Citizens Property Insurance Corporation

Transcription

1 Citizens Property Insurance Corporation Barry Gilway, President/CEO and Executive Director Sharon Binnun, CFO December 4, 2012

2 Citizens Basics

3 What is Citizens? A State-created, not-for-profit, tax-exempt governmental entity whose public purpose is to provide property insurance coverage to those unable to find coverage in the voluntary admitted market. Governed by an eight member board of Governors, two of whom are appointed by each of the following State leaders: Governor, Chief Financial Officer, Senate President, and Speaker of the House. Executive Leadership team comprised of insurance professionals. Plan of Operation subject to review by the Financial Services Commission, subject to regulation by the Florida Office of Insurance Regulation, Operational Reviews by the Auditor General and the OIR, external audits, robust Office of Internal Audit. Financial statements are a component unit of the Florida CAFR. 3

4 Basics re: Citizens Unlike a private insurer, Citizens does not have the ability to manage its book of business so that the exposure matches its surplus s and reinsurancerance program. Citizens accepts most risks and its wind risk far exceeds its surplus and reinsurance. Citizens has contingent capital in the form of assessments to ensure adequate claims paying resources. While Citizens is in its best ever financial position, with projected 2012 combined surplus + FHCF reimbursements + private reinsurance of approximately $14.5 billion, we continue to rely on assessments to fund catastrophe losses in the event of a large storm or several smaller storms. 4

5 Overview of Accounts Each of the following three accounts are separate statutory accounts and have separate calculations of surplus, plan year deficit and assessment bases. Assets in one account may not be commingled or used to fund losses in another account. The three accounts are listed below with the types of policies written in each. For credit and reinsurance purposes, the PLA and CLA are one account. Personal Lines Account (PLA) Personal residential multi-peril il policies i including homeowners, dwelling fire, mobile home, tenants and condominium unit owners. Coastal Account (formerly High-Risk Account HRA) Wind-only and multi-peril policies for personal residential, commercial residential, and commercial non-residential risks located in eligible coastal high risk areas. Commercial Lines Account (CLA) Commercial residential multi-peril policies including condominium associations, apartment buildings and homeowners association policies Commercial non-residential multi-peril (required to include wind coverage) policies (e.g., office buildings, retail, etc.) located outside of the coastal HRA eligible areas. 5

6 Citizens Policy Counts by Account and Year Policy Counts by Year and Account 6

7 2012 Initiatives of Board of Governors Aggressively Transfer Risk to Private Markets Final placements reduced potential assessments after a large storm* by $1.5B Reduce Exposure In total, 31 separate initiatives have been filed by the Board Coverage excluded for pool cages Coverage excluded d for personal residential homes $1M + Coverage excluded for some special class risk items Combined changes reduced 1 in 100 year PML by approximately 5% Increase Depopulation Activity * Large storm is considered a 1 in 50 year PML or greater 7

8 Historical Depopulation Activity Activity 8

9 Citizens Financial and Claims Paying Capabilities

10 Citizens Financial Resources Citizens has at its disposal both the traditional resources available to all property and casualty companies that conduct business in the state, as well as special assessment powers granted to Citizens by the state legislature Traditional Financial Resources Unique Financial Resources Insurance Premiums Investment Income Operating Surplus from Prior Years Florida Hurricane Catastrophe Fund Reimbursements Private Reinsurance Citizens Policyholder Surcharges Regular Assessments (Coastal only) Emergency Assessments Pre event liquidity resources (debt issuances and lines of credit which, if drawn upon, must be repaid) 10

11 2012 Estimated Claims-Paying Ability (Projected) Notes: 1.Surplus amounts consist of audited 2011 PHS and 2012 projected net income. 2.Pre Event Liquidity reflects current estimated liquidity for PLA/CLA and Coastal; PLA/CLA financing not yet complete. This does not represent risk transfer and any monies drawn must be repaid. 3.FHCF coverage is based on preliminary 2011 retention and payment multiples, but the actual retention and limits may be significantly different from these estimates. 11

12 Assessments Summary 1. Citizens Policyholder Surcharge Up to 15% per account for Coastal Account, PLA, and/or CLA deficits Applies at new business/renewal for all Citizens policyholders 2. Regular Assessment Up to 2% for Coastal Account deficits Applies at new business/renewal for all non Citizens policyholders 3. Emergency Assessment Up to 10% per year per account for Coastal Account, PLA and/or CLA deficits Applies at new business/renewal for all Citizens and non Citizens policyholders 12

