They were very adept at the marketing arm, but in the accounting controls and the day-to-day operational aspects of an insurance company they were sorely lacking," says Deputy Insurance Commissioner Susanne K. Murphy. "We were still not comfortable with the management of the insurer."
Beginning of the end
In late May 1997, Riscorp's directors hired Frederick Dawson, a turnaround specialist who had parachuted into a number of troubled insurance companies. A bearded, quick-talking attorney, Dawson replaced Griffin as CEO and quickly forced Malone, Halloy and Scott Merritt, the company's investment officer, to resign as directors. (Griffin would subsequently step down as Riscorp's chairman and resign from the board when he was indicted in September.) Dawson also brought in Jacksonville forensic accountant Ed Buttner to reconstruct the company's financial statements. And Dawson began trying to settle the lawsuits.
Any thoughts of salvaging Riscorp as a going concern were soon dashed, however. When Riscorp wasn't able to file its annual financial statements with state insurance regulators by the June 1 deadline, Dawson traveled to Tallahassee to ask Nelson for more time. Despite Dawson's assurances that he was negotiating a sale of Riscorp's insurance business, Nelson gave him just four days to strike a deal or face a takeover.
Behind the scenes, rivals of Riscorp and Griffin had turned up the heat. Among others, Jon Shebel, an influential Tallahassee lobbyist and president of Associated Industries Insurance Co., called Nelson about Riscorp's situation. Bad blood existed between Shebel and Griffin, once a lobbyist at Associated Industries. Several years before, Griffin had tried unsuccessfully to get a law passed that in effect would have barred Shebel from the insurance industry in Florida. Shebel won't say exactly what he encouraged Nelson to do. On the one hand, Shebel and other insurance executives in Florida had reason to worry about Riscorp's fate; if it failed, others insurers would have to pay the bill in the form of assessments. On the other hand, Riscorp's troubles clearly provided Shebel a chance to exact revenge on a rival and competitor by pushing Nelson to punish Riscorp.
For his part, Nelson says only that he followed the law. He was in a tight spot. His 1994 campaign for insurance commissioner received $62,800 in political contributions from Griffin and Griffin-related individuals and companies. As rumors of the grand jury investigation swirled through Tallahassee early last summer, Nelson felt pressure to show that he wasn't going to give any breaks to Griffin and his company, Dawson believes. "I took them at their word that they were under pressure from business and political entities to not let Riscorp be delinquent on regulatory filings," says Dawson, "I believe the Insurance Department's actions were premature and precipitous."
Perhaps, but Nelson and Murphy say the lack of accurate financial information from Riscorp tied their hands. "We never thought Riscorp was insolvent, but we didn't have any proof of that," Nelson says. "We could not take that risk." Nelson refused to give Dawson more time, and Dawson hurriedly put together a sale of Riscorp's insurance assets to Zenith Insurance Co., a Woodland Hills, Calif., insurer that was looking to expand its workers' comp business. Zenith has already put its name and logo on Riscorp's Sarasota headquarters and retained all but a half-dozen of Riscorp's 550 employees. As many as 800 worked for Riscorp at its peak in the summer of 1996.
Zenith made an initial payment of $35 million and assumed $15 million in debt for Riscorp's insurance business. Arbitrators will determine the balance of the price in mid August, but indications are that Zenith will end up with a good deal: Riscorp, whatever its failures, wasn't looted, only mismanaged. "This wasn't a train robbery," says Dawson. "It was a high-speed train that derailed because management forgot to build enough track."
Consider: Riscorp's 1997 audited statements (filed with the SEC on time) show the company with a net worth of $163.5 million. The costs of settling the lawsuits against the company are either included in Riscorp's 1997 finances or covered by liability insurance on Riscorp's officers and directors. So, if Zenith ends up paying somewhere around $163 million, shareholders will get about $4.20 a share, based on the 38.5 million shares outstanding. That's way down from the $24.50 high, but not bad for a corporate shell. And not bad for Dawson, whose management company has been given 1.7 million shares of restricted stock and is being paid $100,000 a month to liquidate Riscorp. And not bad for Griffin, who still owns 24.3 million of those shares and will end up with more than $100 million.
