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CAS Ratemaking SeminarNew Orleans, LA

State – Specific Issues in Personal Lines

March 11, 2005

CAS Ratemaking SeminarNew Orleans, LA

State – Specific Issues in Personal Lines

March 11, 2005

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The 2004 Hurricane Season & The Florida Property Residual Market

The 2004 Hurricane Season & The Florida Property Residual Market

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• History of Citizens• Financial Position of Citizens and the Cat

Fund … Post Hurricanes• Rates and Depopulation Efforts• Closing Remarks

AgendaAgenda

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Florida’s Residual Market Prior to Citizens

Florida’s Residual Market Prior to Citizens

• Prior to the formation of Citizens Property Insurance Corporation, there were two (2) property residual market facilities in operation in Florida:

o Florida Windstorm Underwriting Association (“FWUA”)

o Florida Residential Property & Casualty Joint Underwriting Association (“FRPCJUA”)

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When and why was Citizens created?When and why was Citizens created?

• Initially proposed by Florida Treasurer Tom Gallagher in 2001 to achieve:

• One property residual market mechanism• Federal tax-exempt status

• IRS issued Private Letter Ruling. • Federal tax-exempt status in February 2002.• Legislation signed into law in May 2002.• Citizens came into being on August 1, 2002.

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Citizens Has Three AccountsCitizens Has Three Accounts

Three Accounts:• Personal Lines Account – former FRPCJUA• Commercial Lines Account – former FRPCJUA• High-Risk Account – former FWUA

With separate calculations of:• Surplus• Plan Year Deficit• Assessment Base

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Personal Lines & Commercial Lines Account (PLA/CLA)

Personal Lines & Commercial Lines Account (PLA/CLA)

• Personal lines: homeowners, mobile homeowners, dwelling fire, tenants, condominium unit owners and similar policies written throughout the state.

• Commercial lines: condominium association, apartment building and homeowners association policies.

• Personal lines rates set for each county at the highest rate of the 20 largest insurers in the State.

2002 legislation required Citizens rates to be actuarially sound and not competitive with the voluntary market.

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High-Risk Account (HRA)High-Risk Account (HRA)

Citizens uses Insurance Service Office (ISO) policy forms and modified ISO policy forms to adjust for the unique coverage that is needed for a residual market such as a wind only policy. The completed forms are filed with the Office of Insurance Regulation for final approval.

• Personal lines wind-only policies – covering homeowners, mobile homeowners, tenants, condominium unit owners

• Commercial residential wind-only polices

• Commercial non-residential wind only policies

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Historical Policy Counts ComparisonHistorical Policy Counts Comparison

465,738

936,837

414,123

102,792

397,676

205,256

433,056

383,280

434,003

377,096

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1996 December 31, 2001 December 31, 2002 December 31, 2003 July 31, 2004

Policies In Force

CLA

PLA

HRA

1996 : Highest PIF for PLA.

Combined total over 1.4 million

policies.

517,113

605,288

820,255 815,064

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Citizens has at its disposal both the typical resources available to all P&C insurers that conduct business in the State, as well as special assessment powers granted to Citizens by the State Legislature.

Typical Financial ResourcesTypical Financial ResourcesTypical Financial ResourcesTypical Financial Resources Special Assessment PowersSpecial Assessment PowersSpecial Assessment PowersSpecial Assessment Powers

• Insurance Premiums

• Investment Income

• Operating Surplus from Prior Years

• Florida Hurricane Catastrophe Fund Reimbursements

• Private reinsurance (Citizens does not utilize private reinsurance)

• Insurance Premiums

• Investment Income

• Operating Surplus from Prior Years

• Florida Hurricane Catastrophe Fund Reimbursements

• Private reinsurance (Citizens does not utilize private reinsurance)

• Regular Assessments

• Market Equalization Surcharges on Citizens Policyholders

• Emergency Assessments

• Regular Assessments

• Market Equalization Surcharges on Citizens Policyholders

• Emergency Assessments

Citizens Financial Resources

Citizens’ Financial ResourcesCitizens’ Financial Resources

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PLA Account – Comparison of Financial Strength to Predecessor FRPCJUA

PLA Account – Comparison of Financial Strength to Predecessor FRPCJUA

$-

$1,000

$2,000

$3,000

$4,000

$5,000

1996 2000 2004*

PML

Resources

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Rate Change HistoryRate Change History

HO MH DF CR Res CR CNR

1994 24.3 24.1 25.0 0.0 0.0 0.0 0.01995 16.6 13.2 25.0 22.1 0.0 0.0 0.01996 23.7 28.2 27.8 13.4 30.0 0.0 0.01997 -4.2 -18.7 0.0 0.0 3.0 0.0 0.01998 2.2 2.5 0.0 0.0 12.0 0.0 0.01999 -0.4 -0.2 0.0 0.0 0.0 0.0 0.02000 0.0 0.0 0.0 0.0 20.0 (1) 0.0 0.02001 0.0 0.0 0.0 20.0 30.0(1) 0.0 0.02002 12.2 2.1 1.8 50.3 8.0(1) 0.0 0.02003 26.0 36.4 39.0 0.0 18.0(1) 0.0 0.02004 4.4 1.1 17.7 0.0 11.6 0.0 0.02005 23.2 17.1 5.1 26.1 11.8 0.0 0.0

YearMulti Peril Wind Only

(1) These are not statewide indications. Rather they are statutory caps for each policyholder. Therefore, a policyholder will receive no more that the percentage indicated and many policyholders will receive less or no rate change at all.