13 Coastal Account Estimated Liquidity & Claims-Paying Resources 1 1 in 100 Year Event (2012 Season Projected) Emergency Assessment not required until at least 1 51 year event Citizens Policyholders Surcharge triggered at about 1 34 year event Regular Assessments triggered at about 1 46 year event 1 in 100 year PML $ Billion at 12/31/11 including 10% of LAE (Not to scale) 1 Please see Notes & Assumptions attached hereto. 13

14 PLA/CLA Estimated Liquidity & Claims-Paying Resources 1 1 in 100 Year Event (No Regular Assessment Season Projected) Emergency Assessment not required until at least 1 72 year event Citizens Policyholders Surcharge triggered at about 1 58 year event 1 in 100 year PML $9.194 Billion at 12/31/11 including 10% LAE (Not to scale) 1 Please see Notes & Assumptions attached hereto. 14

15 Policy and Rate Information

16 Exposure and Risk Count by County Combined (as of 9/30/2012) 16

17 Personal Lines Account Regional Concentrated Policy Growth (as of 06/30/12) 17

18 PLA HRA Homeowner Construction (HO-3) Coverage Profile Ranges (as of 06/30/12) (as of 12/31/10) 18

19 Coastal HRA Account Construction Homeowner Profile (HO-3/HW-2) (as of Coverage Ranges (as of 06/30/12) 12/31/10) 19

20 Rates Prior to 2007, rates were set to non-competitive levels based on Top 20 filings Effective January 1, 2007 through December 31, 2009, rates for personal residential and commercial residential were frozen (based on 2006 rates) Wind mitigation credits were doubled in 2008 Beginning in 2010, Citizens was permitted to increase premiums but with a 10% cap on policy level annual increases With the current 10% cap, it will take several years to reach actuarially sound rates 20

21 Rates (cont d) Even if rates are actuarially sound, assessments could be triggered depending di on amount of losses in a season (severe single event or multiple events in a single season) When Citizens rates are actuarially sound, such rates could still be less than private market due to differences in cost structure o No taxes o No profit/return to investors o Lower administrative expenses as a governmental entity o Less reinsurance than private market o Lower commissions, no contingent commissions, profit sharing o No advertising 21

22 Effects of Sinkhole Losses

23 Sinkhole/Non-Sinkhole Loss Ratios l Loss Ratios No on Sinkhole & Tota 70% 60% 50% 40% 30% 20% 10% Non Sinkhole Loss Ratio Total Loss Ratio Sinkhole Loss Ratio 1000% 900% 800% 700% 600% 500% 400% 300% 200% 100% Sinkhole Loss Ra tio Only 0% 6/30/2011 / 9/30/2011 / 12/31/2011 / 3/31/2012 / 6/30/2012 / 0% 6/30/2011 9/30/ /31/2011 3/31/2012 6/30/2012 Sinkhole Loss Ratio 785% 742% 873% 483% 479% Non Sinkhole Loss Ratio 31% 37% 36% 35% 39% Total Loss Ratio 57% 61% 65% 50% 54% 23

24 Sinkhole/Non-Sinkhole Premium and Losses 50.00% 45.00% 40.00% Sinkhole Premium/Total Premium Sinkhole Losses/Total Losses 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 6/30/2011 9/30/ /31/2011 3/31/2012 6/30/2012 6/30/2011 9/30/ /31/2011 3/31/2012 6/30/2012 Sinkhole Premium/Total Premium 3.61% 3.62% 3.60% 3.55% 3.59% Sinkhole Losses/Total Losses 46.05% 40.08% 44.56% 30.60% 28.20% 24

25 Proposed Surplus Notes Program

26 2012 Initiatives Increase Depopulation Activity Citizens has made several enhancements to its traditional depopulation program, including: Chairman re-instituted the Depopulation Committee Eliminated the standard 16% ceding commission (retroactively applied to the 4 th quarter of 2011) Convened a Depopulation Summit Solicited depopulation ideas Obtained feedback on barriers to depopulation Improved depopulation communications with consumers Enhanced the volume and refinement of data used by take-out companies in evaluating assumed policies 26

27 2012 Initiatives Increase Depopulation Activity (cont d) These enhancements have facilitated Assumptions totaling approximately 230,000 policies and $61.5B in exposure (as of November 2012) Anticipated assumptions of approximately 48,000 policies (December 2012) Assumptions year to date as of December 31, 2011 removed approximately 53,000 policies. 27

