Citizens Property Insurance Corporation

Transcription

1 This discussion provides an assessment by management of the consolidated financial position and the results of operations for Citizens Property Insurance Corporation ( Citizens or the Company ) for the nine months ended September 30, Information presented in this discussion is organized into three sections, (1) comparative analysis of the financial position, (2) comparative analysis of the results of operations and (3) budgetary analysis of the results of operations. The September 2012 financial package prepared by management should be used in conjunction with this discussion. The financial information referenced within this analysis has been prepared in accordance with Statutory Accounting Principles. Comparative Financial Position Analysis (begins at page 5 of the financial report) Total assets increased $2.6 billion, or 19%, during the nine months ended September 30, The overall increase is largely the result of an increase in cash and invested assets resulting from year-to-date net income, the $1.5 billion PLA/CLA pre-event bond issuance in June 2012, a considerable increase in premiums collected and a decrease in non-admitted invested assets, partially offset by the $106.1 million debt maturity of the 2007A HRA Refunding Bonds in March 2012, the $106.4 million debt maturity of the 2009A HRA Bonds in June 2012 and the $105 million debt maturity of the 2011A HRA Bonds in June Certain investments, representing less than 1% of total cash and invested assets, continue to be held in defaulted Structured Investment Vehicles (SIVs) for which the Company continues to receive payments of principal and interest. Declines in market value of invested assets are continually evaluated to determine whether these declines are temporary or other-than-temporary in nature. In making this determination, the Company monitors external impairment indicators such as issuer credit ratings as well as the extent and duration of the related declines and internal impairment indicators such as the Company s intent and ability with respect to retention of the impaired securities. These indicators are obtained from both third-party valuation services and internal analyses performed by the Company. No such other-than-temporary declines in market value have been recorded in 2012 or 2011; however, other-than-temporary declines totaling $294 million were recorded during 2007 and 2008 related to defaulted SIVs. Full realization of the principal value on defaulted SIVs is not readily determinable. However, it is noteworthy to mention that $117.1 million of the other-than-temporary impairment has been recovered as of September It is possible that the Company could recognize additional other-thantemporary impairments in the future if future events, information and the passage of time cause it to conclude that declines in market value are otherthan-temporary. 1 of 17

2 The Company s invested assets at amortized cost totaled $15.3 billion at September 30, The Company employs an investment policy that emphasizes protection of principal while maintaining adequate liquidity in order to meet future claim obligations. At September 30, 2012, the Company s cash and invested assets consists of: US Treasury and Agency securities and money market funds (27%), corporate bonds, commercial paper and certificates of deposit (24%), tax-exempt money market funds (3%), taxable municipal bonds (3%), tax-exempt municipal bonds (29%), tax-exempt variable rate demand notes (5%), prime money market funds (8%), and defaulted SIVs (1%). During 2012, the Company earned $140.7 million in interest income, offset by $144.3 million in interest expense. Cash and invested assets increased $2.6 billion, or 21%, during the nine months ended September 30, This increase is the result of the $1.5 billion bond issuance, net cash flows from 2012 operations, the collection of emergency assessment funds and reinsurance reimbursements, partially offset by the $317.5 million of total debt maturities during the first half of Approximately $26.0 million of the Company s operating funds are invested in the Florida State Board of Administration s Florida Prime ( SBA Florida Prime ), formerly known as the Florida State Board of Administration s Local Governmental Investment Pool ( LGIP ). At September 30, 2012, the entire $26.0 million invested in the SBA Florida Prime is invested in Fund B, which has been frozen from investor withdrawals due to that portfolio s investment in distressed illiquid assets. As principal and interest payments are received, Citizens allocable portion is eligible for withdrawal and such withdrawals have been consistently made. Full realization of the principal value of Pool B assets is not readily determinable. Premium receivables increased $31.2 million, or 17%, during the nine months ended September 30, This increase is directly related to the increase in written premiums. Premium due from takeout companies increased $0.4 million, or 43%, due largely to the increase in assumption activity and timing of the corresponding assumptions. At assumption, Citizens cedes all unearned premium to the takeout company for the policies assumed while Citizens continues to service these policies until expiration. Such servicing of policies includes cancellations and endorsements that could result in policyholder refunds. In addition, policyholder opt-outs that occur after the assumption date cause an increase in premiums due back to Citizens. As a result of substantial levels of opt-outs that result in significant amounts due back to Citizens, management has implemented a more frequent billing cycle for all assumptions. The amount reported is net of any ceded premium receivables over 90 days past due or ceded premium receivables 2 of 17

