FLORIDA HURRICANE CATASTROPHE FUND

Transcription

1 FLORIDA HURRICANE CATASTROPHE FUND FISCAL YEAR ANNUAL REPORT State Board of Administration of Florida

2 The purpose of the Florida Hurricane Catastrophe Fund is to improve the availability and affordability of property insurance in Florida by providing reimbursements to insurers for a portion of their catastrophic hurricane losses.

3 Tropical Storm Barry, the only storm of the 2007 Atlantic hurricane season to make landfall in Florida, June 1, 2007.

4 EXECUTIVE MESSAGE It is my privilege to present the Florida Hurricane Catastrophe Fund (FHCF) annual report for the fiscal year ended June 30, This report provides the financial status and operational activities of the FHCF during the past fiscal year. Fortunately for the second consecutive year, no hurricanes made landfall in Florida; consequently, no reimbursement payments for the 2007 Contract Year were required from the FHCF to our participating companies. The FHCF was faced with a shortfall in resources to reimburse insurers from the 2005 hurricane season and issued $1.35 billion in revenue bonds in An emergency assessment of 1% for approximately six years on all policies issued or renewed after January 1, 2007 was levied to finance the post-event bonds. Since the FHCF s cash balance for paying claims had been exhausted, the FHCF took steps in 2006 and 2007 to create liquidity for paying future claims by issuing pre-event liquidity financings of $2.8 billion in July 2006 and $3.5 billion in October We would like to thank the State Board of Administration (SBA) Trustees, the FHCF Advisory Council, the SBA/FHCF staff, and our service providers for their support during this past year. We hope you will find this report informative and useful. We welcome any comments regarding the content of future issues. For questions or additional information regarding the FHCF, please contact our office or visit our website at Jack E. Nicholson, Senior FHCF Officer Florida Hurricane Catastrophe Fund State Board of Administration of Florida

5 OVERVIEW The Florida Hurricane Catastrophe Fund (FHCF) is a tax-exempt trust fund created by the Florida Legislature during a special session in November Following Hurricane Andrew in August of 1992, the residential property insurance market loomed in crisis. Numerous problems developed and the availability of reinsurance for hurricanes became scarce and extremely expensive. Many insurers were forced to re-evaluate their exposure in Florida. State action was deemed necessary to maintain a stable property insurance market. Section , Florida Statutes, created the FHCF with the purpose of providing a stable and ongoing source of reimbursement to insurers for a portion of their catastrophic hurricane losses in order to provide additional insurance capacity for the state. Supporting the private sector s role as the primary risk bearer, the FHCF operates as a public-private partnership. The FHCF currently provides approximately $27.83 billion of reinsurance capacity for the state of Florida. The cost of FHCF coverage is significantly less than the cost of private reinsurance due to the FHCF s tax-exempt status, low administrative costs, and lack of a profit or risk-load. As a result, the FHCF has helped keep residential property insurance rates down, has helped stabilize the market, has enabled more insurance to be written in the state, and has helped keep business out of the residual market. The FHCF operates as a state administered reinsurance program and is mandatory for residential 1

6 property insurers writing covered policies in the state of Florida. Covered policies are any insurance policy that covers residential property in the state of Florida, including, but not limited to, any homeowner s, mobile home owner s, farm owner s, condominium association, condominium unit owner s, tenant s, or apartment building policy, or any other policy covering a residential structure or its contents issued by any authorized insurer, including a commercial self-insurance fund holding a certificate of authority issued by the Office of Insurance Regulation under Section , Florida Statutes, the Citizens Property Insurance Corporation, and any joint underwriting association or similar entity created under law. Certain collateral protection policies covering personal residences are also considered covered policies if they meet the requirements of Section (2)(c), Florida Statutes. Business commercial property policies were exempted from the FHCF during the 1995 Legislative session. The FHCF is under the direction and control of the State Board of Administration of Florida (SBA). The SBA is the constitutional entity of Florida state government that provides a variety of investment services to various governmental entities. The SBA is composed of a three-member Board of Trustees. The Trustees are Florida s Governor, Charlie Crist, as Chairman; Chief Financial Officer, Alex Sink, as Treasurer; and Attorney General, Bill McCollum, as Secretary. A nine member Advisory Council was established by the Legislature to provide the SBA with advice and information. The membership consists of three consumer representatives, a representative of insurers, a representative of insurance agents, a representative of reinsurers, and three technical experts a meteorologist, an engineer, and an actuary. The management and day-to-day operations of the FHCF is the responsibility of the Senior FHCF Officer who reports directly to the Executive Director of the SBA. 2

7 Section , Florida Statutes created the FHCF and: Requires certain insurers to participate in the FHCF as a condition of doing business in the State Grants rulemaking authority Establishes the procedures for developing rates and collecting reimbursement premiums Authorizes the FHCF to inspect, examine, and verify the records of each insurer Authorizes the investment and disbursement of moneys collected by the FHCF Authorizes the issuance of debt secured by assessments and premiums Authorizes the collection of emergency assessments to retire bonds Requires insurers to participate at certain coverage levels if bonds are outstanding Limits debt issuance and the amount of the assessments Provides for debt security if the FHCF is terminated by law Establishes an Advisory Council Provides that a violation of Section , Florida Statutes, is a violation of the Insurance Code Provides explicit authority to the SBA for other legal action Provides for initial season claims paying capacity up to a limit of $27.83 billion consisting of mandatory coverage and optional coverages Establishes additional emergency assessment authority to help fund capacity for subsequent contract years Provides for temporary emergency programs, applicable to the 2007, 2008, and 2009 hurricane seasons, that offer participating insurers additional coverage options FHCF Mission Statement The mission of the FHCF is to responsibly and ethically administer the FHCF by: Understanding the catastrophe financing needs of its beneficiaries and stakeholders. Striving to satisfy a portion of the hurricane catastrophe financing needs of insurers in order to create additional insurance capacity for the state. Protecting the public interest by maintaining insurance capacity in the state. Providing exceptional investment, financial, and administrative services. Headquarters of the State Board of Administration of Florida Hermitage Centre, Tallahassee, Florida 3

8 IN REVIEW 2007 Hurricane Season Operational Activities The 2007 Atlantic hurricane season was an active season with a total of fourteen named storms of which six became hurricanes. Two hurricanes were major, Category 5 hurricanes, and only one made landfall in the United States. The first two hurricanes of the season reached Category 5 intensity which was a rare occurrence. Nine tropical storms developed in 2007 with Florida experiencing one tropical storm landfall in June with Tropical Storm Barry. Since no hurricanes made landfall in Florida, FHCF coverage was not triggered during the 2007 hurricane season. Saffir-Simpson Hurricane Scale Category Wind Speed (mph) Central Pressure > > 155 < 920 Atlantic Hurricane Season: Starts June 1 and ends November 30 Major FHCF activities for the past fiscal year included: Four meetings of the FHCF Advisory Council Monitoring and responding to proposed legislation Assistance in the drafting of FHCF legislation for the January 2007 Special Legislative Session Development of the 2007 premium formula Publication of bonding capacity estimates in May and October Adoption of four rules Issuance of $3.5 billion Pre-Event Floating Rate Notes Administration of the SBA Insurance Capital Build-Up Incentive Program Invitation to Negotiate for Financial Advisor A Strategic Planning Summit A Participating Insurers Workshop Staff support to the Florida Commission on Hurricane Loss Projection Methodology (FCHLPM) Updating and maintaining the FHCF and FCHLPM websites 140 Contract Year 2006 company exams of exposure data conducted representing 99.42% of FHCF premium 72 Contract Year 2004 company exams of losses conducted to date 4 Contract Year 2005 company exams of losses conducted to date 4

9 FHCF Participating Insurers Workshop The FHCF hosted its seventh annual Participating Insurers Workshop on June 7 & 8, Our goal is to educate participating insurers on their responsibilities to meet the FHCF reporting requirements. The workshop highlights changes to the previous year s requirements and insurer responsibilities. It also provides an opportunity for the FHCF to receive comments from the insurance industry on its rules and incorporated documents. This year s workshop opened with guest speaker Dr. Robert Hartwig, President and Chief Economist with the Insurance Information Institute who provided a review of Florida s hurricane risk from an insurance industry perspective and an analysis of Florida s exposure. Other topics included: Key legislative changes impacting the FHCF and insurers Hurricane preparedness and the importance of mitigation Recommendations for long-term solutions to Florida s insurance crisis Post-event claims settlement practices and public policy concerns Status of the reinsurance market Changes to the upcoming contract year s Reimbursement Contract and Insurer Reporting Requirements (Data Call) FHCF on-line claims reporting system FHCF exposure and loss reimbursement examination programs Commutation of 2004 and 2005 losses FHCF bonding and emergency assessments FHCF premium formula, rates, retention multiples, and payout multiples. 5