28 New Depopulation Program(s) August 2012, Depopulation Committee meeting The Board of Governors charged staff with evaluating four depopulation proposals Staff was directed to evaluate each proposal s impact on: Materially reducing Citizens policy count and exposure to catastrophe loss, thereby reducing its reliance on assessments Citizens existing policyholders Attracting new or additional capital to the state of Florida Staff was further directed to: Make inquiries of the submitting entities Better understand the intricacies of each proposal Better understand the functionality of each program Consider development of a separate proposal designed in Citizens best interest of reducing policy count and wind loss exposure Objective: Seek and evaluate every opportunity to reduce policies in force and potential for assessments 28

29 New Depopulation Program(s) Evaluation Process In performing its initial evaluation of the proposals, Citizens staff considered the following additional items that served as guiding principles during the evaluation process: Does the proposal provide for any risk to the proposing insurer Does the proposal require Citizens to build additional infrastructure or outsourcing to monitor the program Could the proposal be implemented by early December 2012 Does the proposal, after various catastrophic event scenarios, reduce assessments Does the proposal require retention of policies Does the proposal contain a concise and measurable consequence if the insurer does not retain or replace policies assumed Does the insurer meet minimum financial requirements Does the proposal include elements that create legal or bond document risk 29

30 New Depopulation Program(s) Evaluation Process (cont d) Staff conducted a comprehensive review of all proposals Generate a detailed summary of each proposal Identify potential issues and/or risks Draft follow-up questions Met with members of the submitting entities to discuss results of Staff Review and how each proposal addresses the following: Time needed to implement Reduction in exposure and reliance/likelihood of assessments Impact to policyholders (current and assumed) Sustainability of the proposal given various consequences (i.e. opt-outs, rate freezes, cat events) Cost to Citizens and initial/future impact on surplus Review other proposals p submitted to Citizens Meet with FHCF (SBA) to discuss administration and structure of the capital build-up surplus notes program Perform a detailed financial analysis of each proposal to obtain the following: Specific PML/AAL reduction Rate gap (need) by territory Surplus reduction (i.e. net cash outflow to Citizens) Impact on assessments Stress test conclusions Consult with the Office of Insurance Regulation at various decision points Consider other proposals received 30

31 Projected Claims Paying Resources PLA Only Historical Depopulation Activity Potential Effect of Proposed Surplus Notes Program 1 See Notes & Assumptions ; PML in pie charts includes estimate for LAE 31

37 PLA - Potential Effect of Proposed Surplus Note Program Layer on Projected Chart - Probable PLA Maximum Loss (PML) by Single Occurrence Storm Event ($ in billions) 37

38 Proposed Surplus Notes Program Summary: remove significant number of policies from PLA and personal lines policies from Coastal Account by using a loan program ( surplus note ) as the incentive mechanism The amount of surplus notes is generally based on the gap in Citizens rates and is risk-based. Applies only to personal residential policies Maximum of f$ $300 million and $50 million of committed capital by Citizens within the PLA and Coastal Account, respectively Surplus note amount is a function of the exposure removed as well as policy wind risk (4 times FHCF premium) capped at aggregate 3-year rate differential Surplus note/loan term of 20 years Rate increases capped at 10% for 3 renewal cycles following assumption to encourage retention by assuming insurer Policies must be retained for at least 10 years; can accelerate principal payments or increase interest rate for non-compliance Minimum initial and continuing financial requirements for participants 38

39 Proposed Surplus Notes Program (cont d) Surplus notes will be limited to $50 million per assuming insurer Surplus note principal may be credited in an amount not to exceed 20% per year for the first 5 years in the event of a PCS-named Florida hurricane (risk sharing element) Citizens will initially hold-back 5% of the initial surplus note proceeds in consideration of opt-outs Minimum TIV removal of $5.5 billion per assumption Limits usage of funds to payment for reinsurance and associated hurricane claims 39

40 Proposed Surplus Notes Program (cont d) Citizens Proposed Financial Requirements for participants: Must have been actively writing property business in Florida for the preceding 2 years, and Actual 2011 or projected 2012 Risk Based Capital (RBC) ratio of at least 300 and minimum surplus of $25 million, OR Actual 2011 or projected 2012 RBC ratio of at least 400 and minimum surplus of $20 million, and Must have Florida direct written property premium in 2010 and 2011 of at least $50 million, and Maintain net catastrophe reinsurance retention of not more than 20% of surplus, and Reinsurance protection up to the 1:100 year and two 1:10 year PML levels including a factor for LAE, and Cash and total t invested assets (net admitted) d) to total t liabilities of at least 11 1:1, and Liabilities to surplus of no more than 3:1 Requirements are initial to qualify for program, continuing with certain exceptions after a cat event 40