3 due from insolvent companies, as these receivables are considered uncollectible and have therefore been non-admitted. Reinsurance recoverable increased $1.8 million or 59%. This increase is mainly due to development of ceded reserves as well as the timing for which recoveries are billed to reinsurers for ceded paid losses. Citizens has recoverable losses of $4.7 million and $0.3 million due from private reinsurers in the PLA and Coastal accounts, respectively. Citizens has no recoverable losses from the FHCF for paid Hurricane Wilma losses in the PLA/CLA or Coastal accounts due to the FHCF Contract Year 2005 Commutations that were executed during EDP equipment increased $1.8 million, or 89%, during the nine months of This increase is primarily related to the purchase of servers for various projects and storage as well as end of life cycle equipment replacement. Accrued investment income at September 30, 2012 increased $8.5 million, or 12%, as compared to year-end This increase is mainly attributed to the additional cash (provided from operations) being transferred from money market funds to external investment manager accounts with a longer weighted average maturity. The increase in accrued interest payments in the external investment manager accounts is due to the majority of assets invested in fixed-maturity securities with semi-annual payment patterns versus monthly payments from money market funds. In June 2012, an additional $1.5 billion from the 2012A bond issuance was transferred to tax-exempt manager accounts. Also, Citizens has transferred $780 million of operating funds held in money market funds to external investment managers through September 30, Amounts due from investment brokers increased $52.0 million, or 100%, for the first nine months of Security transactions are recorded on the trade date rather than the settlement date. Occasionally, securities are sold and recorded in the Company s financial records, but the cash has not been received as of the balance sheet date. At December 31, 2011, Citizens did not have a balance due from brokers, compared to $52.0 million that brokers owed Citizens as of September 30, These receivables are typically settled within 5 to 10 business days after the trade date. Other assets decreased $2.2 million, or 93%. This decrease is due to the collection of an ineligible takeout bonus due to Citizens, which was recorded as a receivable at year-end Assessment receivables decreased $122.3 million, or 25%. This decrease is due to the collection of approximately $120.6 million of emergency assessments and approximately $1.7 million of 2009 Florida Insurance Guaranty Association ( FIGA ) assessment recoupment. 3 of 17

4 Total liabilities increased $2.1 billion, or 27%, during the nine months ended September 30, The increase is due primarily to an increase in notes payable, loss reserves and amounts due to investment brokers partially offset by a decrease in unearned premiums and unearned assessment income. Loss reserves and loss adjustment expense (LAE) reserves are determined based on the Company s estimate of the ultimate cost of settling all incurred but unpaid claims. Citizens does not discount liabilities for loss and LAE reserves. Loss reserves increased approximately $181.8 million, or 17%, and LAE reserves increased approximately $33.5 million, or 13%, during the first nine months of 2012 as compared to Activity with respect to unpaid losses and LAE is as follows: Net loss and loss adjustment expense reserves related to the 2004 and 2005 hurricanes and the 2008 Tropical Storm Faye decreased from $128.3 million as of December 31, 2011 to $94.0 million as of September 30, This decrease is largely due to a decrease in the case reserves resulting from claim settlement. A significant portion of the decrease was due to the 2005 storms. At year-end 2011 there were approximately 1,600 open claims from the 2005 storms, compared to 1,147 at September 30, Unpaid losses and LAE reserves not related to hurricanes (non-catastrophe claims) increased from $1.22 billion as of December 31, 2011 to $1.47 billion as of September 30, 2012; which represents an increase of 20%. Approximately $31 million of this increase in loss and ALAE reserves can be attributed directly to Tropical Storms Debby and Isaac. Additionally, an increase in the number of pending Non-CAT claims contributed to the increase in reserves. Excluding Tropical Storms Debby and Isaac, the number of pending claims increased by approximately 19% as of September 30, 2012 as compared to year-end This increase in pending claims is largely due to the peril of water. Water claims account for 16% of the increase in total pending Non-CAT claims. Sinkhole continues to dominate the vast majority of the loss reserves. The sinkhole PLA loss and ALAE reserves comprise 49.6% of the total company-wide Non-CAT reserves. Further discussion of non-catastrophe losses is presented within the Comparative Statement of Operations Analysis section. Direct written premium increased 5% from Unearned premiums decreased $23.8 million, or 2%, which is primarily due to additional ceded unearned premium resulting from the increase in private reinsurance and the increase in the FHCF premium, partially offset by an increase in direct written premium. The remaining difference is a result of the timing of when the underlying policies were written during the preceding 12 month period. Unearned assessment income decreased $23.9 million, or 21%, at September 30, 2012 compared to December 31, This decrease is consistent with the nine 4 of 17