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• Citizens has depopulated over 124,000 policies in 2004 and it anticipates the removal of an additional 69,500 before year-end. This does not include an additional 75,000 polices approved for takeout at the October 12th meeting.

• This results in a reduction to our PIF of over 270,000 policies.

• The 124,512 represents a reduction of our current PIF by 15%.

• For policies removed in 2004 Citizens has paid out:

• Unearned Premium: $87 million• Escrowed Bonuses: $24 million

• The number of policies removed and the success of our depopulation efforts have been adversely affected by Consumers Choice.

PLA actual removed 110,119

HRA actual removed 12,457

Voluntary Renewal Offer 1,936

TOTAL actual removed 124,512

PLA anticipated 58,000

HRA anticipated 8,000

OTHER anticipated 3,500

TOTAL anticipated 69,500

Depopulation in Calendar Year 2004

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GAAP Surplus by Account (Prior to 2004 Hurricanes)GAAP Surplus by Account (Prior to 2004 Hurricanes)

$-$100$200$300$400$500$600$700$800$900

$1,000$1,100$1,200

1997 1999 2001 2003

PLA/CLA

HRA

In Millions

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Plan Year Regular Assessment Base

Plan Year Regular Assessment Base

• Must be levied to fund a deficit in any plan year

• Levied up to the greater of: 10% of the regular assessment base or 10% of the Plan Year Deficit

• Levied on assessable insurers and assessable insureds (surplus lines policyholders) collectively in proportion to their share of statewide direct written premium in prior year

“Market Equalization Surcharge” – assessment rate applied to Citizens policyholders.

• Insurers are obligated to pay within 30 days

• Insurers may pass regular assessments through to their policyholders through a rate filing process

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Plan Year Regular Assessment Base

Plan Year Regular Assessment Base

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

1998 1999 2000 2001 2002 2003 2004

CLA

PLA

HRA

In Millions

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Plan Year Emergency Assessment Base

Plan Year Emergency Assessment Base

• Must be imposed upon determination that Regular Assessments are insufficient to fund a Plan Year Deficit

• Levied up to the greater of: 10% of the Emergency Assessment base or 10% of the Plan Year Deficit plus interest, reserves, and other financing costs

• Levied as a uniform percentage on all policies in the subject lines of business (including surplus lines and Citizens policyholders)

• Collected by insurers upon new business issuance or renewal of policies

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Plan Year Emergency Assessment Base

Plan Year Emergency Assessment Base

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

1998 1999 2000 2001 2002 2003 2004

CLA

PLA

HRA

In Millions

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Assessment MechanicsAssessment Mechanics

• “Plan Year Deficit” not defined in enabling statute

• Timing of assessments allows for flexibility in timing and amount of assessment

• Rate filing process statutorily defined for insurers’ recoupment of paid Regular Assessments

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Claims Paying Resources - PLAClaims Paying Resources - PLA

$3,325M

$3,225M

$1,725M

$725M

*Estimateexcluding takeouts through 7/7/04

1997 PRE-EVENT NOTES$100 M

REGULAR ASSESSMENTS

$1,500M

FHCF RECOVERY

As of June 1, 2004

$1,000M*

$725M

ADJUSTED SURPLUS

100 YEAR PML

$2,000M

250 YEAR PML

$3,500M

FHCF Attachment Point$300M

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Claims Paying Resources - HRAClaims Paying Resources - HRA

$7,200M

$6,450M

$5,450M

$5,150M

$1,850M

$1,100M

*Estimate

PRE-EVENT NOTES

PRE-EVENT NOTES$750M

1,100 M

$3,300M

$1,000M

As of June 1, 2004

PRE-EVENT NOTES$300M

ADJUSTED SURPLUS

REGULAR ASSESSMENTS$750M

FHCF RECOVERY*

100 YEAR PML

$6,700M

FHCF Attachment Point$950M

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2004 Hurricane Season2004 Hurricane Season

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2004 Hurricane Season2004 Hurricane Season• This has been an unprecedented hurricane season with 4 storms

• Industry loss estimate between $15 - $20 billion• Shortage of adjusters and industry response

• The stability of the insurance market after the storms

• The cost of insurance and potential rate increases as a result of Hurricane losses or assessments

• All insurers in the State of Florida have responded effectively and efficiently to a monumental task

• The Department of Financial Services will continue to take steps necessary to improve the insurance market and the availability of insurance for Florida Citizens.