41 Potential Results from Citizens Evaluation Results from analyses of the potential reduction in PLA exposure, assuming approximately 350,000 policies are removed and surplus notes of $300M* are issued as the incentive mechanism: Results Based on 1-in Year PML Before Surplus Note Program After Surplus Note Program Projected Surplus Note Program Change Emergency Assessment $3.06 $1.89 ($1.17) -38.3% PML $7.90 $5.83 ($2.07) -26.1% Notes 1 All dollar amounts are in billions 2 Assumes surplus note is carried at 50% of its face value 3 Projections depend on number and characteristics of polices removed If Citizens depopulated under this proposal projection, it would invest $300M into this program (20% of PLA surplus) where emergency assessments could decrease by $1.2B or (38%) after a 1-in-100 year event Assuming a rate online of 20%, it would cost Citizens appx. $240 million each year to reduce this amount of PML through private reinsurance 41

42 Proposed Surplus Notes Program Risks Principal and interest payments are subject to OIR approval if an assuming insurer is financially impaired, it may be difficult for Citizens to enforce its contractual right to payments (principal and interest) If a catastrophic event occurs in each of the five years after note is issued, Citizens may be in a position of crediting100% of the principal Credit risk for proposed surplus note term of 20 years Despite contractual requirements, policies could return to Citizens if assuming insurer fails to retain The interest rate charged (approximately 2%) does not approximate the true market rate for similar debentures with similar credit and event-risk characteristics Using the FHCF times a factor of 4 may not categorically align with the actual rate gap for each policy Significant reliance on independent assurance (i.e. External Auditors) and regulatory oversight (i.e. OIR) of participants control environment and activities Inaccurate or non-representative sample selected for audit may lead to incorrect calculation of note provisions Possible administrative errors due to the burden of tracking/monitoring status of potentially hundreds of thousands of policies under the program Enterprise Risk Management (ERM) evaluated the proposed surplus notes program and provided an analysis of potential risks. 42

43 Appendices

44 Appendix 1 Citizens Estimated Claims Paying Resources Assumptions ASSUMPTIONS Citizens 2012 Budgeted DWP $3.63 Billion Citizens Policyholder Surcharge Maximum % Per Account 15% 2012 Regular Assessment Base $31.01 Billion Regular Assessment Maximum % Per Account 2% for Coastal; 0% for PLA/CLA 2010 Emergency Assessment Base $34.64 Billion PML Based on modeled losses as of December 31, 2011 per AIR CLASIC/2, Version 13 based on a weighted average of Standard Sea Surface Temp (SSST) and Warm Sea Surface Temp (WSST) Event Catalogs including Demand Surge, excluding Storm Surge Interim Return Periods are derived by Linear Interpolation Surplus based on estimates at December 31, 2012 assuming no hurricanes Citizens 2012 FHCF attachment point based on projected industry retention per Paragon in their 2012 RatemakingReport Report NOTES These charts are imperfect! They attempt to show projected claims paying resources, but they are approximations only. Four significant complicating factors are described below: 1) Coastal PML vs. PLA/CLA PML: An actual 100 year PML event in Coastal Account may not be a 100 year PML event for PLA/CLA. The relative magnitude of actual losses for Coastal and PLA/CLA will depend on the storm size and path 2) Combining PLA and CLA: The PLA and CLA are separate accounts for deficit calculation and assessment purposes, but are combined for FHCF and credit purposes. It is impossible to accurately show the PML resources situation of these accounts on either separate or combined charts since simplifications must be made in either case that could prove materially inaccurate. Although we show the combined accounts, there is no guarantee that they will have deficits at the same time or of similar magnitude 3) Nonresidential exposure: Commercial nonresidential exposures in the CLA and Coastal Account are not reinsured by FHCF. Actual deficits and assessments may be significantly different than an aggregated PML would otherwise indicate 4) Liquidity: These charts do not show the liquidity needs of the accounts. An account with ample PML resources may still require liquidity as many of the PML resources are not available immediately following a major hurricane. The timing and magnitude of receivables such as FHCF recoveries and assessments are unknown. Therefore, Citizens should consider having a liquidity bridge. 44