5 months of earnings elapsed since 2011 for deferred financing costs of post-event bonds related to the 2005 HRA emergency assessment. Reinsurance premiums payable increased $475.7 million, or 854%. Reinsurance premiums payable includes premium payable to the FHCF, private reinsurers and ceded premium payable to depopulation companies. This increase is attributable to timing, as the September 30, 2012 amount includes reinsurance premiums of $339.9 million and $191.5 million to the FHCF and private reinsurers, respectively. Premium installments for private reinsurance are paid quarterly throughout the contract period whereas premium amounts due to the FHCF are typically settled in full prior to year-end. The year-end balance typically includes only depopulation premiums payable and private reinsurance, if purchased. Advanced premiums and suspended cash decreased $8.3 million, or 8%, for the nine months ended September 30, This balance is comprised primarily of advanced premiums which make up 87% of the total balance. Advanced premiums accumulate when payments are received before the effective date of the related policy. Notes payable increased $1.3 billion, or 28%, during the first nine months of This increase is due primarily to the $1.5 billion pre-event bond issuance offset by the $317.5 million of total debt maturities during the first half of Interest payable increased $45.8 million, or 167%, during the first nine months of This increase is primarily due to the timing of the debt service payment schedule. The majority of the debt service payments are due semi-annually. Taxes, licenses and fees payable increased $9.8 million, or 151%. This increase is attributable to an increase in accrued premium tax payable due to the timing of the quarterly payments. The second quarter payment is due prior to the end of the second quarter, on June 15 th. In contrast, the third quarter payment is not due until October 15 th and the year-end payment is not due until March 1 st of the following year. The increase in the liability is also due to an increase in the related expense since premium has increased from Amounts due to investment brokers increased $166.4 million, or 12,050%, for the first nine months of Security transactions are recorded on the trade date rather than the settlement date. Occasionally, securities are purchased and recorded in the Company s financial records, but the cash has not been disbursed as of the balance sheet date. At September 30, 2012, Citizens owed brokers $167.7 million, compared to $1.4 million, as of December 31, These payables are typically settled within 5 to 10 business days after the trade date. 5 of 17

6 Other liabilities increased $6.5 million, or 6%. Other liabilities are comprised of commissions payable, surcharges payable, accounts payable and accrued expenses and escheated funds. Individually, each of these payables had insignificant variances for the first nine months of 2012 as compared to the prior year. Surplus increased $432.2 million, or 8%, at September 30, 2012 compared to year-end 2011, largely as a result of current period earnings, which is discussed in further detail below. Comparative Statement of Operations Analysis (begins at page 6 of the financial report) Net earned premiums were $1.76 billion as of September 30, 2012, as compared to $1.69 billion as of September 30, 2011, which represents an increase of $70.3 million, or 4%. This increase is a direct result of the following factors: Direct written premiums increased $114.2 million, or 5%, as of September 30, 2012 compared to September 30, This increase is the result of the implementation of the glide path rate increase during 2012, as well as a 5% increase in policies in-force (including those policies serviced by Citizens after assumption). Ceded written premiums to takeout companies as of September 30, 2012 increased $44.6 million, or 252%, compared to the same period in This increase is the direct result of an increase in the number of policies assumed from takeout companies. Ceded premiums to private reinsurers increased $157.5 million, or 139%, as of September 30, Citizens entered into traditional catastrophe excess of loss reinsurance treaties with private reinsurers in both 2012 and 2011 for the Coastal Account. The amount of risk transferred in 2011 was $575 million as compared to the amount of risk transferred in 2012 of $1.5 billion. As such, the premium ceded was substantially larger for the 2012 hurricane season. Losses incurred decreased $47.9 million, or 6%, as of September 30, 2012, compared to the same period in However, the losses incurred for catastrophe (CAT) and non-catastrophe (Non-CAT) claims warrant individual discussion to delineate differences between periods. 6 of 17

