Albany

On paper, New York's second-largest medical malpractice insurance company struggled in 2015: Physicians' Reciprocal Insurers' liabilities surged to $138 million more than its assets, a gap that had been $86 million a year before.

Yet Anthony J. Bonomo, a star federal witness in last fall's corruption trial of ex-Senate Majority Leader Dean Skelos, has been in talks to sell the company that runs PRI to a firm in California for what could be a significant amount, according to multiple sources. In his testimony, Bonomo pegged the management company's value between $100 million and $125 million.

That's what makes PRI unique in its field, and what some say makes its finances potentially worrisome: PRI's condition can worsen, but the management firm that runs it and rakes in fees doesn't bear the burden.

PRI's underlying finances are not just a matter of concern for Bonomo, however, or the doctors and hospitals that are its customers. Every New Yorker who pays for home, auto or business insurance would foot the bill if the company collapses. Unpaid claims would be paid by the state's insurance company guaranty fund, with the cost ultimately passed on to policyholders.

"Allowing a medical malpractice insurer to operate in the red is terribly risky," said Ellen Melchionni, president of the New York Insurance Association, which represents property and casualty insurers.

In addition, records show that if Bonomo were to hang on to the company and it did collapse, a real estate company he co-owns would still be paid $8 million of PRI's money.

In a detailed series of answers to questions posed by the Times Union, PRI noted it has always been in "good standing" with regulators through its 35-year history and scrupulously followed all of their reporting requests. PRI's surplus often goes up and down "based on runoff from old cases (and) write downs of assets," the statement said. The company said its bottom line is expected to improve in 2016.

"While PRI does operate with a negative surplus due to the low (premium) rates DFS sets for every provider in the state, PRI remains in good standing with (the state Department of Financial Services), able to pay its bills and meet current claims," the company told the Times Union. "PRI has shown positive surplus/balance when rates are set correctly by DFS, and currently has about $1.3 billion in assets."

It's currently impossible for New Yorkers to tell if state government feels similarly bullish about PRI.

As the Times Union reported in March, state insurance regulators have routinely suppressed deep governmental exams they're required to conduct every five years probing PRI's finances — even as the exams of PRI's competitors have been released.

A person with knowledge of the workings of the Department of Financial Services told the Times Union that the release of a negative report might cause doctors who currently use the insurer to flee to other companies. State regulators fear such a disruption of the market, the person said, and actuaries for the regulator and regulated have had difficulty agreeing on financial numbers.

The administration of Gov. Andrew Cuomo, a major recipient of Bonomo's generous campaign giving, is staying quiet about whether it will eventually release a currently ongoing audit.

Testifying at the Skelos trial under a non-prosecution agreement, the Brooklyn-born Bonomo, 57, explained PRI's financial structure.

PRI was founded in 1981, a rough time for the industry. The Legislature created a law in 1985 allowing medical malpractice insurers to operate at a loss; it has been renewed every few years. The law's survival is a top priority for the lobbyists employed by PRI, as the company is one of two such firms operating in the red in New York.

Just weeks before his arrest in May 2015, Skelos pushed through the latest renewal of the law (good through 2019) as part of the state budget. Skelos had pressured Bonomo in 2012 to hire his son, Adam, to what amounted to a no-show job. Dean and Adam Skelos were convicted in December on eight federal counts connected to quid pro quo arrangements with PRI and two other companies.

Bonomo started working at PRI in 1985, and eventually rose to run PRI's management company. A copy of Bonomo's 1999 employment agreement, posted online by TechAgreements.com, lays out lucrative benefits: a $400,000 salary, a $500,000 signing bonus, performance bonuses, stock, a personal company automobile (specified as a BMW 740 or equivalent) and membership in Long Island's Cherry Valley country club.

In 2006, Bonomo bought the management company that runs PRI, Administrators for the Professions (plus a controlling interest in another company), for about $40 million, according to a news release.

AFP has about 315 employees, including a number of Bonomo's family members. According to a prosecutor at the Skelos trial, employees hired at Bonomo's behest are known internally as "AB Referrals," and were uniquely allowed to work from home — something Bonomo denied. Adam Skelos was such an employee.

In testimony, Bonomo described the relationship between the management company and PRI.

Under New York law, reciprocal insurers such as PRI have no actual employees and must be run by an outside management firm led by an attorney — in this case, Bonomo.