45 Layer Appendix Chart 2 - PLA Surplus Notes Definition Surplus notes (surplus debentures, contribution certificates) are instruments that have the characteristics of both debt and equity. While surplus notes generally require the repayment of principal and interest (note that interest cannot compound), they are subject to the strict control of the commissioner of the reporting entity s state of domicile. In order for surplus notes to be included as equity (as opposed to debt) by the issuing entity, the following provisions must be included within the debenture: Subordination to policyholders; Subordination to claimant and beneficiary claims; Subordination to all other classes of creditors other than surplus note holders; and Interest payments and principal repayments require approval of the commission of the state of domicile. Additional considerations Surplus notes cannot be used for the purpose of initially capitalizing a stock reporting entity. Surplus notes are not considered part of the issuing entity s legal liabilities. Investments in surplus notes are considered admitted assets and follow the general accounting and reporting requirements of Bonds (excluding loan backed and structured securities). Surplus notes are reported as debt by the issuing entity for GAAP reporting. Interest and principal can only be recorded as a liability upon approval for payment by the commissioner in the state of domicile. Citizens may have to record a discount (i.e. valuation allowance) to the surplus notes (thereby reducing surplus) since the market (fair) value will lk likelyl be less than the facevalue 45

46 Appendix 3 Proposed Surplus Notes Program Key Surplus Note Terms Companies desiring i to participate i t in the Program will be required to enter into a surplus note under terms prescribed by Citizens. Some of the more significant terms appear below. The duration of the surplus note is 20 years. Interest on the surplus note will be the same as the 10-year US Treasury note rate. Interest does not compound. The interest rate will be adjusted to reflect the current US Treasury rate on a quarterly basis. The surplus note will require payment of interest only during the first three years. The surplus note contains no prepayment penalty. 5%of the total surplus note proceeds will be retained by Citizens until the final true- up date in consideration of opt-outs and insured-initiated cancellations that may occur between the execution date of the surplus note and the true up date. The final amount of the surplus note will be determined on the true up date. The surplus note will be subordinate to policyholder obligations and certain other creditors but not to the assuming insurer s parent, affiliates and holders of common and preferred stock. 46

47 Appendix 3 Proposed Surplus Notes Program (cont d) Key Surplus Note Terms (cont d) The principal i amount of surplus notes outstanding tt may not be included d in the assuming insurer s surplus for the purpose of calculating dividends. Surplus note proceeds may be used only for investment, payment of and hurricane losses on the assumed policies. Surplus note proceeds may not be used for the following: - purchase of non-permitted investments t notwithstanding t special consent investments that may be permitted under Section , Florida Statutes - purchase of physical assets - advances, bonus payments or distribution of funds to parent, subsidiaries or affiliates The surplus note will contain an acceleration clause requiring immediate payment of outstanding principal and interest for material misrepresentation of facts. Failure to make timely payment under the surplus note or to comply with any material provision of the surplus note will result in one or more of the following: - an increased interest rate up to the maximum interest rate permitted by law - acceleration of the repayment of principal or interest - prohibit further assumptions from Citizens - all other remedies available at law or equity 47

48 Appendix 3 Proposed Surplus Notes Program (cont d) Requirements for Participation in the Program Companies desiring to participate in the Program must meet the financial requirements listed below. Financial i eligibility ibilit requirements must be satisfied as a condition of the issuance of the surplus note and will be validated via a due diligence process. Following are the requirements that must be met both initially and during the term of the surplus note: The assuming insurer must have 2011 actual or 2012 projected minimum surplus of $25 million and a Risk Based Capital ratio of at least 300%; OR the assuming insurer must have actual 2011 or projected 2012 minimum surplus of $20 million and a Risk Based Capital ratio of at least 400%. Additional amounts of surplus funds may be infused such that t an assuming insurer can meet these requirements; however, the assuming insurer must evidence receipt of these funds prior to execution of the surplus note document. The assuming insurer must secure reinsurance sufficient to cover its seasonal 1:100 year PML with at least one reinstatement and two 1:10 year PML for a single storm season. PML shall be calculated using the most recent version of a model accepted for use by the Florida Commission on Hurricane Loss Projection Methodology. Models should be set using the long term version with demand surge. The assuming insurer must have cash and total invested assets to total liabilities of at least 1:1. The assuming insurer must have total liabilities to surplus of less than 3:1. 48