7 September 30, 2012 September 30, 2011 Losses incurred CAT $ 2.8 million $ 33.8 million Losses incurred Non-CAT million million Total losses incurred $ million $ million The losses incurred represents CAT and Non-CAT losses, which includes paid claims, case reserves, and incurred but not reported (IBNR) reserves. The CAT component of the loss ratio (expressed as a percentage of losses incurred to earned premium) for the first nine months of 2012 was 0.16% compared to 2.00% for the first nine months of CAT Only: Adverse development from 2011 was $3,100,323 and $2,849,330 gross and net of reinsurance, respectively, for the nine months ended 09/30/2012. There are over 1,200 outstanding claims remaining for the 2004 and 2005 storms, most of which are in litigation. The majority of these outstanding claims, 1,147, are related to the 2005 storms. Some uncertainty still remains surrounding the ultimate settlement of these remaining claims and the future development (favorable or adverse) will depend upon the outcome of the litigation. CAT Only: Adverse development from 2010 was $1,169,443 and $35,246,407 gross and net of reinsurance, respectively for the 12 months ended 12/31/2011. The unfavorable development of the net CAT losses was due to an adjustment of eligible losses that were ceded to the FHCF as a result of the Contract Year 2005 Commutation of Hurricane Wilma for the Coastal Account that occurred during the first half of It is noteworthy to mention that Hurricane Wilma losses were the only losses from 2004/2005 that triggered reimbursements from the FHCF. Non-CAT Only: Tropical Storms Debby and Isaac are included in the aggregate net Non-CAT loss ratio. As of September 30, 2012, the company-wide selected ultimate loss for Debby and Isaac are approximately $26.0 million and $35.1 million, respectively. This contributes to approximately 7% of the overall Non-CAT loss ratio. The number of litigated and disputed claims increased 23% during the first nine months of 2012 as compared to the same period in In addition, the first notice of loss (FNOL) increased 27% as compared to 7 of 17

8 2011. The increase in FNOLs is primarily related to water claims (19% increase), Non-CAT weather related claims including Tropical Storms Beryl, Debby and Isaac (91% increase), burglary & theft claims (23% decrease) and sinkhole claims (28% decrease). Loss adjustment expenses were $202.0 million at September 30, 2012 as compared to $145.9 million at September 30, The increase in LAE is due primarily to an increase in reported/pending claims, an increase in the average ALAE costs, Tropical Storms Debby and Isaac costs, and an increase in overall ULAE costs. Reported claims have increased by approximately 24.9% during the first nine months of Additionally, litigated claims make up a higher percentage of reported/pending claims, as ALAE costs related to litigated claims are usually higher than non-litigated claims. As the percentage of litigated claims increases, so does the ALAE. Tropical Storms Debby and Isaac contributed to approximately $11.7 million of ALAE as of the September 30, 2012 incurred amount. The ULAE paid amounts have increased approximately $9.7 million through the first nine months of 2012 as compared to the same period in This, coupled with the increased number of outstanding claims/reserves, has lead to an increase in the ULAE IBNR. Certain expenses vary directly with and are proportionate to written premiums. Accordingly, the increase in written premiums during the first nine months of 2012 caused an increase in both producer commissions (agents are paid a percentage of commissionable premium ranging from 10% to 14% depending on the type of business) and taxes & assessments (premium and State Fire Marshal taxes approximate 1.75% and 1% of certain written premium, respectively). Administrative and other underwriting expenses include traditional administrative costs, professional fees, servicing carrier fees, and underwriting costs (such as inspection fees and ISO participation fees). These expenses are provided in detail on page 10 of the financial report. Administrative and other underwriting expenses increased $55.8 million, or 50%, during the first nine months of 2012 compared to the same period in The primary drivers for this large increase are the Inspection Outreach Program and Core. Additionally, the following factors contributed to the overall increase in administrative expenses: Salary expenses, employee benefits and payroll taxes increased $3.8 million, or 5%. This increase is primarily due to an increase in average per-employee salary resulting from hiring more experienced staff at higher pay grades. In addition, this increase is due to an increase in headcount as well as an increase in accrued leave year over year. This increase was anticipated as indicated in the budgetary comparison on page 15 of the financial report. 8 of 17