Griffin faces multiple charges related to alleged illegal campaign contributions and each count carries a maximum penalty of five years in prison and a $250,000 fine. He has hired a high-powered legal team headed by Miami criminal defense attorney Robert Josefsberg. While barred from the insurance business by Commissioner Nelson, pending the outcome of the trial, Griffin may have an eye on rebuilding his business empire; he's retained a Miami public relations firm to burnish his image. Also Griffin hasn't abandoned his adopted city of Sarasota. "He's still active socially; you can see him around town quite a bit," says Michael Klauber, a long-time friend and business partner in Morton's Market and Michael's Fine Wine and Tasting Room. "He believes in Sarasota."
Most of Griffin's former executive team has scattered. Malone, the ex-president, lives in Atlanta where he is reportedly trying to build an insurance services business. Hall, who led Riscorp's acquisition drive, also lives in Atlanta, where he works for a major data processing company. Hammel, the displaced chief financial officer, moved to San Antonio, Texas. Halloy, the former financial officer, works for Griffin's private holding company in Sarasota.
When he left Riscorp, Griffin took his stock. But despite a management contract that had granted Griffin continued use of Riscorp's gryphon logo, ownership of the Riscorp name and logo now belongs to Zenith. And perhaps that is fitting: another of the mythological beast's roles was to keep a vigilant watch over the treasure. "They were a victim of their own success," says Zenith chief Stanley Zax. "They grew too fast and ran into difficulty." But, he hastens to add, "That made them available to us."
William Griffin convinces Florida Chamber of Commerce to form workers' compensation fund for its members. Griffin forms Riscorp to administer the fund.
The chamber fund becomes Commerce Mutual Insurance Co., owned by its policyholders.
Griffin buys Commerce Mutual from policyholders, paying nothing in cash, and converts the fund into a stock insurance company with Griffin as the only shareholder. For the year, Griffin earns $6.3 million in salary and bonus.
Feb. 29 - Riscorp completes initial public offering at $19 a share, generating $128 million in cash for the company and $66 million for Griffin, who remains the largest shareholder with 90 percent of the voting stock.
Former Commerce Mutual policyholders sue Riscorp and key executive for racketeering and breach of fiduciary duty in his conversion of the company to a stock company.
Riscorp shares peak at $24.50 after IPO's three lead underwriters issue buy recommendations.
Riscorp names Richard Halloy, a Griffin protege with no insurance company expertise, as chief financial officer, replacing Edward Hammel.
Insurance Commissioner Bill Nelson cuts workers' comp premiums 11/7% [???] for 1997.
After inquiries from a St. Petersburg Times reporter, Riscorp announces that two former executives and a subsidiary - Riscorp Management Services - have been subpoenaed in federal probe of campaign contributions.
Riscorp directors form a strategic alternative committee to explore alternatives to maximize shareholder value, including the possible sale of the company.
After Riscorp stock plummets to below $3 a share, the first of nine suits by shareholders is filed alleging the company's IPO contained misleading financial statements.
Riscorp misses deadline to file annual audited statements with the Securities and Exchange Commission.
Halloy removed as chief financial officer.
Insurance rating firm A.M. Best & Co. cuts Riscorp's rating to "weak."
Riscorp hires turnaround specialist Frederick Dawson as chief executive officer to replace Griffin, who remains chairman. As part of Dawson's arrival, key Riscorp officers and directors - William A. Malone, Scott Merritt and Richard Halloy - resign.
Insurance Commissioner Bill Nelson gives Dawson fours days to sell Riscorp's insurance business or risk seizure.
Riscorp strikes deal to sell its insurance operations to California-based Zenith Insurance Co. for a minimum of $35 million in cash and assumption of $15 million in debt.
Riscorp Management Services, Griffin and four other Riscorp executives are indicted for campaign contribution violations. Griffin resigns as chairman.
In a Securities and Exchange Commission filing, Riscorp reveals it had a net worth of $164 million as of end of 1997; the company announces it has reached deals to settle the shareholder lawsuits for $21 million and the policyholder suit for $475,000.
After Riscorp shareholders approve the sale to Zenith, Zenith assumes control of insurance operations at Sarasota headquarters. A final sales price will be reached by mid-August.
Campaign contribution trial expected to begin in Tallahassee.