49 Appendix 3 Proposed Surplus Notes Program (cont d) Requirements for Participation in the Program (cont d) The assuming insurer may be granted temporary relief (not to exceed 12 months) from these requirements under a Qualifying Event (as defined in the Surplus Note Assumption Agreement), and must provide Citizens with a plan of how to achieve compliance. The assuming insurer must also allow Citizens access to information that addresses various elements of business operations to allow Citizens the ability to further evaluate the assuming insurer s ability to participate in this program. These elements will be reviewed as consideration for participating in the program. 1. The assuming insurer must be admitted in the State of Florida and have direct written property premium in both 2010 and 2011 of at least $50 million. 2. A listing of all consent orders issued by the Florida Office of Insurance Regulation (OIR) since January 1, A listing of all current consent orders issued by the OIR regardless of the date of issuance. 4. A copy of the applicant s most recent audited financial statements and an indication of any changes in external audit firm in the last two years. 49

50 Appendix 3 Proposed Surplus Notes Program (cont d) Requirements for Participation in the Program (cont d) Annual Statement t t and June 30, 2012 Quarterly Statement. t t 6. Risk-Based Capital reports filed with the OIR. 7. IRIS ratios filed with the OIR. 8. The most recently completed Market Conduct annual statement. 9. The percentage of the applicant s current total Florida residential property policies (as of September 30, 2012) that have been assumed from Citizens and demonstration of compliance with those contractual terms with Citizens. 10. A summary of the applicant s policies i by product, exposure, and premium. 11. Written communications received from ratings agencies (within the past 2 years) and any formal response(s) provided by the applicant. 12. Tenure of senior management and descriptions of any changes that have occurred within the prior 24 months. 13. Number of appointed agents and demonstration of sufficient agency force for the current and depopulated business. The company may wish to consider submitting the number of agents by zip code as well as counties/zip codes that are closed for new writings. 14. Complaint handling procedures as well as the number of complaints the company received during 2010 and

51 Appendix 3 Proposed Surplus Notes Program (cont d) Requirements for Participation in the Program (cont d) 15. Current and planned underwriting, claims and customer service operations and how the assumption of policies will be managed with current/expected underwriting/claims/customer service capabilities. 16. Overview of outsourced functions for the company including details of oversight and controls for the internal and outsourced operations including quality assurance. 17. Copies of all in force reinsurance agreements. 18. The assuming insurer must demonstrate its ability to write business that is approved by the secondary mortgage g market. 19. The assuming insurer must be in compliance with the minimum surplus provision of the SBA Capital Build-Up Program, if the assuming insurer participated in that program year pro forma financial statements (post assumption) and supporting documents/analysis for the assumptions used. 21. Exposure schematic (i.e. layer charts ) demonstrating expected losses, reinsurance attachment levels, reinsurance payout levels, reinstatement(s) and surplus levels for the following using an approved model one 1:100 year event two 1:10 year events in a single season 51

52 Appendix 3 Proposed Surplus Notes Program (cont d) Other Legal Requirements: Audit, Reporting: Citizens has a general power to audit the insurer s records at any time with one business day notice. Additionally, Citizens has the specific power to audit the insurer s reporting and replacement of cancelled or nonrenewed policies and its ongoing g financial soundness. Additionally, theinsurer must automatically provide monthly reports of assumed policies including all cancelled or nonrenewed. All audits are at the insurer s expense. Insurer Sale, Liquidation: If the insurer is sold or reorganized, the successor entity must expressly assume the insurer s obligations under the Agreement and Surplus Note. If the insurer is liquidated, it agrees that Citizens will have highest priority within the general creditor class. The insurer s contracts with its insiders and affiliates must include an express subordination to the Surplus Note debt. Affiliated Party Restrictions: The insurer cannot make distributions of profits, dividends or assets to insiders or affiliates unless all Surplus Note payments are current, distributions will not impair the insurer and it will maintain all financial soundness requirements. 52

53 Appendix 3 Proposed Surplus Notes Program (cont d) Other Legal Requirements (cont d): Conditions of Default: The breach and default provisions of the Agreement and the Surplus Note are linked together so that a breach or default of one constitutes a default of the other. Additionally, the Note will be in default if the insurer fails to maintain its authority to conduct property and casualty insurance business in Florida, becomes subject to administrative supervision, rehabilitation or liquidation, or is required to cancel or nonrenew the Assumed Policies. In addition to the above, the Agreement will be in default if the insurer fails to maintain its surplus or RBC ratio requirements, uses the Note proceeds in violation of the Agreement, fails to timely make Note payments, or makes material misstatements related to the Agreement or the Surplus Note. Right to Cure: If a party is in breach under the Surplus Note which may be cured, that party will have 15 days to cure the breach. There is no right to cure a default caused by a regulatory event. Consequences of Default: A material breach or default under either the Agreement or the Surplus Note shall trigger any or all of the following remedies being available to Citizens: Increase the interest rate to the legal maximum Acceleration of principal and interest Prohibit Insurer from further assumptions All other remedies available at law or equity 53