9 Temporary labor increased $4.5 million, or 167%, for the nine month period ending September 30, 2012, as compared to the same period in The bulk of the increase relates to additional resources related to the inspection program. Citizens experienced increased utilization of temporary services in Consumer and Agent Services, Insurance Operations Vendor Management and Insurance Operations - Underwriting. Consumer and Agent Services incurred a $0.73 million, or 376% increase which was necessary to maintain service levels as a result of increased call volumes. Insurance Operations Vendor Management increased $0.74 million, or 210%, due to increased utilization of temporary labor related to Core backfill, the Inspection Outreach Program, and the addition of seven new vendor programs. Insurance Operations Underwriting experienced a $2.7 million, or 252% increase which was related to the Inspection Outreach Program. The increases were anticipated as indicated in the budgetary comparison on page 15 of the financial report. Other underwriting fees increased $22.1 million, or 232%, for the nine month period ending September 30, 2012, as compared to the same period in This increase is mainly due to an increase in property inspection expenses related to the Inspection Outreach Program. This increase was anticipated as indicated in the budgetary comparison on page 15 of the financial report. Other processing fees through September 30, 2012 were consistent with the same period in Training expenses through September 30, 2012 were consistent with the same period in Recruiting expenses increased $0.3 million, or 124%, through September 30, 2012 as compared to the same period in This increase is mainly due to increases in recruitment fees to fill three crucial positions in Printing and office supplies were $1.0 million, or 108%, higher through September 30, 2012 as compared to the same period in This is primarily related to the purchase of computers and network hardware items that individually fall under the $2,500 capital acquisition threshold and therefore, are reported under office supplies. The majority of these new computers and network hardware items are related to the Core and Inspection Outreach Programs. Subscription and dues increased $0.1 million, or 19%, in the first nine months of 2012, as compared to the same period in This is primarily due to recording certain expense items as subscription and dues in 2012 as opposed to software maintenance and licensing in This realignment was done to better match the expenses with the appropriate expense category. 9 of 17

10 Postage expenses increased $2.1 million, or 53%, through September 30, 2012 as compared to the same period in This is primarily due to an increase in the volume of individual mail pieces generated from policy processing systems, and from an increase in policies in-force. An increase was anticipated as indicated in the budgetary comparison on page 15 of the financial report. Telecommunication expenses for the first nine months of 2012 increased $0.55 million, or 21%, as compared to the same period in This increase is primarily due to the implementation of three communication links between Tallahassee, Tampa and Jacksonville, added services to route Underwriting calls to an external vendor, increased conference calls due to Core, a catastrophe backup plan, upgraded phone system, and an increase in the Mobile Device Management sandbox to test additional methods for providing a mobile workforce. Legal expenses and related matters increased $0.77 million, or 551%, during the first nine months of 2012, as compared to This is primarily due to the return of escrowed funds during 2011 related to a case from 2008 that significantly reduced legal expenses in Insurance expenses for the first nine months of 2012 decreased $0.08 million, or 17%, as compared to the same period in This decrease is primarily due to the reduction in annual premiums for Directors and Officers (D&O) insurance of approximately 30%. Travel and meals increased $0.38 million, or 34%, due to increases in travel within the Executive, Claims, Underwriting and Core cost centers. Travel for the Executive cost center increased 114% year over year; however, this increase was anticipated in the 2012 budget. Core travel increased 100% during the same period, as there were no Core travel expenses incurred in The Claims department experienced a 57% increase and Underwriting experienced a 128% increase in year over year travel and meals expense. However, these increases were anticipated in the 2012 budget. Servicing carrier fees for the first nine months of 2012 were consistent with the same period in Professional consulting increased by $19.6 million, or 173%, during the first nine months of 2012 as compared to the same period in This increase is primarily due to professional consulting costs related to Core. Increases in print vendor costs as a result of increased policies in-force, new notices and increased document size also contributed to the overall increase in professional consulting. Lastly, increased utilization of staff augmentation resources in IT for use in several approved enterprise and departmental projects for 2012 also contributed to the increase in professional consulting. An increase was 10 of 17