10 Rulemaking Legislation Specific policies and provisions of the FHCF are outlined in the rules of the SBA. The rulemaking process includes workshops, hearings, approval by the FHCF Advisory Council, and adoption by the SBA Trustees. All of the meetings are open to the public, and input from participating insurers and all interested parties is encouraged. The rules are continually updated in order to accommodate new procedures and forms necessary for the administration of the FHCF. This past fiscal year, the SBA adopted the following rules , F.A.C. Reimbursement Contract Adoption of the Reimbursement Contract During the 2007 Special Legislative Session in January, the Florida Legislature passed CS/HB 1, which had the following impact on the FHCF: Repealed the 25% rapid cash build-up factor applied to FHCF premiums that was added in 2006 and did not reinstate the 2002 language allowing for a rapid cash build-up factor in establishing premiums; Provided an additional amount of FHCF coverage up to $10 million for eligible insurers. The retention for this optional coverage is 30% of an insurer s surplus, and the cost of the coverage was priced at 50% of the coverage provided. The coverage limit applies to two hurricanes and is offered only for the 2007 Contract Year; , F.A.C. Reimbursement Premium Formula Adoption of the Contract Year Rates , F.A.C. Insurer Reporting Requirements Adoption of the Data Reporting Requirements of Insurer Exposure (Data Call) , F.A.C. Insurer Responsibilities Establishes certain deadlines and other requirements for insurers required to participate in the FHCF 6 Created the Temporary Emergency Additional Coverage Options (TEACO) which allows insurers to purchase additional FHCF coverage below each insurer s retention or mandatory FHCF layer of coverage. An insurer can reduce its retention based upon its share of an industry level retention of $3 billion, $4 billion, or $5 billion. The cost of the TEACO coverage was established at 85%, 80%, and 75% rate-online, respectively. The TEACO options will be effective for the 2007, 2008, and 2009 Contract Years; Created the Temporary Increase in Coverage Lim-

11 Old and New Capitol Buildings, Tallahassee, Florida its (TICL) option which ties will be considered allows insurers to pur- insurers for purposes of chase additional FHCF FHCF emergency as- coverage above the maxi- sessments; mum limits of the mandatory FHCF coverage in CS/SB 2498 revised $1 billion increments for the optional $10 million its share of up to $12 bil- FHCF coverage added lion. The cost of the op- during the Special Ses- tional TICL coverage is sion in January to allow established by the SBA all limited apportion- under the same method it ment companies the uses for determining ac- ability to take advantage tuarially indicated premiums for the mandatory of the additional coverage rather than only those lim- FHCF coverage. The TICL option is offered only for ited apportionment companies that first began writ- the 2007, 2008, and 2009 Contract Years; and ing property and casualty insurance in 2007, and allowed participants in the Insurance Capital Build-Up Authorized the SBA to further increase the FHCF Incentive Program this additional coverage option; TICL coverage limits by an additional $4 billion. CS/SB 2498 extended the provision indefinitely that During the 2007 Regular Legislative Session, the allows Citizens Property Insurance Corporation to Florida Legislature passed HB 7031 and CS/SB 2498 choose placement of policies transferred from a liqui- which also had the following impact on the FHCF: dated insurer under Citizen s Reimbursement Contract with the FHCF or to accept an assignment of the HB 7031 amended the definition of covered liquidated insurer s Reimbursement Contract with the policy in Section (2)(c), Florida Statutes, to FHCF; and include commercial self-insurance funds that include homeowners associations, condominium associa- CS/SB 2498 extended the exemption for medical tions, etc. The bill also amended Section (5), malpractice insurance from FHCF emergency assess- Florida Statutes, to specifically state that these enti- ments from June 1, 2007 to May 31,

12 History of Legislative Changes Limited insurers payout except for FRPCJUA and FWUA (now known as Citizens Property Insurance Corporation) House Chambers The Capitol, Tallahassee, Florida 1995 Tax-exempt status granted to the FHCF Retention and Payout Multiples created Three coverage options 45%, 75%, and 90% Non-residential commercial property insurance excluded Exposure reporting date moved to September 1 for exposures existing as of June 30 Loss reimbursement preferences provided to limited apportionment companies 1996 FHCF Finance Corporation created Provisions established for issuance of tax-exempt debt 1998 Advances provided to limited apportionment companies and residual market mechanisms 1999 Subsequent Season Capacity created Initial Season Capacity temporarily limited to $11 billion Emergency assessments set at 4% for debt service on storms occurring in one contract year and a 6% aggregate limit applied for emergency assesments for all years 2002 Added coverage for Additional Living Expense (ALE) Added coverage for certain Collateral Protection Insurance Policies Provision established for inclusion of a rapid cash build-up factor 2004 Capacity was expanded by increasing emergency assessment authority sufficient to create $15 billion and to allow future capacity to grow with exposure growth The increase in assessment authority additionally allowed subsequent season capacity to expand to $15 billion Insurance industry aggregate retention was reset to $4.5 billion and designed to grow with exposure growth Emergency assessment authority increased to 6% for debt service on storms occurring in one contract year with a 10% aggregate limit for all years Emergency assessment base expanded to include surplus lines with provision for the insurer to collect the assessments from policyholders as premiums are paid Emergency assessments may be used for debt service coverage and may also be used to refinance debt Medical malpractice insurers excluded from emergency assessments for any covered event occurring prior to June 1,

13 Exemption exposure limit increased to $10 million Selection of reinsurers broadened Rulemaking authority allowing for interest charges on late remittances Rulemaking authority allowing for the exclusion of certain deductible buy-back and commercial residential excess policies Mitigation appropriations to be based on the most recent fiscal year-end audited financial statements Allocation of excess recoveries between Citizens Property Insurance Corporation accounts clarified Flexibility provided for ALE coverage Audit requirement language changed to reference examination in lieu of audit 2005 Insurance industry aggregate retention reset to $4.5 billion and set to grow with exposure growth Full retention required for the insurer s two largest covered events and then only one-third of the full retention required for each subsequent covered event 2006 FHCF premiums to include a 25 percent rapid cash build-up factor Option to purchase, for the 2006 Contract Year only, additional FHCF coverage up to $10 million for limited apportionment companies with retention equal to 30 percent of the insurer s surplus at a 50 percent rate on line 2007 Repealed the mandatory 25 percent rapid cash build-up factor for FHCF premiums Extended for one year, the option to purchase additional FHCF coverage up to $10 million for limited apportionment companies and certain other companies with retention equal to 30 percent of the insurer s surplus at a premium of 50 percent of the coverage selected Option to purchase, for the 2007, 2008, and 2009 Contract Years only, additional FHCF coverage below the mandatory FHCF coverage layer. The Temporary Emergency Additional Coverage Options (TEACO) allows insurers to choose optional FHCF coverage based upon their share of an industry retention amount of $3 billion, $4 billion, or $5 billion Option to purchase, for the 2007, 2008, and 2009 Contract Years only, additional FHCF coverage above the mandatory FHCF coverage layer. The Temporary Increase in Coverage Limits (TICL) option provides a total amount of additional coverage up to $12 billion above the FHCF industry limit of $ billion estimated for 2007 Authorized SBA option to increase FHCF coverage limits by an additional $4 billion Amended definition of covered policy to include commercial self-insurance funds that include homeowners associations, condominium associations, etc. and these entities will be considered insurers for purposes of FHCF emergency assessments Indefinitely extended the provision allowing Citizens Property Insurance Corporation to choose placement of policies transferred from a liquidated insurer under Citizen s Reimbursement Contract with the FHCF or to accept an assignment of the liquidated insurer s Reimbursement Contract with the FHCF Medical malpractice insurers excluded from emergency assessments for any covered event occurring prior to June 1,

14 Examination Program The SBA routinely conducts examinations of exposure data submitted by participating companies. The examinations are limited in scope and are intended to verify that participating companies are properly reporting their exposure. In addition, the examinations are used to review a participating insurer s compliance with FHCF data reporting requirements. The SBA provides notification to a company at least 60 days prior to commencement of an examination. The notification includes detailed instructions to the company on the required records needed for the examination. All information that supports a company s exposure is subject to examination. Previously conducted examinations have revealed several common errors, such as: Incorrectly reporting ZIP Codes and construction characteristics (e.g., reporting the mailing ZIP Code rather than the property location ZIP Code), Omitting coverages or endorsements to property coverage, Reporting policies or coverages not required to be reported (e.g., builders risk, wind exclusion, business interruption), and Failure to report percentage deductibles. Every participating company is required to report its exposure data annually and to generate an examination file that supports the reported data. The following table reflects the adjustments made to insurers premiums as a result of the examinations of exposure data and subsequent resubmissions to correct errors. 10

15 FHCF Examination Adjustments As of Contract Year Additional Premium Due Premium Refunds Made Net Results 1994 $7,832, ($10,572,916.19) ($2,740,878.43) 1995 $4,141, ($4,975,537.28) ($834,087.37) 1996 $3,095, ($2,389,171.29) $706, $3,457, ($4,166,782.27) ($709,353.92) 1998 $9,763, ($4,724,819.63) $5,039, $8,777, ($2,286,886.83) $6,491, $592, ($2,173,802.99) ($1,581,229.16) 2001 $1,586, ($1,219,890.39) $366, $1,225, ($1,542,388.46) ($316,556.59) 2003 $2,202, ($4,776,331.89) ($2,573,702.76) 2004 $896, ($1,346,813.00) ($450,542.98) 2005 $3,535, ($18,463,259.88) ($14,928,202.72) 2006 $1,105, ($404,072.55) $701,

16 The SBA also conducts loss reimbursement examinations when covered events occur that result in a participating company receiving reimbursements from the FHCF. The examinations are limited in scope and are intended to verify participating companies losses were reported correctly. The FHCF is currently conducting loss reimbursement examinations of participating companies that received a reimbursement from the FHCF for covered events occurring in 2004 and These examinations have revealed several common errors which include, but are not limited to: Reporting losses for fair rental value or loss of rental income, Reporting losses for risks not covered, i.e. loss to an auto, Reporting losses that occurred as a result of another peril other than the covered event, Reporting losses on covered policies that were not reported in the Data Call submission, and Reporting losses paid on ex-wind policies. Participating companies are required to prepare and retain a detailed claims listing to support each Proof of Loss Report submitted to the FHCF. This listing is required to be retained until the company is noticed for an examination. The FHCF will provide at least a 60-day advance notice of a scheduled examination. The notification contains detailed instructions to help the company prepare for the loss examination. Companies are required to retain detailed records of all reported exposures and losses until the FHCF has completed an examination of these specific records for each Contract Year, as applicable. Retention of records is imperative until both types of exams are complete since an examination may result in a resubmission of exposure data and/or an update to loss reports, which could result in an adjustment to a company s FHCF premium and/ or loss recovery. 12