Riscorp's Legacy: A Strategy for the Future
Riscorp's trailblazing growth strategy may have proved overly ambitious and ill-executed, but it is fast becoming a roadmap for some of Florida's largest workers' compensation insurers. A number of companies, including Sarasota-based FCCI Mutual Insurance Co. and Associated Industries Insurance Co., of Boca Raton, adopted Riscorp's tactic of contracting with a network of hospitals and physicians to help hold down workers' comp claim costs. A state law effective January 1, 1997, now requires workers' comp insurers to use managed care.
Big insurers like FCCI and Associated Industries also are positioning themselves, as did Riscorp, to grow by acquiring other workers' comp insurers - both out of state and within Florida. Consider FCCI, the state's largest writer of workers' comp policies. Like all mutual companies, FCCI is "owned" by its policyholders, who receive a share of company profits in the form of rebates on their premiums. And like all mutual companies, FCCI is prohibited by the mutual structure from issuing equity stock to raise capital, the essential ingredient for a growth-by-acquisition strategy.
Some mutual companies choose to raise capital by "demutualizing" - giving shares to policyholders that the policyholders can resell. Equitable Cos. took that route in 1992; other big insurers, including Prudential Insurance Co., are contemplating it.
FCCI, however, is reorganizing from a mutual company into a mutual holding company, a structure that will allow it to expand by issuing stock through a subsidiary. Under the structure, the holding company keeps 51% of the voting stock of a subsidiary and can sell the balance of the shares to investors.
The mutual holding company structure is fairly new: So far, 16 states, including Florida, have authorized the creation of mutual holding companies within the last two years, and FCCI is the first insurance company in Florida to receive regulatory approval to convert to a mutual holding company. FCCI policyholders are to vote on the matter in August.
FCCI executives say they don't plan to sell shares to investors, as Riscorp did. Instead, they want to use the equity as "acquisition currency,'' purchasing other companies with FCCI stock, rather than cash. "We believe we now have in place the infrastructure - the employees and the technology - that will allow us to expand," says Ray Neff, FCCI's chief executive officer. "The mutual holding company structure will give us the capital to expand into the Southeast."
Some critics such as insurance industry gadfly David Schiff, publisher of Schiff's Insurance Observer in New York City, complain that mutual holding companies are just a form of demutualizing that creates the possibility for management to enrich itself without being accountable to policyholders or investors.
Neff disputes such criticism, arguing that he and FCCI's board of directors will be responsive. He says the holding company structure is appropriate and will help FCCI survive the ongoing consolidation of Florida's workers' comp industry. Over the past 20 years, Florida's workers' comp market has undergone a number of wrenching changes. In the mid 1980s, home-grown self-insurance funds flourished after market conditions forced commercial insurers to increase their subsidy of the state assigned-risk pool for hard-to-insure employers. Commercial insurers were handing over as much as 30% of each premium. In response, big national carriers fled Florida. The state's self-insurance funds, however, were exempt from the assigned-risk assessment - one of the factors that led Griffin to found Commerce Mutual and Riscorp.
By 1994, national workers' comp carriers began returning to Florida when new legislation did away with the assigned-risk pool by creating the Florida Workers Compensation Joint Underwriting Association. The self-insurance funds suddenly found themselves at a disadvantage. The returning commercial carriers were able to offer employers competitive rates, while policyholders in a self-insurance fund continued to be liable if the overall fund's premiums couldn't cover claims and expenses. Some funds converted to mutual insurance companies. Riscorp converted to a stock company. Some collapsed.
By late last year, the number of self-insurance workers' comp funds in Florida had dropped from 33 in 1994 to nine, according to the Department of Insurance. Insurance analysts expect the remaining funds to convert or be acquired. "There are only a handful of self-insurance funds left," FCCI's Neff says. "We are very definitely interested in talking to each and every one of them."
FCCI isn't the only Florida-based insurer eyeing expansion. Associated Industries is exploring a number of money-raising possibilities, including a private placement of either equity or debt to investors. "We have no lack of interest," says Jon Shebel, Associated Industries' president. "We've been meeting with people." He declined to give any details.
Meanwhile, FCCI's Neff says he'd be interested in acquiring Associated Industries. "You can tell Jon I'd love to talk with him," Neff says.
Whatever the outcome of that discussion, it's clear there will be continued mergers and acquisitions in the Florida's workers' comp industry. It's ironic that Riscorp, the company that got out of the starting gate first, won't be around to run in the race.