11 anticipated as indicated in the budgetary comparison on page 15 of the financial report. Rent - facilities increased $0.87 million, or 19%, due to escalation in rental rates that occur annually, and increases in square footage leased to accommodate Core and Inspection program facilities in both Jacksonville and Tallahassee. Depreciation expense decreased $0.8 million, or 22%, in the first nine months of 2012 as compared to the same period in 2011, primarily due to reduced capital acquisitions in the last two years and the full depreciation of certain existing fixed assets. Maintenance and repairs expense increased $0.2 million, or 15%, in the first nine months of 2012 as compared to the same period in This increase is primarily due to an increase in security services necessitated by the expansion to additional facilities that were included in the last half of 2011 expenditures and additional janitorial and copier leases to support new space. Bank charges during the nine months ending September 30, 2012 were consistent with expenses in the same period in Software maintenance and licensing increased $4 million, or 68%, in the first nine months of 2012, as compared to the same period in While roughly half of this increase is related to Core (note that Citizens did not contract with Guidewire until July 2011 and therefore did not recognize any Core-related expenses during the first half of 2011), efforts by management to systematically analyze IT-related costs and categorize these costs as either capital acquisitions or maintenance costs have led to an overall increase within software maintenance and licensing. These efforts, in turn, have led to a decrease in capital acquisitions. The increase was anticipated as indicated in the budgetary comparison on page 15 of the financial report. The ULAE expense allocation represents administrative costs associated with claims processing that are allocated to LAE in accordance with applicable accounting pronouncements. The ULAE expense allocation was $4 million, or 24% greater in the first nine months of 2012, as compared to the same period in This increase is primarily the result of an overall increase in companywide administrative expenses during the first nine months of Capital acquisitions increased $4 million, or 460%, in the first nine months of 2012 as compared to the same period in 2011 due to planned increases in capital acquisitions for of 17

12 Investment income increased $45.1 million, or 47%, for the nine months ended September 30, 2012, as compared to the nine months ended September 30, This increase is mainly attributed to the increase in allocations to external investment managers and an increase in total asset portfolio. Since September 30, 2011, Citizens has moved an additional $905 million from taxable operating money market accounts and $1.5 billion in tax-exempt bond proceeds to accounts managed by external money managers. The increase in allocations to external investment managers also resulted in an overall increase in investment income as the portfolios were repositioned from money market funds yielding 0.12% on average to longer duration investment objectives yielding 1.12% on average. The increase in interest expense of $17.4 million, or 14%, for the first nine months of 2012 as compared to 2011 relates primarily to the issuances of the $900 million Coastal 2011A bonds in July of 2011 and the $1.5 billion PLA/CLA 2012A bonds in June 2012, partially offset by subsequent debt maturities. Takeout bonus for years after 2007 will tend to be a revenue source rather than an expense as the bonus program has ended and Citizens now may receive monies back from overfunded escrow accounts from prior years as audits are performed. Assessment income decreased $2.3 million, or 9%, for the first nine months of 2012 as compared to the first nine months of This decrease is due to the amortization method used to recognize earnings from post-event financing costs related to the 2005 HRA emergency assessment and will continue to gradually decrease in each calendar year. Net income increased $11.3 million, or 3%, during the first nine months of 2012 compared to the first nine months of The increase in net income relates to increased earned premiums and investment income and decreased losses incurred; partially offset by increased LAE incurred and total administrative and other underwriting expense. The expense ratio for the CLA was 19%, compared to 16% and 17% for the PLA and Coastal Account, respectively. The cost of operations in the CLA, as a percentage of direct written premiums, is higher than the costs in the PLA and Coastal Account. This can be attributed to higher commission rates for the CLA and overall higher processing costs paid to an outside vendor. This is consistent with prior year and budget. 12 of 17