17 FHCF Loss Reimbursement For losses occurring in the 2004 and 2005 hurricane seasons, at June 30, 2007, the FHCF had reimbursed participating insurers over $7.6 billion. The total amount the FHCF expects to pay for both seasons is $8.75 billion. For companies submitting complete requests and having no outstanding FHCF issues, disbursements were made within 2 to 7 business days until bond proceeds were used to pay claims and then disbursements were made within 10 to 14 business days. Following is a recap of FHCF reimbursements to participating insurers: As of Number of Total Total Companies Recovery Expected (In millions) with FHCF Paid (Excess to be Recoveries of Retention) Paid 1995 Erin, Opal 9 $13 $ Charley, Frances, Ivan, Jeanne 134 $3,678 $3,950* 2005 Dennis, Katrina, Rita, Wilma 106 $3,600 $4,500* Note: - Total of 136 insurers are expected to seek loss reimbursement from the FHCF for Total of 111 insurers are expected to seek loss reimbursement from the FHCF for 2005 * including reserves 13

18 Bonding Program Revenue bonds are required to be issued if the FHCF s cash balance is anticipated to be insufficient to reimburse losses. There are two ways in which revenue bonds can be issued. One is in conjunction with counties or municipalities and the other is through the FHCF Finance Corporation. The FHCF Finance Corporation was created in the statute to allow the FHCF greater flexibility in planning. a maturity date of July The funding source for the repayment of the Revenue Bonds issued is through a 1% emergency assessment that began on January 1, 2007, on all property and casualty lines of business in the state, including surplus lines, but excluding worker s compensation, federal flood, accident and health insurance, and medical malpractice premiums. The FHCF Finance Corporation has a United States Internal Revenue Service private letter ruling regarding the ability to issue tax-exempt debt. The initial ruling was granted on March 27, 1998, for five years until June 30, The ruling was renewed on June 13, 2003, for an additional five years, expiring on June 30, Florida was hit by four hurricanes in 2004 and three hurricanes in 2005 that impacted the FHCF. As of June 30, 2007, the FHCF had paid over $7.6 billion in loss reimbursements to its participating insurers. The losses associated with the 2005 hurricanes produced payouts that exceeded the FHCF s available cash. To address this shortfall, the FHCF Finance Corporation issued $1,350,250,000 in tax-exempt post event Series 2006A Revenue Bonds. This was the first time the FHCF has issued bonds. The Bonds were priced in June 2006, and settled in July 2006, and have To provide a source of funds to reimburse participating insurers for losses relating to future covered events, in July 2006, the FHCF Finance Corporation issued $2.8 billion in taxable pre event Series 2006B Extendable Floating Rate Notes. For additional liquidity, the FHCF Finance Corporation also issued $3.5 billion pre event Series 2007A Floating Rate Notes in October The 2006A Revenue Bonds, Series 2006B Notes, and Series 2007A Notes were issued on a parity basis. Interest on the Notes will be paid from reimbursement premiums. The proceeds from the Notes will be invested pending their need to pay claims. Investment earnings on these funds, as well as reimbursement premiums if necessary, are expected to offset the debt service requirements of the Notes. At June 30, 2007, the FHCF Finance Corporation had long-term ratings of Aa3/AA-/AA- from Moody s, Standard and Poor s, and Fitch, respectively. 14

19 Estimated FHCF Claims Paying Capacity* ($ billions) Calendar Initial Subsequent Year End Season Claims Season Claims Year Bonding Capacity Fund Balance Paying Capacity Paying Capacity 1994 $2.0 $0.3 $ May October 1996 $5.0 $ Initial/Subsequent Season Initial/Subsequent Season / $ / / / / / / / / / / / / / / / / The 1995 Legislative Session required bonding estimates to be published twice a year reflects a private letter ruling granting tax-exempt status to bonds. The 1999 Legislative Session resulted in limiting the overall capacity of the FHCF to $11 billion and providing for subsequent season capacity. Initial Season and Subsequent Season Claims Paying Capacity is based on the October Bonding Capacity Estimates. Subsequent Season Claims Paying Capacity consists of bonding plus available cash. The 2004 Legislative Session expanded the overall capacity of the FHCF to $15 billion. The 2007 Special Legislative Session created optional coverages expanding the overall capacity of the FHCF. *Refer to Vol. 33, No. 43 Florida Administrative Weekly and prior year s Florida Administrative Weekly volumes regarding the assumptions and reservations associated with these estimates. 15

20 Litigation As of December 31, 2007, the FHCF is not currently involved in any litigation. Public Contributions When the Internal Revenue Service (IRS) issued a private letter ruling granting tax-exempt status to the FHCF, it contained a requirement that a certain amount of the funds in the FHCF be devoted to hurricane mitigation purposes. The purposes are specified in Section (7)(c), Florida Statutes: Each fiscal year, the Legislature shall appropriate from the investment income of the Florida Hurricane Catastrophe Fund an amount no less than $10 million and no more than 35 percent of the investment income from the prior fiscal year for the purpose of providing funding for local governments, state agencies, public and private educational institutions, and nonprofit organizations to support programs intended to improve hurricane preparedness, reduce potential losses in the event of a hurricane, provide research into means to reduce such losses, assist the public in determining the appropriateness of particular upgrades to structures or in the financing of such upgrades, or to protect local infrastructure from potential damage from a hurricane. Moneys shall first be available for appropriation under this paragraph in fiscal year Moneys in excess of the $10 million specified in this paragraph shall not be available for appropriation under this paragraph if the State Board of Administration finds that an appropriation of investment income from the fund would jeopardize the actuarial soundness of the fund. Beginning in 1999, the Florida Legislature created Section , Florida Statutes, which annually appropriates $10 million from the FHCF to the Department of Community Affairs for the Hurricane Loss Mitigation Program. 16

21 2007 Legislative Session Mitigation Funding Department of Community Affairs: Hurricane Loss Mitigation Program: retrofit public hurricane shelters $3,000,000 hurricane loss mitigation programs $7,000,000 Total Appropriation $10,000,000 FHCF Hurricane Mitigation Funding Appropriations Total Total Carried Forward Current Year Available for Appropriated Vetoed by Funded Year From Prior Years Appropriation Appropriation by Florida Governor by FHCF (a) (b) (c) = (a) + (b) Legislature 1997 $0 $10,000,000 $10,000,000 $10,000,000 $2,822,400 $7,177, $2,822,400 $10,000,000 $12,822,400 $12,500,000 $0 $12,500, $322,400 $10,000,000 $10,322,400 $10,300,000 $2,200,000 $8,100, $2,222,400 $10,000,000 $12,222,400 $12,200,000 $0 $12,200, $22,400 $30,000,000 $30,022,400 $30,000,000 $0 $30,000, $22,400 $19,075,309 $19,097,709 $19,075,309 $0 $19,075, $22,400 $10,000,000 $10,022,400 $10,000,000 $0 $10,000, $22,400 $10,000,000 $10,022,400 $10,000,000 $0 $10,000, $22,400 $10,000,000 $10,022,400 $10,000,000 $0 $10,000, $22,400 $10,000,000 $10,022,400 $10,000,000 $0 $10,000, $22,400 $10,000,000 $10,022,400 $10,000,000 $0 $10,000,000 Total funds appropriated for mitigation from the FHCF $139,052,909 17

22 CONSUMER INFORMATION Following Hurricane Andrew, residential property insurers began to re-evaluate their commitment to the Florida market in light of the fact that there were major difficulties obtaining private reinsurance. The Florida Hurricane Catastrophe Fund (FHCF) was created in a special legislative session in November 1993 in the aftermath of Hurricane Andrew in order to provide additional reinsurance capacity to enable insurers to continue to write business in the state. The FHCF has been important in helping insurers meet their responsibilities to Florida residential policyholders following the catastrophic hurricanes that hit Florida. The FHCF provides very economical coverage for insurers writing residential insurance in the state. It is estimated that coverage purchased through the FHCF costs insurers between one-fourth to onethird what it would cost in the private reinsurance market. There are several reasons for these cost savings, which include the following: The FHCF operating cost is less than 1% of the annual premium collected compared with the operating costs associated with private reinsurance, which can range between 10% to 15% of the premium collected. The FHCF does not pay reinsurance brokerage commissions. The FHCF has no underwriting costs since it is a mandatory state program requiring a certain level of participation by all insurers who write residential property insurance in the state. Since the FHCF is a program that benefits the citizens of the state and is under the control of elected officials, the FHCF is a tax-exempt entity that does not pay federal income taxes or state taxes. The FHCF has the ability to issue tax-exempt debt which will result in lower financing costs should the need arise to finance losses with revenue bonds. A major cost saving factor is that the FHCF does not include a factor for profits nor does it include a risk load. The hurricane timing risk is addressed through the issuance of revenue bonds. Although reinsurance cost savings are realized in the short term, the cost of financing revenue bonds may impact a broad base of Florida policyholders who are subject to emergency assessments in the future. The FHCF is financed by three sources: 1) reimbursement premiums charged to participating insurers, 2) investment earnings, and 3) emergency assessments on all Florida property and casualty lines of business (including surplus lines, but excluding medical malpractice until June 1, 2010, federal flood, accident and health, and workers compensation insurance). Due to losses associated with the 2004 and 2005 hurricane seasons, the FHCF s $6 billion in reserves, which it had accumulated since its inception in 1993, was insufficient to meet its obligations. For the first time in FHCF history, an emergency assessment of 1% was levied to retire the 2006 post-event bonds issued to finance the 2005 hurricane season shortfall. For additional information, refer to the Bonding Program portion of this report. For additional information regarding the FHCF, please review the information provided on the FHCF website at Most of the documents, including the FHCF s most recent annual report, are published on the website along with a current listing of FHCF participating insurers. If you have additional questions, please feel free to contact the FHCF staff. 18