54 Appendix 3 Proposed Surplus Notes Program (cont d) Key Assumption Agreement Terms Companies desiring to participate in the Program must enter into an Assumption Agreement with Citizens which h sets forth the requirements and conditions of the assumption of policies under the Program. The assuming insurer must agree to offer to renew policies assumed under the Program for the first 10 years of the program. The Assumption Agreement contains a provision allowing forgiveness of Surplus Note principal, as a risk-sharing measure, for hurricanes occurring during the first 5 years of the note. This provision will apply based upon the assuming insurer s ratio of gross paid losses on assumed policies i to gross paid losses on total t policies i multiplied li by total net paid losses, not to exceed 20% per year (aggregate of all hurricanes) on an ultimate net loss basis. The assuming insurer must agree to replace any assumed policies which are nonrenewed or cancelled during the 10 year term with either additional i Citizens i policies or new voluntary policies. The replacement of policies will occur in the following progression: I. Identify a Citizens policy in the same zip code that closely matches the policy to be replaced in terms of TIV, age of home, construction type and Florida Hurricane Catastrophe Fund premium and shall assume a Replacement Policy meeting those criteria. 54

55 Appendix 3 Proposed Surplus Notes Program (cont d) Key Assumption Agreement Terms (cont d) II. Identify a Citizens policy in the same zip code that closely matches the policy to be replaced in terms of Florida Hurricane Catastrophe Fund premium and shall assume a Replacement Policy meeting those criteria. III. If unable to identify a Citizens Replacement Policy under (ii) above, the same procedure will be followed using rating territory in place of zip code and the Insurer shall assume that policy. IV. If unable to identify a Citizens replacement policy in the same rating territory under (iii) above, identify any Citizens policy or group of policies in the same rating territory that generate an aggregate g Florida Hurricane Catastrophe Fund premium at least the same as the policy to be replaced and shall assume that policy as the Replacement Policy. V. If unable to identify a Citizens policy in the same rating territory which generates a Florida Hurricane Catastrophe Fund premium at least the same as the policy to be replaced, select any policy or group of policies within Citizens that generates at least the same amount of Florida Hurricane Catastrophe Fund premium, calculated as of the Assumption Date, as the policy to be replaced. 55

56 Appendix 3 Proposed Surplus Notes Program (cont d) Key Assumption Agreement Terms (cont d) VI. Assuming insurer shall demonstrate to Citizens that it has made a good faith effort to identify a Replacement Policy in progressing through steps (i) through (v) above. VII. If unable to identify a Citizens policy as provided above, may replace the policy with a private market policy in the same rating territory that has at least the same Florida Hurricane Catastrophe Fund premium as the policy to be replaced calculated as of the date of replacement. VIII. If unable to identify a Citizens policy to replace the policy in accordance with any of the above procedures, Insurer shall repay to Citizens an amount of Surplus Note principal equal to the ratio of the total surplus note (as of the assumption date) to the aggregate of 4 times the FHCF premium multiplied by 4 times the FHCF premium on the policy not retained. The assuming insurer must agree during the first 10 years of the term of the agreement not to initiate cancellation or nonrenewal of more than 10% of its voluntary book of business as of the date of assumption. Refer to the Surplus Note Assumption Agreement for additional details. 56

57 Appendix 3 Proposed Surplus Notes Program (cont d) Key Assumption Agreement Terms (cont d) The assuming insurer must agree that with renewal offers commencing January 1, 2013 and ending January 1, 2016, annual rate increases for the assumed policies will be limited to no more than 10% per policy per year. Coverage provided will be on Citizens forms for the three year period described above. Renewals after January 1, 2016 may be at the assuming insurer s filed and approved rate level and on its filed and approved voluntary policy form. Proceeds received by the assuming insurer must be maintained in a segregated fund and provide for monthly reporting to Citizens. Unless there is a hurricane, no more than 1/3 of the total note proceeds may be used in each of the first three years for reinsurance and for meeting policyholder ld obligations. 57