13 Budgetary Statement of Operations Analysis (begins at page 11 of the financial report) Net earned premiums were $209.4 million, or 11%, less than budgeted for the first nine months of This variance is due to the following factors: Direct written premiums for the nine months ended September 30, 2012 were $262.8 million, or 9%, less than budgeted primarily due to less than expected new business. Premium is earned ratably over the life of the policy; as such, the full impact will not appear in earned premium until the policies have been in force for a full year. Premiums ceded to takeout companies were $43.7 million, or 235%, more than budgeted. This is due to higher than expected takeout activity during the first nine months of 2012 related to the change in ceding commission for depopulation. Premiums ceded to private reinsurers were $71.1 million, or 36%, more than expected. This variance is primarily due to the upsizing of the private risk transfer program due to improved pricing and capacity. Losses incurred of $752.6 million were $113.4 million, or 13%, less than budgeted, due to an overall decrease in earned premium. The actual loss ratio (expressed as a percentage of losses incurred to earned premium) was 43% as compared to 44% as budgeted. The losses incurred are further explained in the comparative section herein. Loss adjustment expenses incurred for the nine months ended September 30, 2012 were $36.0 million, or 22%, more than expected. This is due mainly to an increase in sinkhole claims, which are more costly to adjust, and an increase in litigated claims. The actual non-catastrophe LAE ratio was 11% as compared to 8% as budgeted. The ratio of LAE to losses was 27% and 19% for actual and budgeted, respectively. Producer commissions and taxes & assessments are each based on a certain percentage of written premiums. As written premiums fluctuate, these expenses should fluctuate proportionately. For the nine months ended September 30, 2012, written premiums were 9% less than budgeted. Producer commissions were 12% less than budgeted and taxes & assessments were 11% more than budgeted. Although taxes & assessments were higher than expected during the first nine months of 2012, they will become closer to the estimated amount as there will be a significant premium tax credit at year-end. 13 of 17

14 Ceded commissions have traditionally been a revenue earned by Citizens. For 2012 ceded commissions were eliminated to incentivize depopulation. Historically, Citizens received a commission ranging from 6% to 16% of premiums assumed by takeout companies. During the first quarter of 2012, Citizens removed the hold back of ceding commissions on assumptions effective the fourth quarter of Although no ceding commissions were budgeted in 2012, of the amount of ceding commission recognized in 2012, $3.3 million represents the amount of ceding commissions refunded to takeout companies and $1.1 million represents the true-up amount for cancelled and endorsed policies serviced by Citizens during the second and third quarters of Administrative and other underwriting expenses that are not directly attributable to a particular account (PLA, CLA or Coastal) are allocated on the basis of premiums written, policies in-force, or other similar factors. Actual administrative and other underwriting expenses for the nine months ending September 30, 2012 were $2.5 million, or 1%, less than budgeted, largely due to continued cost management and timing differences of expenditures due to delayed projects. A detailed listing of administrative expenses is provided on page 15 of the financial report. Specific variances by expense category are as follows: Salaries, benefits and payroll taxes for the nine month period ended September 30, 2012 were $73.1 million compared to $74.2 million as budgeted. This resulted in $1.1 million, or 1.5%, less in expenses than expected. Temporary services were $1.2 million, or 21%, greater than budgeted due to a higher than expected need for temporary labor during the first nine months of The majority of the overage is attributed to Underwriting, where temporary staffing has increased to accommodate the acceleration of the Inspection Outreach Program in Additionally, Customer Call Center volumes have exceeded projections and additional temporary staff was required to maintain service levels. Other underwriting fees were $5.1 million, or 19%, more than budgeted primarily due to acceleration of the Inspection Outreach Program (projected 22% increase in 2012 re-inspection fees) and increased sinkhole inspection activity. Other processing fees were consistent with budgeted amounts. 14 of 17