23 FHCF AT-A-GLANCE Fiscal Year (as of ) Created: November, 1993 No. of Participating Insurers: 202 Mandatory Premium Billed: Total Premium Billed: (includes mandatory and optional coverages) Exposure: Projected Fund Balance: Mitigation Funding for 2007: Claims Paying Capacity: Initial Season Subsequent Season Bonding Capacity: Initial Season Subsequent Season $951.2 million $1,333.6 million $2.019 trillion $2.065 billion $10 million $27.8 billion ($ billion mandatory) $26.4 billion ($ billion mandatory) $25.75 billion $25.21 billion Emergency Assessments (available): $2,253 million (6%) Initial Season (required) $1,861 million (1.61%) Subsequent Season (required) $1,519 million (4.01%) Assessment Base: $37.6 billion includes Surplus Lines and all P&C Lines except worker s compensation, and accident and health, and medical malpractice until June 1, 2010 Mandatory Coverage Retention Multiples: 90% % % Moody s, Standard & Poor s, and Fitch Ratings: Tax Status: Aa3/AA-/AA- Tax-Exempt Trust Fund Tax-Exempt Bonds 19

24 STATISTICAL INFORMATION 2007 Exposure Concentration by County ($ billions) Total % of Total County Exposure* Exposure Palm Beach $ % Broward Miami-Dade Orange Hillsborough Pinellas Lee Duval Collier Brevard Other Total $2, % 2006 Exposure Concentration by County ($ billions) Total % of Total County Exposure* Exposure Palm Beach $ % Broward Miami-Dade Orange Hillsborough Pinellas Lee Duval Collier Brevard Other Total $1, % 78% of the FHCF exposure is located in Florida s thirty-five coastal counties, making Florida particularly vulnerable. *Updated as of 12/31/07 20

25 Participating Insurers by Mandatory Coverage Option Selection FHCF Premium by Mandatory Coverage Option 45% 75% 90% # of % of % of # of % of % of # of % of % of Insurers Insurers Premium Insurers Insurers Premium Insurers Insurers Premium 1995/ % 12.2% % 2.8% % 85.0% 1996/ % 9.9% % 2.2% % 87.9% 1997/ % 7.0% % 2.0% % 91.0% 1998/ % 6.2% 8 2.6% 1.3% % 92.5% 1999/ % 5.2% 8 2.8% 1.2% % 93.6% 2000/ % 4.06% 5 1.7% 0.025% % 95.91% 2001/ % 2.14% 2 0.7% 0.001% % 97.86% 2002/ % 1.30% 2 0.8% 0.001% % 98.70% 2003/ % 1.55% 1 0.4% 0.00% % 98.45% 2004/ % 0.98% 1 0.4% 0.00% % 99.02% 2005/ % 0.49% 0 0.0% 0.00% % 99.51% 2006/ % 0.44% 0 0.0% 0.00% % 99.56% 2007/ % 0.24% 1 0.5% 0.06% % 99.70% 21

26 FHCF Optional Coverages* Additional Coverage Option up to $10 Million Certain companies may select additional FHCF reimbursement coverage of up to $10 million dollars for an additional premium of 50% of the additional reimbursement coverage provided which includes one prepaid reinstatement. The minimum retention level is 30% of the insurer s surplus as of December 31, 2006, for each covered event. For the 2007/2008 Contract Year, 31 companies selected $278,452,920 in additional coverage for a total premium of $139,226,460 and a combined FHCF additional coverage of $556,905,840. Temporary Emergency Additional Coverage Options (TEACO) Retention Multiples Contract Year $3 Billion $4 Billion $5 Billion 07/08 90% % % For the 2007/2008 Contract Year, no companies selected this coverage option. Temporary Increase in Coverage Limits (TILC) Payout Multiples Contract Year 07/08 Mandatory FHCF Limit FHCF Payout Multiple $15,845,000, TICL Limit TICL Payout Multiple FHCF + TICL Payout Multiple $ 1,000,000, $ 2,000,000, $ 3,000,000, $ 4,000,000, $ 5,000,000, $ 6,000,000, $ 7,000,000, $ 8,000,000, $ 9,000,000, $10,000,000, $11,000,000, $12,000,000, For the 2007/2008 Contract Year, 134 companies selected this coverage option for a total premium of $243,105,048 and a combined increase in the FHCF limit of $1,517,000,000. *Optional coverages are defined in s (4), (16), (17), Florida Statutes and are available for Contract Years

27 Statistical Summary as of 12/31/07 ($ billions) October Projected Claims Projected Contract FHCF Bonding 12/31 Paying Payout Number of Year Premium (1) Capacity Fund Balance Capacity (2) Multiple Exposure Participants (a) (b) (c)=(a)+(b) 95/96 $0.439 $4.0 $0.9 $ $ / / / / / / / , / , /05a /05b , / , / , /08 1, , (1) FHCF premium for Contract Years 98/99 and 99/00 is the premium received as of 12/31 each year. By definition, these premium factors were used to calculate the Projected Payout Multiple for each contract year, and as such, have not been updated to reflect subsequent changes. - FHCF premium for Contract Years 00/01 through 04/05 is the premium billed as of 12/31 of each year. By definition, similar to the above, this premium is locked. - FHCF premium for Contract Year 04/05a is as if all companies chose the transitional option. FHCF premium for Contract Year 04/05b is as if all companies did not choose the transitional option. Actual FHCF premium billed for Contract Year 04/05 at 12/31/04 was $ million. - FHCF premium for Contract Year 07/08 consists of $951 million mandatory coverage, $243 million TICL coverage, and $139 million for coverage up to $10 million. (2) The 1999 Legislative Session resulted in limiting the overall single-season capacity to $11 billion and provided for subsequent season capacity. FHCF Mandatory Coverage Retention Multiples Contract Year 45% 75% 90% 95/ / / / / / / / / /05 $11B xs $4.9B /05 $15B xs $4.5B / / /

28 2007 TROPICAL CYCLONES IN THE ATLANTIC BASIN TS Andrea TS Barry TS Chantal H Dean TS Erin H Felix TS Gabrielle H Humberto TS Ingrid TS Jerry H Karen H Lorenzo TS Melissa H Noel TS Tropical Storm H Hurricane Storms making landfall in Florida The FHCF was not required to pay losses for the 2007 hurricane season TROPICAL CYCLONES IN THE ATLANTIC BASIN TS Alberto TS Beryl TS Chris TS Debby H Ernesto* H Florence H Gordon H Helene H Isaac TS Tropical Storm H Hurricane Storms making landfall in Florida *made landfall in Florida as a Tropical Storm The FHCF was not required to pay losses for the 2006 hurricane season. 24

29 THE PEOPLE WHO MAKE IT POSSIBLE STATE BOARD OF ADMINISTRATION OF FLORIDA Trustees The Honorable Charlie Crist Governor, State of Florida The Capitol Tallahassee, FL The Honorable Bill McCollum Attorney General, State of Florida The Capitol Tallahassee, FL The Honorable Alex Sink Chief Financial Officer, State of Florida The Capitol Tallahassee, FL Interim Executive Director General Bob Milligan State Board of Administration of Florida 1801 Hermitage Boulevard, Suite 100 Tallahassee, FL Ph: (850) Florida Hurricane Catastrophe Fund Staff 1801 Hermitage Boulevard, Suite 100, Tallahassee, FL Jack E. Nicholson, Ph.D., CLU, CPCU Senior FHCF Officer Ph: (850) Anne T. Bert, CPM Director of Operations Ph: (850) Tracy L. Allen, J.D., LLM Senior Attorney Ph: (850) Gina Wilson, CPA, CPM, CPCU, ARe Manager, FHCF Audit Program Ph: (850) Patrick M. Bowen Financial Examiner/Analyst II Ph: (850) Marcie Vernon, CPM Audit Program Analyst Ph: (850) Patti Elsbernd Management Assistant, Audit Program Ph: (850) Ramona A. Worley Budget Analyst II Ph: (850) Donna Sirmons Management Review Analyst Ph: (850) (as of 12/31/07) 25