The reciprocal insurer holds assets and liabilities, while the management company makes its money by selling malpractice insurance, and taking a percentage cut of the resulting premiums. In the case of PRI, a state-approved management agreement means AFP takes a maximum of 13 percent.

AFP "derives its revenue from a percentage of the premium written by PRI," Bonomo testified, pegging that revenue at about $45 million annually.

Terry Cummings, a Manhattan attorney who works extensively on insurance regulation issues, told the Times Union it was "unusual" for a New York insurer to buy management services from an affiliate based on a cut of premiums — instead of simply getting paid for the cost of services.

"The regulatory objective is to use premiums to build capital in the insurer to pay future claims," she said, rather than putting premium "into the administrator, outside the reach of claimants and insurers."

During the trial, Bonomo pinned PRI's financial issues on state insurance regulators, who set the premiums that medical malpractice firms can charge doctors. Many insurers believe those premiums are far too low. (In 2007, State Insurance Superintendent Eric Dinallo approved a 14 percent increase in the rates to "avoid further financial deterioration of the companies.")

Medical malpractice insurers, however, are largely allowed to pick the rates for plans they sell to hospitals. And PRI has gained a reputation for offering cheaper premiums than its competitors.

PRI's main competitor, the largest medical malpractice insurer operating in New York, is Latham-based Medical Liability Mutual Insurance Company. MLMIC is in the black: Its most recent financial filing shows a $1.8 billion surplus. MLMIC and PRI insure most doctors in New York, and many hospitals. If PRI were to go under, MLMIC alone would control much of the market. (While PRI began operating in the 1980s — the industry's nadir — MLMIC has been operating longer, and had more time to build a surplus.)

As a mutual insurance company, MLMIC's corporate structure is different from PRI: There's no outside private management company that makes money based on the amount of premiums written.

"They have an interest in keeping it healthy — unlike PRI, which works to provide for the benefit of its (owners)," said Michael Goldstein, an ophthalmologist and president of the New York County Medical Society, which represents doctors in Manhattan.

In the 2000s, MLMIC lost significant hospital business to PRI.

"They came in and undersold MLMIC at a ton of places," said Goldstein. "Selling at a lower price means you're going to get business — but if you're selling premium at too low a price, it catches up to you."

Of course, the resulting liabilities from those sales lay on the books of employee-less PRI — not on Bonomo's separate management company that gets the commissions.

PRI said in its statement that its business at Long Island's North Shore University Hospital had come "because we had many of its doctors as clients" and added it was a "competitive business and we did offer good rates to get it." PRI recently submitted a notice with DFS seeking to allow the company to raise its rates at hospitals up to 20 percent — although "we have not raised rates to near that level," PRI told the Times Union.

Those are not the only ways in which the financial interests of PRI and Bonomo might diverge.

If PRI were to collapse, a deal involving three Bonomo-run companies means $8 million would go back to a Bonomo-owned real estate company — a sum that would be paid by PRI.

According to annual reports, a Bonomo company called AJB Ventures in 2007 purchased PRI's office building in Roslyn, Long Island. AJB Ventures installed PRI's management company, AFP, as the rent-paying tenant.

AFP issued a $7.95 million letter of credit, with PRI's assets serving as collateral.

That means that if PRI were to collapse and AFP were unable to continue paying rent, there is $8 million sitting in the bank waiting to be paid out to the landlord: Bonomo.

"It is standard business practice for any commercial lease that the leasor would ask the leasee to put up a letter of credit," PRI said in its statement. "Anthony and his partner who jointly purchased the building followed this practice, as would any other building owner — and PRI fully disclosed the terms of the lease arrangement to DFS."

PRI maintains the outstanding mortgage on the property is much larger than $7.95 million.

It remains a mystery what state financial regulators think about these issues.

The state Insurance Department examined PRI's finances for the years 2000, 2004 and 2009 — the first two under the tenure of Gov. George Pataki, the third under Gov. David Paterson. (In 2011, the state Department of Financial Services came into being through a merger of the state's banking and insurance agencies.)

In 2000, Greg Serio was a top official at the Insurance Department; from 2001 to around the end of 2004, he was its superintendent.

When Serio left his government post, he began working for Park Strategies, the lobbying firm owned by former U.S. Sen. Alphonse D'Amato, one of the state's most influential lobbyists. Serio set up the firm's "risk and insurance management practice group," according to the firm's website; he is also a principal in Compass Company Consultants, "a risk management and insurance consulting subsidiary of Park."