15 Training expenses were $0.76 million, or 62%, less than expected. This can be attributed to workload and delays in planned training or elimination of planned training. Recruiting expenses were $0.43 million, or 299%, more than budgeted. This is attributable to higher than anticipated recruiting fees related to the placement of three key hires in the first half of Printing and office supplies were $0.46 million, or 32%, more than expected. Office supplies were $0.56 million, or 42%, over budget primarily due to expenditures related to setting up the new Core and Inspection Program facilities. Printing expenses were $0.01 million, or 55%, under budget due to lower than expected printing needs across the entire company. Subscriptions and dues were $0.1 million, or 15%, more than budgeted primarily due to timing differences between budgeted and actual expenditures as well as initially budgeting for subscription services under the incorrect expense category. Postage expenses were $1.3 million, or 26%, more than budgeted due to under budgeting postage expenses. These expenses are incurred in connection with mail generated by the policy processing systems. Telecommunication expense was consistent with budgeted amounts. Legal expenses and related matters were $0.07 million, or 12%, more than expected through September 30, Legal expenses were reduced by two refunds totaling approximately $499,000. The gross legal fees were approximately $1.1 million, which was $0.57 million, or 101%, more than budgeted. This overage is primarily due to reinsurance counsel, new class action suits, and the sinkhole coordinating counsel. Insurance expense was $0.07 million, or 13%, less than budgeted primarily due to lower than anticipated premiums for Citizens Directors and Officers (D&O) insurance. Travel and meals were $1.1 million, or 43%, less than budgeted. This is largely attributed to significantly lower travel cost associated with Core due to increased utilization of telecommunication resources rather than incurring travel expenses. In addition, many business units have indicated that planned travel has been postponed until later in the year. 15 of 17

16 Servicing carrier fees were $4.1 million, or 35%, less than budgeted due to lower than anticipated growth in new business applications resulting in lower servicing carrier fees. Other professional fees were $2.3 million, or 7%, less than anticipated mainly due to the professional consulting budget related to Core, which anticipated a ratable allocation of expenses throughout the year. The Inception Phase (January April) is expected to have a lower staffing run-rate than the Development Phase (May December), thereby delaying the related expenses to later months. Maintenance and repairs were $0.7 million, or 32%, lower than budgeted primarily due to a reduction in cost of security guard services based on renegotiated pricing, a reduction in Shred-it usage, savings in janitorial services in Tallahassee, and using internal resources for relocating personnel to new facilities associated with Core and Inspection Programs. Bank charges were consistent with budgeted amounts. Actual expenditures for software maintenance and licensing of $9.8 million were consistent with budgeted expenditures of $10.6 million. The ULAE expense allocation represents costs associated with the Claims department that are allocated to loss adjustment expenses in accordance with applicable accounting standards. ULAE expense allocation was consistent with the budgeted ULAE expense allocation. Capital acquisitions were $5.7 million, or 54%, less than expected due to the delay or deferral of several budgeted projects. Investment income of $140.7 million as of September 30, 2012 was $53.5 million, or 61%, more than budgeted. This variance is primarily due to the recognition of $44.3 million in realized net gains during the first nine months of 2012; such gains were not contemplated in the budget. These realized gains resulted from the increased allocation of invested assets with external investment managers and a change in the investment policy which increased the universe of allowable investments. This necessitated the sale of existing positions to provide cash for reinvesting in higher yielding investments, thereby resulting in realized gains. Interest expense was $9.9 million, or 7%, more than budgeted. Interest expense for the remainder of the year is expected to be over budget as the 2012 PLA/CLA financing was not included in the 2012 budget. 16 of 17

17 Financing costs were $8.4 million, or 100%, more than expected. The budget did not include the $1.5 billion pre-event bond issuance and therefore the related financing costs were not considered in the budget. Assessment income was $0.2 million, or 1%, more than expected. Assessment income due to the recognition of a portion of the unearned post-event financing costs related to the 2005 HRA emergency assessment was calculated using a straight-line amortization schedule for purposes of preparing the 2012 budget. The actual amortization schedule does not follow the straight-line method. Other income and expense was $1.1 million, or 19%, more than budgeted. Other income and expense consist primarily of payment plan fees. Other income and expense is budgeted using a historical factor multiplied by direct written premium. Net income was $75.4 million, or 16%, less than expected at September 30, This is primarily due to the overestimation of budgeted earned premium coupled with the underestimation of budgeted loss adjustment expenses incurred; partially offset by the overestimation of budgeted losses incurred and the underestimation of budgeted investment income, all of which resulted from the factors described above. 17 of 17