30 FHCF Advisory Council Members John Auer, CPCU American Strategic Insurance Corp. St. Petersburg, FL Jim W. Henderson, CPA, CPCU (Vice Chair) Brown & Brown, Inc. Daytona Beach, FL William H. Huffcut (Chair) Tallahassee, FL Larry Johnson, FCAS, MAAA Allstate Insurance Company Northbrook, IL Robert M. Peduto Swiss Re Overland Park, KS David Walker, CPA, CFE Clearwater, FL Joseph Varon, P.E. Quick Tie Products, Inc. Jacksonville, FL FHCF Service Providers Financial Services: Raymond James & Associates, Inc. 880 Carillon Parkway St. Petersburg, FL Ph: (727) Administrative Services: Paragon Strategic Solutions Inc American Boulevard West Suite 700 Minneapolis, MN Ph: (800) Actuarial Consulting Services: Paragon Strategic Solutions Inc American Boulevard West Suite 700 Minneapolis, MN Ph: (800) Exposure Examination Services: Timothy J. Butler, CFE, ARe, CPM President Regulatory Insurance Consulting Services, Inc. Tallahassee, FL Kevin Machia, CFE Montgomery, VT Wendell McDavid, AIE Stockbridge, GA James E. Salter, CPA, CFE President BD Regulatory Services, LLC Williston, VT Harold S. Tattershall, AIE San Antonio, TX Loss Examination Services: Examination Resources, LLC Atlanta, GA 26

31 AUDITED FINANCIAL STATEMENTS Financial Statements and Other Financial Information Florida Hurricane Catastrophe Fund Years ended June 30, 2007 and 2006 Report of Independent Auditors The Trustees of the State Board of Administration of Florida Florida Hurricane Catastrophe Fund We have audited the accompanying financial statements of the Florida Hurricane Catastrophe Fund (the Fund) as of and for the years ended June 30, 2007 and These financial statements are the responsibility of the Fund s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States and the standards for financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Fund s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1, the financial statements present only the Fund and do not purport to, and do not, fairly present the financial position of the State Board of Administration of Florida, the changes in its financial position, and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Fund as of June 30, 2007 and 2006, and the changes in its financial position and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. Management s discussion and analysis are not a required part of the financial statements, but are supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. In accordance with Government Auditing Standards, we have issued our report dated October 15, 2007, on our consideration of the Fund s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, and grants. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report when considering the results of our audits. October 15, 2007 A Member Practice of Ernst & Young Global 27

32 Florida Hurricane Catastrophe Fund Management s Discussion and Analysis June 30, 2007 and 2006 Our discussion and analysis of the financial performance of the Florida Hurricane Catastrophe Fund (the Fund) provides an overview of the Fund s financial activities for the fiscal years ended June 30, 2007 and Please read this information in conjunction with the Fund s financial statements. Overview of the Financial Statements The statements presented are the statements of net assets (deficit), the statements of revenues, expenses, and changes in net assets (deficit), and the statements of cash flows. These statements represent the financial position of the Fund, which includes the Florida Hurricane Catastrophe Fund Finance Corporation (the Corporation). The Corporation is a blended component unit of the Fund. Separate stand-alone audited financial statements of the blended component unit are not available. Combining statements can be found in the other financial information section of this report. The statements of net assets (deficit) present the ending balances of all assets and liabilities of the Fund using the economic resources measurement focus and the accrual basis of accounting. The difference between assets and liabilities is reported as net assets of the Fund. The statements of revenues, expenses, and changes in net assets (deficit) present all revenues and expenses of the Fund occurring during the year resulting from operations and the effect of this activity on net assets. Revenues are recorded when earned, and expenses are recorded when a liability is incurred, regardless of the timing of the related cash flows. The statements of cash flows provide information about how the Fund finances and meets the cash flow needs of its activities. 28

33 Financial Summary A summary of the statements of net assets (deficit) for the Fund is presented below (in thousands): June Capital assets $ 4 $ 6 $ 10 Other assets 4,990,203 2,228,447 4,054,311 Total assets 4,990,207 2,228,453 4,054,321 Current liabilities 856,403 2,300,536 1,667,165 Long-term liabilities 4,193,252 1,407, Total liabilities 5,049,655 3,707,988 1,667,257 Net assets (deficit): Invested in capital assets, net of related debt Unrestricted (59,474) (1,479,563) 2,288,307 Restricted for hurricane mitigation ,747 Total net assets (deficit) $ (59,448) $ (1,479,535) $ 2,387,064 A summary of the combined statements of revenues, expenses, and changes in net assets (deficit) for the Fund and the Corporation is presented below (in thousands): Year Ended June Net premium revenue $ 1,202,362 $734,675 $ 617,089 Net interest on premium adjustments Net interest on loss disbursement adjustments/advances 1,732 3,342 1,118 Total operating revenues 1,204, , ,207 Total nonoperating revenue 230, , ,101 Total revenues 1,435, , ,308 Hurricane losses 4,700,000 3,750,000 Other operating expenses 5,063 4,690 4,152 Depreciation Total expenses 5,066 4,704,697 3,754,161 Income (loss) before transfers 1,430,087 (3,863,228) (3,027,853) Transfers to other funds (10,000) (3,371) (61,275) Change in net assets 1,420,087 (3,866,599) (3,089,128) Net assets (deficit), beginning of year (1,479,535) 2,387,064 5,476,192 Net assets (deficit), end of year $ (59,448) $ (1,479,535) $ 2,387,064 Financial Highlights The Fund s reimbursement premiums have continued to grow as a result of increased exposure in Florida and legislative changes adopted that ultimately impacted the premium. Investment income for the Fund was $107,689,000 at June 30, 2005, $102,819,000 at June 30, 2006, and $234,294,000 at 29

34 June 30, The decrease in investment income from 2005 to 2006 is due to less cash available for investment because of loss reimbursement payments. The total hurricane losses are expected to be $3.95 billion for 2004 covered events and $4.50 billion for 2005 covered events. As a result, the Fund experienced a shortfall. In June 2006, the Corporation issued Series 2006A Revenue Bonds in the amount of $1,350,025,000. The proceeds from these Bonds, along with the expected investment earnings, will provide moneys sufficient to reimburse participating insurers for losses from these covered events. Debt service on the 2006A Bonds will be paid from a 1% emergency assessment on all assessable lines of business beginning in January To provide a source of funds to reimburse participating insurers for losses relating to future covered events, in July 2006, the Corporation issued pre-event Series 2006B Extendible Floating Rate Notes in the amount of $2.8 billion. Investment earnings on these funds, as well as reimbursement premiums if necessary, are used to pay the debt service requirement of the Notes. The Fund is obligated to pay losses to participating insurers only to the extent of their actual claims-paying capacity up to a limit of $15 billion for any single contract year. This capacity is increased by the optional coverage options provided for in Section The $15 billion will increase with exposure growth each year as long as the increase does not exceed the increase in the actual dollar growth of the Fund. At June 30, 2007, the Fund had the following credit ratings: Moody s Aa3, Fitch AA-, and Standard and Poor s AA-. Florida Hurricane Catastrophe Fund Statements of Net Assets (Deficit) (In Thousands) June Assets Current assets: Cash and cash equivalents $ 19 $ 13,005 Short-term investments 2,269, ,969 Bond proceeds receivable 1,394,365 Emergency assessment funds receivable 100,655 Securities lending receivable 555 Securities lending collateral 128,355 Accrued interest 18,558 1,497 Accounts receivable 6 Loss reimbursement advances receivable 26,988 Excess loss payments receivable 9, Premiums receivable, net (9) 39 Total current assets 2,398,808 2,075,806 Long-term assets: Long-term investments 2,581, ,730 Unamortized bond issuance costs 9,978 6,911 Capital assets, net of accumulated depreciation of $84 and $87 for June 30, 2007 and 2006, respectively 4 6 Total long-term assets 2,591, ,647 Total assets $ 4,990,207 $ 2,228,453 30

35 June Liabilities and net assets Current liabilities: Hurricane losses: Unpaid hurricane losses $ 809,895 $ 2,131,913 Losses payable 5,295 32,633 Premium refunds payable 10 3 Accrued expenses 775 8,112 Obligation under securities lending agreement 127,875 Accrued bond interest expense 40,428 Total current liabilities 856,403 2,300,536 Long-term liabilities: Bonds payable 4,150,025 1,350,025 Premium on bonds payable 43,124 57,340 Compensated absences, net of current portion Total long-term liabilities 4,193,252 1,407,452 Total liabilities 5,049,655 3,707,988 Net assets (deficit): Unrestricted (59,474) (1,479,563) Invested in capital assets, net of related debt 4 6 Restricted for hurricane mitigation Total net assets (deficit) (59,448) (1,479,535) Total liabilities and net assets (deficit) $ 4,990,207 $ 2,228,453 See accompanying notes. 31

36 Florida Hurricane Catastrophe Fund Statements of Revenues, Expenses, and Changes in Net Assets (Deficit) (In Thousands) Year Ended June Operating revenues: Current contract year premium revenue $1,200,022 $736,646 Prior contract year adjustment: Premium billed 2,340 (1,971) Premium interest Net premium revenue 1,202, ,708 Net interest on loss disbursement adjustments/advances 1,732 3,342 Total operating revenues 1,204, ,050 Operating expenses: Hurricane losses 4,700,000 Administrative and actuarial fees 2,621 2,546 Other professional fees 1,431 1,261 Personnel expenses Depreciation 3 7 Other Total operating expenses 5,066 4,704,697 Operating income (loss) 1,199,306 (3,966,647) Nonoperating revenue (expense): Investment income 234, ,819 Investment advisor fees (426) (270) Securities lending income 1,088 17,461 Securities lending expense (1,056) (16,835) Securities lending net appreciation (480) 244 Emergency assessment funds received 195,226 Bond trustee fees (4) Bond interest expense (195,673) Amortization of bond issuance costs (2,188) Total nonoperating revenue 230, ,419 Income (loss) before transfers 1,430,087 (3,863,228) Transfers to other funds (10,000) (3,371) Change in net assets 1,420,087 (3,866,599) Net assets (deficit), beginning of year (1,479,535) 2,387,064 Net assets (deficit), end of year $ (59,448) $(1,479,535) See accompanying notes. 32