Park Strategies began working for PRI's management company in 2004, while Serio was still running the agency. Serio did not discuss PRI's 2004 financial exam with the company while he was superintendent, PRI says, and the never-released report was not actually finished until 2007.

Serio eventually became PRI's "day-to-day" lobbyist, D'Amato said on the stand at the Skelos trial.

"He was the former commissioner of insurance and knows all of the regulations," D'Amato testified. "And Greg Serio has, for all of the time that we've represented PRI, dealt with a lot of regulatory matters in front of the Insurance Department."

New York's Public Officers Law bans former government officials from appearing before the state agencies where they worked for two years in a paid capacity, and also says state employees cannot ever practice, appear before or ever even "communicate" with those agencies on matters over which they were "directly concerned" during their state employment, or which were under their "active consideration."

Serio's two-year ban was lifted after the onset of Gov. Eliot Spitzer administration in 2007, when Serio and Park Strategies registered to lobby for PRI.

Asked why the 2000 exam wasn't publicly released, Serio told the Times Union he could not remember the specifics, but said such decisions are made "in consideration of a lot of other issues" such as "market stability." (Serio lowered premium rates for PRI and its competitors while superintendent — a move that was opposed by those companies.)

In 2014, PRI paid $250,000 to four Albany lobbying firms, including Park Strategies — a typical outlay for the company.

With both his own and PRI's funds, Bonomo has been a major donor to politicians on both sides of the aisle, including Cuomo and Pataki. Bonomo acknowledged in testimony that he gives to politicians in order to build goodwill. A horse racing enthusiast who owns a racing stable called Brooklyn Boyz, he was appointed by Cuomo in March 2015 as chair of the New York Racing Association, but took a leave of absence just weeks later after Adam Skelos' no-show job was brought to light.

The Department of Financial Services recently rejected the Times Union's open records request for PRI's three most recent exam reports. (The agency says the final formal steps to make the exams technically "adopted and filed" were never completed, and therefore the records aren't public.)

The agency did provide one report — from 1996.

PRI and its Bonomo-run management company said jointly that they "don't know" why the state never finalized or released the reports.

The companies "never lobbied DFS not to release its audits, and we won't lobby DFS not to release the current audit it is conducting," they said, adding they have "no issue with DFS releasing any of the financial documents that both parties review."

Some in the industry also question the value of exams that are publicly released, given that they often come out several years after the period of time the reports are examining.

PRI says its finances are transparent, and noted that it voluntarily submits lengthy explanations of its finances to regulators each year, and that its leadership meets quarterly with those regulators.

DFS spokesman Rich Loconte said the agency was unable to track down anyone who had worked at the Insurance Department who knew why the last three exams weren't released to the public — including the one covering 2009.

"We have talked internally," Loconte said. "We cannot determine why in fact the reports were not finalized."

PRI says the company's finances are increasingly strong, the result of an "ongoing effort since 2009 to reform its management, governance, operations, actuarial and claims practices and procedures, and overall financial footing." Its negative surplus was much higher — $180 million — five years ago, the company says.

In a February 2015 letter to DFS, Bonomo argued that PRI had an improved surplus and reserves, and a strengthened investment portfolio.

Bonomo's letter pointed to a potential thundercloud: the "unprecedented danger" from the growth of largely unregulated, lower-priced "risk retention groups" that cover doctors and hospitals. PRI suggested the Legislature should address the issue by only allowing "admitted carriers" such as PRI to operate, in order to ensure the "highest degree of financial security."

Now multiple sources say Bonomo is seeking to make a deal with a California firm, the Doctors Company, to sell off Administrators for the Professions, the firm that runs PRI. A Doctors Company official, David McHale, said that he would decline comment "until there is actually something substantial to comment on."

PRI declined to comment on "rumors or speculation."

The potential sale of its management company could raise the stakes concerning PRI's next financial exam.

Asked if DFS would approve Bonomo's sale of the management company while PRI was $138 million in the red, Loconte said the agency was not currently prepared to approve any deal.

"We are aware of the potential offer, but it is something we're looking at that will be in the totality of the exam process," he said.

Loconte, however, declined to answers questions about whether the new report would ever be publicly released. He also declined to outline the agency's criteria for suppressing or releasing an exam.

It will be a decision for Maria Vullo, who in January was nominated by Cuomo as the next DFS superintendent; she awaits state Senate confirmation.

"I'm not going to comment on the decision-making right now," Loconte said.

cbragg@timesunion.com • 518-454-5303 • @chrisbragg1