• The success of the Cat Fund and Citizens• Ample resources on hand to pay claims• Cat Fund continues to build cash• Citizens able to rebuild surplus at amazing rate due to tax exempt status and rate

increases• Potential income tax refund of $200 million for the High-Risk Account (HRA)

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Things Don’t Always Go as Planned…Things Don’t Always Go as Planned…

• Staff and members of the Board put together a plan to respond to one category 5 storm:

• Designed to respond to large storm in small geographical area

• 6 “dedicated” claim adjusting firms

• Emergency Response Vehicle (EOC)

• System capacity testing• System designed dispatch

system

• The 2004 Storm season resulted in four major storms with different challenges

• 110,000 claims geographically spread over 67 counties

• Adjuster shortages• Lost adjusting days• OIR order and reporting• Tallahassee Cat Center to

manage independent adjusters

• System issues

What we planned for… What happened…

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Storm LossesStorm Losses

• The estimated losses based upon Risk Management Solutions (RMS) footprint of each storm is shown below. These numbers are unverified and preliminary and are based on computer analyses, not actual reported and paid claims. In addition, please note that the quarterly and annual financial statements prepared in accordance with accounting guidelines would not record losses based upon the models. Ultimate losses from each storm are based upon actuarially determined amounts which use factors other than models and therefore may differ from RMS’s modeled loss projections.

ESTIMATED STORM LOSSES PROVIDED BY RMSESTIMATED STORM LOSSES PROVIDED BY RMS

StormStorm HRAHRA PLAPLA CLACLA TotalTotal

Charley $850 million $60 million $15 million $925 million

Frances $225 million $50 million $15 million $290 million

Ivan $220 million $6 million $6 million $232 million

Jeanne $250 million $50 million $27 million $327 million

Total $1.55 billion $166 million $63 million $1.8 billion

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Cat Models: Indemnity and Loss Dollar Comparisons

Cat Models: Indemnity and Loss Dollar Comparisons

Current RMS Model Current RMS Model

Charley $319 $925 19,799 41,922Frances $507 $290 48,684 55,691Ivan $404 $232 15,087 18,340Jeanne $331 $327 28,359 47,131

Aggregate $1,561 $1,774 111,929 163,084

Incurred Losses (in millions) Reported Claims

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Hurricanes:Hurricanes:

CharleyCharley

FrancesFrances

Ivan Ivan

JeanneJeanne

Approximately 111,000 reported claimsApproximately 111,000 reported claims

Citizens Reported Claims By StormCitizens Reported Claims By Storm

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Industry Response:The Financial Impact of 4 Storms

Industry Response:The Financial Impact of 4 Storms

Company Funding$4,500

Cat Fund Cash $ 6,000

Cat Fund Assessment $4,500

Company Funding$12,000

Cat Fund Cash$3,000

Cat Fund Assessment$0

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

One Storm Four Storms

Cat Fund Assessment

Cat Fund Cash

Company Funding (retention)

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To What Extent Was Company’s Reinsurance Triggered

(A Look at the Cat Fund:)

To What Extent Was Company’s Reinsurance Triggered

(A Look at the Cat Fund:)

Cat Fund Retention$950 million

Cat Fund Recoveries$3.3 billion

Charley $850 million

Frances $225 millionIvan $220 million

Jeanne $250 million Cat Fund Retention$330 million

Cat Fund Recoveries $1 billion

Charley $75 millionFrances $65 millionIvan $12 million

Jeanne $77 million

•Retention applies separately to each storm

•No recoveries are anticipated for either account for any storm.

HRAHRA PLA/CLAPLA/CLA

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Closing RemarksClosing Remarks

• Citizens and the Cat Fund have been a great success and exceed expectations in responding to an unprecedented four storm season.

• Citizens will continue to work with DFS to seek legislative changes to add to its claim paying abilities and to manage its risk profile.

• The growth in Citizens exposure has been offset by:• Tax exempt status

• Rate increases

• Takeouts

• If Citizens has a Deficit actions will be taken to levy assessments.

• The Cat Fund has significant cash balances remaining after Charley, Frances, Ivan and Jeanne.

• Both entities will continue to re-build cash balances.

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APPENDIX

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Citizens Exposure: Overview HRA Total Insured Value (TIV) by

County

Citizens Exposure: Overview HRA Total Insured Value (TIV) by

County

Top 5 Counties in Total Exposure

County Exposure as of 7/31/04

Dade 28,275,980,554

Palm Beach 20,756,842,790

Broward 18,438,396,281

Monroe 8,257,954,297

Sarasota 8,228,585,732

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Citizens Exposure:Overview PLA Total Insured Value (TIV) by County

Top 5 Counties in Total Exposure

County Exposure as of 7/31/04Dade $ 19,776,649,208 Pinellas $ 7,704,634,849 Broward $ 6,079,884,094 Pasco $ 4,799,524,844 Palm Beach $ 4,411,984,106