37 Florida Hurricane Catastrophe Fund Statements of Cash Flows (In Thousands) Year Ended June Operating activities Premium received $ 1,202,707 $ 734,720 Hurricane losses paid (1,331,993) (2,603,891) Loss reimbursement advances and related interest 1,596 (882,499) Administrative and actuarial fees (2,573) (2,684) Other professional fees (1,409) (1,238) Personnel expenses (791) (720) Other operating expenses (160) (169) Net cash used by operating activities (132,623) (2,756,481) Investing activities Purchases of investments (103,781,477) (78,066,674) Sales and maturities of investments 99,587,329 80,719,112 Interest received 216, ,938 Investment advisor fees (435) (302) Securities lending Net cash (used by) provided by investing activities (3,977,668) 2,759,858 Financing from noncapital activities Transfers to other funds (10,000) (3,371) Emergency assessment funds received 94,574 Cash received on bond issuance 4,182,199 13,000 Bond interest paid (169,461) Bond trustee fees paid (5) Net cash provided by financing from noncapital activities 4,097,307 9,629 Financing from capital activities Purchases of capital assets (2) (2) Net (decrease) increase in cash and cash equivalents (12,986) 13,004 Cash and cash equivalents at beginning of year 13,005 1 Cash and cash equivalents at end of year $ 19 $ 13,005 See accompanying notes. 33

38 Florida Hurricane Catastrophe Reconciliations of Operating Income to Net Cash Used by Operating Activities (In Thousands) Year Ended June Operating income (loss) $ 1,199,306 $ (3,966,647) Adjustments to reconcile operating income (loss) to net cash used by operating activities: Depreciation 3 7 Decrease in premiums receivable, net Increase (decrease) in premium refunds payable 7 (16) (Decrease) increase in unpaid hurricane losses (1,322,018) 1,206,086 (Decrease) increase in losses payable (27,338) 10,014 Decrease (increase) in loss reimbursement advances receivable 26,988 (6,503) Increase (decrease) in excess loss payments receivable (9,749) 671 Increase (decrease) in accrued expenses 130 (121) Net cash used by operating activities $ (132,623) $ (2,756,481) See accompanying notes. Florida Hurricane Catastrophe Fund Notes to Financial Statements June 30, Organization Business The Florida Hurricane Catastrophe Fund (the Fund), a trust fund created in November 1993 during a special legislative session following Hurricane Andrew, provides catastrophic reinsurance coverage to all authorized primary insurers of habitational structures with wind/hurricane coverage in the state of Florida. Premiums are calculated for each of the approximately 200 insurers using rates developed based on hurricane modeling of the trended data from the prior year. The modeling takes into consideration factors such as historical records of hurricane strength and landfall patterns, geographic location, type of business, construction, coverage selected, and deductions. The Fund is administered by the State Board of Administration of Florida (SBA), which has contracted for administrative and actuarial services. The Fund also includes the accounts of its blended component unit, the Florida Hurricane Catastrophe Fund Finance Corporation (the Corporation). The Corporation, a public benefits corporation and an instrumentality of the state of Florida, was created to provide a mechanism for the cost-effective and efficient issuance of bonds necessary to enable the Fund to carry out its purposes. The Corporation is included as a blended component unit because it provides services exclusively for the benefit of the Fund. Separate stand-alone audited financial statements of the component unit are not available. Basis of Presentation The Fund is classified as an enterprise fund, which is a type of proprietary fund. The financial statements of proprietary funds are prepared using the economic resources measurement focus and the accrual basis of accounting. All assets and liabilities associated with the operations of this fund are included in the statement of net assets (deficit). The statement of revenues, expenses, and changes in net assets (deficit) presents increases (revenues) and decreases (expenses) in net total assets. The statement of cash flows provides information about how the Fund finances and meets the cash flow needs of its activities. 34

39 The financial statements presented herein relate solely to the financial position and changes in financial position of the Fund and are not intended to present the financial position of the SBA or the results of its operations and cash flows. The Fund follows Governmental Accounting Standards Board (GASB) pronouncements and only Financial Accounting Standards Board pronouncements issued after November 30, 1989, that do not conflict with or contradict GASB pronouncements. Limited Liability of the Fund The Fund s obligation to participating insurers, in the event of a hurricane(s) that causes reimbursable losses, is limited to the claims-paying capacity of the Fund. For the purpose of defining claims-paying capacity, the SBA shall use the unrestricted net assets as of December 31 of the applicable contract year, to which is added reported fund losses (including loss adjustment expense) for the then-current contract year, whether paid or unpaid by the Fund, as of December 31; any reinsurance purchased by the Fund; and the amount the SBA is able to raise through the issuance of revenue bonds up to the statutory annual aggregate fund limit; and from which is subtracted any reinsurance recovered prior to, or recoverable as of, December 31; any obligations paid or expected to be paid with bonding proceeds or receipts from emergency assessments; amounts needed for administration for the then-current state of Florida fiscal year which have not been spent and which are not reflected on the statement of net assets (deficit); and the amount of undispersed mitigation funds appropriated for the then-current state of Florida fiscal year. Revenue bonds have been issued under authorization of Section (6) of the Florida Statutes; as such, the SBA has directed the Florida Office of Insurance Regulation to levy an emergency assessment on each insurer writing property and casualty business in this state. The Fund, therefore, has no risk that it will be unable to meet its contractual obligations to participating insurers because its obligation is limited to its ability to pay. Although bonds have been issued on behalf of the Fund, the state of Florida assumes no liability for the repayment of the bonds. Additionally, the state of Florida has no legal responsibility to make any contribution to the Fund should its obligations exceed available resources. 2. Significant Accounting Policies Measurement Focus As mentioned in Note 1, the Fund uses the economic resources measurement focus and the accrual basis of accounting. Under the accrual basis of accounting, premium revenues are recognized when billed. Expenses are recorded at the time they are incurred. Investments The Fund invests all funds in relatively low-risk, highly liquid fixed-maturity securities. These investments are recorded at fair value, and the fair values are primarily obtained from independent quoted market prices. No investments were recorded at amortized cost as of June 30, 2007 and The Fund considers all investments with maturity dates of less than one year to be short-term investments. Investments with maturity dates in excess of one year are included in long-term investments. Investment advisory services are provided by the SBA. Emergency Assessment Receivable Emergency assessments are remitted as a percentage of quarterly direct written premium and are due 45 days following the end of each quarter for insurers and 30 days following the end of each quarter for surplus lines agents. Insureds procuring coverage and filing under Section remit 30 days after the insurance is procured. 35

40 Securities Lending The Fund, under authorization of Section (16) of the Florida Statutes, engages in securities lending. In a securities lending program, a lender (i.e., the Fund) loans various securities to a borrower for collateral with a simultaneous agreement to return the collateral for the same securities in the future. The market value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the market value of the loaned securities fluctuates. Initial collateral on cash or U.S. government securities is required at a rate of at least 100% of the market value of a loaned security. The obligation recorded as a current liability represents the obligation to return the collateral received. Interest earned on shortterm investments purchased with the cash collateral held is recognized as revenue. Lending agent costs and borrower rebate fees are recognized as expenses when incurred. Premiums Receivable Premiums receivable represent amounts from previous billings that have not yet been collected and are net of any allowances management has established to anticipate uncollectible billings. Loss Reimbursement Advances Receivable Certain companies may qualify for advances from the Fund, which are in essence loans based on a company s potential recoveries from the Fund (i.e., based on incurred losses rather than paid losses). Loss reimbursement advances receivable represent amounts currently outstanding on these advances, including accrued interest. Capital Assets Capital assets, primarily electronic data processing equipment, are stated at cost, less accumulated depreciation. Depreciation is recorded on a straight-line basis over the estimated useful lives, ranging from three to seven years. Premium Refunds Payable Premium refunds payable represent amounts due to participating insurers where provisional or estimated premium payments are in excess of amounts actually owed based upon the current exposure data. Also included are premium amounts received from companies pending exemption. These amounts are returned once an exemption is granted. Compensated Absences Compensated absences represent the Fund s obligation to accrue a liability for employees rights to receive compensation for future absences, such as vacation and sick leave. The Fund allows vested employees to carry forward any unpaid leave indefinitely. The short-term portion of this liability, $43,000 in 2007 and $40,000 in 2006, is included in accrued expenses on the statements of net assets (deficit). The remaining liability is included as compensated absences with long-term liabilities on the statements of net assets (deficit). Current Contract Year Premium Revenue Premium revenue is recognized when billed. Coverage is provided to the participating insurers on a contract-year basis, which runs from June 1 to May 31. Premiums are billed in three installments, with provisional payments due August 1 and October 1 and a final payment due December 1. 36