58 Appendix 3 Proposed Surplus Notes Program (cont d) Continuing Requirements The following may result in: 1) an increase the interest rate up to the maximum interest rate permitted by law; 2) an acceleration of the repayment of principal and interest; 3) reduction in the term of the Surplus Note; or 4) calling the Surplus Note due and demand full repayment Failure to maintain the financial eligibility requirements stated above. Using surplus note proceeds that are not in compliance with the requirements stated above. Failure to timely make a payment of interest and/or principal. Making any representation, including those made in the application, Assumption Agreement, during due diligence, or accompanying documentation, which is false or misleading. Any other material breach of the terms of this Note or the Assumption Agreement. 58

59 Appendix 3 Proposed Surplus Notes Program (cont d) Oversubscription Allocation: In the event that requests for surplus notes exceed the approved program amount ($350 million - $300 million PLA and $50 million Coastal), proceeds will be allocated in the following manner: 1. Total proceeds allocated to any one group of insurers within the same Holding Company structure will be limited to $100 million the requested amount from insurers within that Holding Company structure will be reduced in proportion to the reduction to $100 million 2. If total requests, after the application of 1. above, remain above the program limit, each insurer s requested surplus amount will be reduced to an amount equal to the program limit divided by the total requests times the requested amount for each insurer. 59

60 Appendix 3 Proposed Surplus Notes Program (cont d) Oversubscription Allocation Illustrative Example Holding Co. W Holding Co. X Holding Co. Y Holding Co. Z Insurer A Insurer B Insurer C Insurer D Insurer E Insurer F $100 million $100 million $50 million $50 million $50 million $50 million $250 million $150 million $400 million Application of Step 1. requests within the same Holding Company structure reduced to $100 million Holding Co. W Holding Co. X Holding Co. Y Holding Co. Z Insurer A Insurer B Insurer C Insurer D Insurer E Insurer F $100 million $100 million $50 million $33 million $33 million $33 million $250 million $100 million $350 million Application of Step 2. remaining amounts are reduced to appx. 85% ($300/$350) Holding Co. W Holding Co. X Holding Co. Y Holding Co. Z Insurer A Insurer B Insurer C Insurer D Insurer E Insurer F $85 million $85 million $43 million $29 million $29 million $29 million $213 million $87 million $300 million 60

61 Appendix 4 Exposure and Risk Count by County PLA (as of 9/30/2012) 61

62 Appendix 4 Exposure and Risk Count by County CLA (as of 9/30/2012) 62

63 Appendix 4 Exposure and Risk Count by County Coastal (as of 9/30/2012) 63

64 Appendix 5 Top 20 Florida Insurers by Total Insured Value Personal Residential Property (QUASR data as of 03/31/12) 64

65 Appendix 5 Top 20 Florida Insurers by Total Insured Value Commercial Residential Property (QUASR data as of 03/31/12) 65

66 Appendix 6 Market Share Analysis Layer Chart - PLA Before and After Surplus Note Program 66

67 Appendix 6 Market Share Analysis (South Florida Only) Layer Chart - PLA Before and After Surplus Note Program 67

68 Appendix 7 Personal Lines Account - Homeowner (HO-3) Average Cost Per Policy: Wind Peril This shows the expected cost, in dollars, per policy, for Wind losses. Costs for loss adjustment, risk load, and reinsurance are included. 68

69 Appendix 7 Personal Lines Account - Homeowner (HO-3) Average Cost Per Policy: Sinkhole Peril This shows the expected cost, in dollars, per policy, for Sinkhole losses. Costs for loss adjustment, risk load, and reinsurance are included. 69

70 Appendix 7 Personal Lines Account - Homeowner (HO-3) Average Cost Per Policy: All Other Perils (excl. Sinkhole and Wind) This shows the expected cost, in dollars, per policy, for losses due to all perils other than Wind or Sinkhole. This includes but is not limited to the perils of fire, water, theft, and liability. Costs for loss adjustment, risk load, and reinsurance are included. 70

71 Appendix 7 Personal Lines Account - Homeowner (HO-3) Average Cost Per Policy This shows the expected cost, in dollars, per policy. Costs for loss adjustment, risk load, and reinsurance are included. d 71

72 Contact Information Barry Gilway, President/CEO and Executive Director Sharon Binnun, CFO Christine Ashburn, Director of Corporate Communications/Legislative and External Affairs 72