41 Prior Contract Year Adjustments Participating insurers remit premium to the Fund based upon current policyholder exposure information. When insurers provide updated or corrected exposure information, the Fund may bill and receive additional premium relating to a prior contract year; the Fund may also be required to refund amounts to insurers relating to a prior contract year. Operating Revenues and Expenses Operating revenues are those revenues that are generated directly from the primary activity of the proprietary fund. For the Fund, these revenues are primarily the premiums charged to all participating insurers. Operating expenses include incurred losses and necessary costs incurred to provide and administer catastrophic reinsurance to the Fund s participants. Net Interest on Premium Adjustments Participating insurers have the option of paying the billed provisional premium or estimating premium for the August and October installments. If the provisional or estimated payments are too high, interest is returned to the insurer on the overpayment. Likewise, if estimated premiums are underpaid, interest is charged to the insurer with the December installment. For the contract year ended May 31, 2007, the interest rate was 5.20% for overpayments of premium and 10.20% for underestimate payments. For the contract year ended May 31, 2006, the interest rate was 3.43% for overpayments of premium and 8.43% for underestimated payments. Hurricane Losses Hurricane losses represent the estimated ultimate cost of all reported and unreported claims incurred during the year that exceed the participating insurers individual company retention levels. The reserves for unpaid claims are estimated primarily by management s review of reported loss information obtained from the participating insurers. Although considerable variability is inherent in such estimates, management believes that the reserves for hurricane losses are adequate. The estimates are continually reviewed and adjusted as experience develops or new information becomes known, and such adjustments are included in current operations. Emergency Assessment Emergency Assessments are collected pursuant to Section (6)(b). As of June 30, 2007, $94.5 million was received, net of refunds, and $100.7 million was included as a receivable in the statement of net assets (deficit). Transfers Pursuant to Section (7)(c) of the Florida Statutes, the Florida Legislature will appropriate from the Fund an amount no less than $10,000,000 and no more than 35% of the investment income from the prior fiscal year, providing that the actuarial soundness of the Fund is not jeopardized, for the purpose of providing funding for governments, agencies, and educational institutions to support programs intended to improve hurricane preparedness or reduce potential losses in the event of a hurricane. For these purposes, in fiscal year and , $10,000,000 and $10,000,000, respectively, was appropriated from the Fund, and $22,400 was available from prior years. The remaining $22,400 available for transfer in fiscal year has been restricted in the June 30, 2007, net assets for future transfer. Income Taxes The Fund and the Corporation are exempt from federal and state income taxes. The Fund s tax-exempt status was affirmed by a 37

42 private letter ruling obtained from the Internal Revenue Service in November The Corporation received its initial private letter ruling to issue tax-exempt debt in March This ruling was renewed in June 2003 for an additional five years. Cash Equivalents The Fund generally considers all highly liquid investments with a maturity of less than one year when purchased to be cash equivalents. Cash equivalents are recorded at cost, which approximates fair value. 3. Investments The Fund is authorized to invest in accordance with Section of the Florida Statutes, which includes, but is not limited to, certificates of deposit, commercial paper, U.S. government agency notes, U.S. Treasury bills, repurchase agreements, and variable rate notes that enhance the Fund s investment income while maintaining liquidity. The fair value of the Fund s investments and securities lending collateral is as follows (in thousands): June Short-term investments Investments: Certificates of deposit $ 158,722 $ Commercial paper 554, ,406 Liquidity notes 1,259, ,621 Corporate bonds and notes, variable rate 135,922 59,959 Federal agencies 49,983 Money market funds 160,767 Total short-term investments $ 2,269,797 $ 510,969 Long-term investments Investments: Certificates of deposit $ 104,994 $ Corporate bonds and notes, variable rate 1,582,206 40,035 Federal agencies 74,964 Non-government mortgage-backed 30,731 U.S. treasuries 894,217 Total long-term investments $ 2,581,417 $ 145,730 Securities lending short-term collateral investment pool $ $ 128,355 As of June 30, 2007, the Fund held the following investments (in thousands): Weighted Average Investment Type Fair Value Maturity (Days) Certificates of deposit $ 263,716 3 Commercial paper 554,615 2 Corporate bonds and notes 1,718, Liquidity notes 1,259,771 2 Money market funds 160,767 1 U.S. treasuries 894,217 1 Total fair value $ 4,851,214 Portfolio weighted average maturity 34 38

43 Interest Rate Risk Liquidity being a primary concern, the investment policy objective is to invest in highly liquid, relatively short-term investment strategies which are reviewed on an annual basis to ensure the appropriateness of the strategic goal. The Fund utilizes the weighted average maturity method to limit exposure to interest rate risk. In accordance with the policy, no individual security shall have a final maturity date longer than 5 years, and the weighted average maturity of the portfolio shall not exceed 365 days. For purposes of this calculation, the maturity date is assumed to be the next reset date rather than the stated maturity. Credit Risk Funds are invested in accordance with Section of the Florida Statutes, which includes, but is not limited to, certificates of deposit, commercial paper, U.S. government agency notes, U.S. Treasury bills, repurchase agreements, and variable rate notes that enhance the Fund s investment income while maintaining liquidity. The investment policy further states that all securities must be investment grade at time of purchase. For short-term ratings, this has been defined as the highest applicable rating by at least one nationally recognized statistical rating organization. For long-term ratings, this has been defined as BBB or better by at least two nationally recognized statistical rating organizations. The schedule below provides the credit quality ratings by Standard and Poor s and Moody s Investor Services at June 30, 2007 (in thousands). Credit Quality Ratings Investment Type Fair Value S&P Moody Certificates of deposit $ 50,006 AA Not Rated Certificates of deposit 104,993 A A Certificates of deposit 18,684 A P-1 Certificates of deposit 90,033 A Not Rated Commercial paper 399,616 A-1 P-1 Commercial paper 154,999 Not Rated P-1 Corporate bonds and notes 45,018 AAA Aaa Corporate bonds and notes 75,016 AA Aaa Corporate bonds and notes 499,824 AA Aa Corporate bonds and notes 94,999 A Aa Corporate bonds and notes 624,366 A A Corporate bonds and notes 295,389 A Not Rated Corporate bonds and notes 83,516 Not Rated A Liquidity notes 1,259,771 A-1 P-1 Money market funds 160,767 AAA Aaa U.S. treasuries 894,217 Not Rated Not Rated Total fair value $ 4,851,214 Concentration of Credit Risk Securities of a single issuer shall not represent more than 5% of portfolio amortized cost (excluding U.S. Treasuries and Agencies) if less than one year to final maturity. If greater than one year to final maturity, single issuer exposure will be limited to 3% of portfolio amortized cost. At June 30, 2007, the fund held $894,216,549 in U.S. Treasury State & Local Government Series Securities (SLGS) which represents 18.43% of total investments. SLGS are nonmarketable securities that are only available for purchase by state and local governments and other issuers of tax-exempt securities. SLGS are direct obligations of the U.S. Government, backed by the full faith and credit of the U.S. Government. 39

44 Custodial Credit Risk Custodial credit risk is defined as the risk that the Fund may not recover securities held by another party. The Fund does not have a formal investment policy for custodial credit risk. At June 30, 2007, all investments held were either insured or registered and held by the Fund or its agent in the Fund s name. Foreign Currency Risk No exposure to foreign currency risk existed at June 30, Securities Lending Transactions The Fund, under authorization of Section (16) of the Florida Statutes, engages in security lending transactions. While the Fund did participate in security lending transactions during the year, there were no securities on loan at June 30, Therefore, there was no credit risk to borrowers at year-end and no cash collateral invested in the agent s short-term investment pool. 4. Security Lending The Fund has a contract with Dresdner Bank to act as a lending agent in the performance of securities lending transactions. Under the securities lending program, Dresdner Bank delivers various securities of the Fund to authorized brokers in return for collateral in the form of cash or U.S. government securities. Borrowers under the transactions must be approved by Dresdner Bank s credit department, and Dresdner Bank is required to indemnify the Fund if the borrower fails to return the underlying securities or fails to pay income distributions on them. The Fund is contractually limited from pledging or selling collateral represented by loaned securities except in the event of borrower default. No violations of legal or contractual provisions occurred, and no losses were incurred due to borrower or lending agent defaults in While the Fund did participate in security lending transactions during the year, there were no securities on loan at June 30, The collateral held represents 102% in 2006 of the market value of the securities lent. Dresdner Bank monitors daily the market value of the securities lent and requests additional collateral if the collateral for any loan is less than 100% of the market value of the underlying securities for that loan. The Fund had no credit risk exposure to borrowers at June 30, 2007 or 2006, because the amounts the Fund owes the borrowers exceed the amounts the borrowers owe the Fund. The collateral held as assets is recorded in the statement of net assets (deficit) at fair value in accordance with Statement No. 31. Obligations under the program are recorded as liabilities based on the cash value of the collateral received. Details of the lending transactions for the Fund at June 30, 2006, are as follows (in thousands): Fair Value Cash Fair Value of Underlying Collateral of Collateral Securities on Loan Securities Lent Held Investment Pool 2006 U.S. obligations $124,953 $127,875 $128,355 As of June 30, 2006, the Fund held $127,875,000 of cash collateral from Dresdner Bank. The cash was reinvested in various short-term instruments as authorized by the securities lending agreement. Maturities of investments made with cash collateral generally are not matched to maturities of the securities loans, due to securities loan agreements being open-ended with no fixed expiration date. 40

45 5. Capital Assets A summary of the Fund s capital assets and the related accumulated depreciation for the years ended June 30, 2007 and 2006, is as follows (in thousands): Accumulated Equipment Depreciation Net Balance as of June 30, 2005 $ 103 $ (93) $ 10 Additions 3 (7) (4) Sales or disposals (13) 13 Balance as of June 30, (87) 6 Additions 2 (4) (2) Sales or disposals (7) 7 Balance as of June 30, 2007 $ 88 $ (84) $ 4 6. Hurricane Losses The state of Florida was not hit by any hurricanes during the 2006 hurricane season. The state of Florida was hit by four hurricanes during July through October of These hurricanes were Category 3 Hurricane Dennis on July 10, Category 1 Hurricane Katrina on August 25, Category 1 Hurricane Rita on September 20, and Category 3 Hurricane Wilma on October 24. The state of Florida was hit by four hurricanes during August and September These hurricanes were Category 4 Hurricane Charley on August 13, Category 2 Hurricane Frances on September 4, Category 3 Hurricane Ivan on September 16, and Category 3 Hurricane Jeanne on September 25. The following table provides a reconciliation of the beginning and ending balances for unpaid hurricane losses for 2007 and 2006 (in thousands): Year Ended June Reserve for unpaid hurricane losses $ 2,131,913 $ 925,827 Add provision for hurricane losses occurring in: The current year 4,500,000 Prior years 200,000 Net incurred losses during the current year 4,700,000 Deduct payments for claims occurring in: The current year 2,734,810 Prior years 1,322, ,104 Net claim payments during the current year 1,322,018 3,493,914 Reserve for unpaid hurricane losses at end of year $ 809,895 $ 2,131,913 The Fund s reserve for unpaid hurricane losses, at June 30, 2005, was increased in the following year by $200,000 as a result of ongoing loss development and actuarial analyses. 41

46 7. Bonds Payable The Fund is expecting to pay loss reimbursements of $3.95 billion to participating insurers for the 2004 hurricanes and $4.50 billion for the 2005 hurricanes. This resulted in deficit unrestricted net assets as of June 30, In response to this shortfall, the Corporation issued post-event Series 2006A Revenue Bonds in the amount of $1,350,025,000 during the year ended June 30, The funding for these bonds will come from a 1% emergency assessment on the direct written premium for all property and casualty lines of business in Florida including property and casualty business of surplus lines insurers, but not including workers compensation premiums or medical malpractice premiums until The bonds are stated to mature without right of prior redemption on July 1 of the following years and bear interest at rates ranging from 4.00% to 5.25% as follows (in thousands): 2008 $ 244, % , , , , , , $ 1,350,025 In order to provide a source of funds to reimburse participating insurers for losses relating to future covered events, in July 2006, the Corporation issued pre-event Series 2006B Extendible Floating Rate Notes in the amount of $2.8 billion. Investment earnings on these funds, as well as reimbursement premiums if necessary, are used to pay the debt service requirement of the notes. The final maturity date for the notes will be August 15, In connection with the issuance of the revenue bonds, the Corporation incurred $12,166,000 of bond issuance costs which have been capitalized and will be amortized over the life of the bonds payable. Amortization expense recognized during 2007 was $2,188,000. Cash and cash equivalents at June 30, 2006, include $13 million of cash received as a good faith deposit in connection with the bond offering. The entire amount of the deposit was returned upon the settlement of the bond offering on July 7, Compensated Absences Compensated absences were as follows (in thousands): Balance as of June 30, 2005 $ 134 Increases 65 Decreases (72) Balance as of June 30, * Increases 75 Decreases (56) Balance as of June 30, 2007 $ 146* * Includes long-term and short-term balances, of which $43,000 and $40,000 is estimated due within one year of June 30, 2007 and 2006, respectively. 42

47 9. Premium Revenues Fiscal year premiums, net of prior contract year adjustments, as reported in the statements of revenue, expenses, and changes in net assets (deficit), relate to contract years as follows (in thousands): Year Ended June Contract year 2006 $ 1,200,022 $ Contract year , ,678 Contract year (1,385) Contract year (585) $ 1,202,362 $ 734, Related Parties The Fund paid the SBA approximately $76,000 for the Fund and $350,535 for the Finance Corporation in the fiscal year ended June 30, 2007, and $345,000 for the Fund in the fiscal year ended June 30, 2006, for investment advisory services. 11. Subsequent Events In July 2006, the Corporation issued pre-event Series 2006B Extendible Floating Rate Notes. In August 2007 and September 2007, $200 million and $ million, respectively, of these notes non-extended and will become due and payable in August 2008 and September 2008, respectively. Until then, interest will be payable on these amounts at the rate of 30-day LIBOR, plus 2 basis points. In September 2007, the Corporation executed a modification to these notes to increase the coupon spreads applicable to the four remaining reset periods from 2, 3, 4, and 4 basis points, respectively, above 30-day LIBOR to 21, 22, 23, and 25 basis points, respectively, above 30-day LIBOR. In addition, to maximize the ability of the Fund to meet future obligations, in October 2007, the Corporation issued $3.5 billion pre-event 2007A Floating Rate Notes. The proceeds from these notes will be used to pay for losses incurred from future covered events. Investment earnings on these funds and reimbursement premiums, if necessary, will be used to pay the debt service requirements of these notes. OTHER FINANCIAL INFORMATION Report of Independent Auditors on Other Financial Information The Trustees of the State Board of Administration of Florida Florida Hurricane Catastrophe Fund Our audits were conducted for the purpose of forming an opinion on the financial statements taken as a whole. The combining statement of net assets (deficit) and statement of revenues, expenses, and changes in net assets (deficit) as of June 30, 2007, and for the year then ended, are presented for purposes of additional analysis and are not a required part of the financial statements. Such information has been subjected to the auditing procedures applied in our audit of the financial statements and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole. October 15,

48 Florida Hurricane Catastrophe Fund Combining Statement of Net Assets (Deficit) (In Thousands) June 30, 2007 Florida Florida Hurricane Hurricane Catastrophe Catastrophe Fund Finanace Combined Fund Corporation Assets Current assets: Cash and cash equivalents $ 19 $ (5) $ 24 Short-term investments 2,269, ,991 1,689,806 Emergency assessement funds receivable 100, ,655 Accrued interest 18,558 3,649 14,909 Accounts receivable 6 6 Excess loss payments receivable 9,782 9,782 Premiums receivable, net (9) (9) Total current assets 2,398, ,414 1,805,394 Long-term assets: Long-term investments 2,581, ,519 2,266,898 Unamortized bond issuance costs 9,978 9,978 Capital assets, net 4 4 Total long-term assets 2,591, ,523 2,276,876 Total assets $ 4,990,207 $ 907,937 $ 4,082,270 Liabilities and net assets Current liabilities: Hurricane losses: Unpaid hurricane losses $ 809,895 $ 809,895 $ Losses payable 5,295 5,295 Premium refunds payable Accrued expenses Accrued bond interest expense 40,428 40,428 Total current liabilities 856, ,963 40,440 Long-term liabilities: Bonds payable 4,150,025 4,150,025 Premiums on bonds payable 43,124 43,124 Compensated absences, net of current portion Total long-term liabilities 4,193, ,193,149 Total liabilities 5,049, ,066 4,233,589 Net assets (deficit): Unrestricted (59,474) 91,845 (151,319) Invested in capital assets, net of related debt 4 4 Restricted for hurricane mitigation Total net assets (deficit) (59,448) 91,871 (151,319) Total liabilities and net assets (deficit) $ 4,990,207 $ 907,937 $ 4,082,270 44

49 Florida Hurricane Catastrophe Fund Combining Statement of Revenues, Expenses, and Changes in Net Assets (Deficit) (In Thousands) Year Ended June 30, 2007 Florida Florida Hurricane Hurricane Catastrophe Catastrophe Fund Finanace Combined Fund Corporation Operating revenues: Current contract year premium revenue $ 1,200,022 $1,200,022 $ Prior contract year adjustment: Premium billed 2,340 2,340 Premium interest Net premium revenue 1,202,640 1,202,640 Net interest on loss disbursement adjustments/advances 1,732 1,732 Total operating revenues 1,204,372 1,204,372 Operating expenses: Administrative and actuarial fees 2,621 2,621 Other professional fees 1,431 1, Personnel expenses Depreciation 3 3 Other Total operating expenses 5,066 5, Operating income (loss) 1,199,306 1,199,340 (34) Nonoperating revenue (expense): Investment income 234,294 36, ,185 Investment advisor fees (426) (76) (350) Securities lending income 1,088 1,088 Securities lending expense (1,056) (1,056) Securities lending net appreciation (480) (480) Emergency assessment funds received 195, ,226 Bond trustee fees (4) (4) Bond interest expense (195,673) (195,673) Amortization of bond issuance costs (2,188) (2,188) Total nonoperating revenue 230,781 35, ,196 Income (loss) before transfers 1,430,087 1,234, ,162 Transfers from (to) component units 346,481 (346,481) Transfers to other funds (10,000) (10,000) Total transfers (10,000) 336,481 (346,481) Change in net assets 1,420,087 1,571,406 (151,319) Net assets (deficit), beginning of year (1,479,535) (1,479,535) Net assets (deficit), end of year $ (59,448) $ 91,871 $ (151,319) 45

50 Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards The Trustees of the State Board of Administration of Florida Florida Hurricane Catastrophe Fund We have audited the financial statements of the Florida Hurricane Catastrophe Fund (the Fund) as of and for the years ended June 30, 2007 and 2006, and have issued our report thereon dated October 15, We conducted our audit in accordance with auditing standards generally accepted in the United States and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting In planning and performing our audit, we considered the Fund s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Fund s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Fund s internal control over financial reporting. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity s ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity s financial statements that is more than inconsequential will not be prevented or detected by the entity s internal control. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the entity s internal control. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. Compliance and Other Matters As part of obtaining reasonable assurance about whether the Fund s financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grants, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. This report is intended solely for the information and use of the Florida Auditor General and the management of the State Board of Administration of Florida and is not intended to be and should not be used by anyone other than these specified parties. October 15,

51 PHOTO CREDITS: FEMA, NOAA, Florida Secretary of State