Florida Hurricane Catastrophe Fund

Transcription

1 Florida Hurricane Catastrophe Fund Hurricane Ivan Hurricane Charley Hurricane Frances Hurricane Jeanne Fiscal Year Annual Report State Board of Administration of Florida

2 Hurricane Frances, September 5, 2004 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 FLORIDA HURRICANE CATASTROPHE FUND FISCAL YEAR ANNUAL REPORT Hurricane Ivan, September 5, 2004 At 11:45 AM EDT September 5, 2004, Hurricane Frances was over eastern Florida and Hurricane Ivan was off the coast of South America.

4 EXECUTIVE MESSAGE It is my pleasure to present the Florida Hurricane Catastrophe Fund (FHCF) annual report for fiscal year ending June 30, This report provides the financial status and operational activities of the FHCF during the past fiscal year. The 2004 hurricane season was unprecedented with Florida enduring four of the season s nine Atlantic hurricanes within a six-week period. Two of the four hurricanes had nearly identical paths across the state. The last time a state felt the impact of four hurricanes was Texas in 1886, and the last time three hurricanes struck Florida was 40 years ago. The FHCF met the challenge of this past hurricane season and was responsive to the needs of its participating insurers with timely loss reimbursements. We would like to thank the State Board of Administration Trustees, the FHCF Advisory Council, the SBA/FHCF staff, and our service providers for their support and contributions during this past year. We hope you find this report informative and useful. We welcome any comments, thoughts, or ideas regarding the content of future issues. For questions or additional information regarding the FHCF, please do not hesitate to 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, problems associated with the residential property insurance market developed. 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 provide a stable and affordable reinsurance market. The FHCF was created in Section , Florida Statutes, 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. The FHCF supports a publicprivate partnership that preserves the private sector s role as the primary risk bearer. In 2003 the FHCF provided $11 billion of reinsurance capacity for the state of Florida. In 2004 the Florida Legislature expanded the claims-paying capacity of the FHCF from $11 billion to $15 billion. The cost of FHCF coverage is 1

6 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, it has helped stabilize the market, it has enabled more insurance to be written in the state, and it has helped keep business out of the residual market. The FHCF acts as a state administered reinsurance program and is mandatory for residential property insurers writing covered policies in the state of Florida. Covered policies are residential property insurance policies that provide wind or hurricane coverage on structures located in Florida, including coverage on contents and coverage for additional living expenses. Certain collateral protection policies covering personal residences are also considered covered policies if they meet the requirements of Section (2)(c), Florida Statutes. Most commercial property was 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 Trustees are the Governor, Jeb Bush, the Chief Financial Officer, Tom Gallagher, and the Attorney General, Charlie Crist. A nine member Advisory Council has been established 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 Senior FHCF Officer, Jack Nicholson, is responsible for the day-to-day operations of the FHCF and reports directly to the Executive Director of the SBA, Coleman Stipanovich. 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 investment and disbursement of moneys collected by the FHCF authorizes the issuance of debt secured by premiums and assessments authorizes the imposition and 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 $15 billion establishes additional emergency assessment authority to help fund capacity for subsequent contract years FHCF Mission Statement The mission of the Florida Hurricane Catastrophe Fund (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 2004 Hurricane Season 1 The 2004 Atlantic hurricane season was unique in a number of ways: Hurricane Ivan was the longest-lived intense hurricane on record. There were no named storms before August 1 when Alex formed in the Western Atlantic. Hurricane Jeanne was the first major hurricane to strike Florida north of West Palm Beach since August had more named storms (eight) and major hurricanes (three) than any August on record. Four hurricanes made landfall along the United States coastline Charley, Frances, Ivan, and Jeanne. All four hurricanes impacted the state of Florida. The last time four or more hurricanes made landfall in the United States was in 1985 when six hurricanes made U.S. landfall. Three hurricanes made landfall in the state of Florida Charley, Frances, and Jeanne. This is the first time that this has occurred since Charley was the first major hurricane to strike Florida since Opal in 1995 and the first Category 4 or greater hurricane to strike Florida since Andrew in Six major hurricanes formed this year Alex, Charley, Frances, Ivan, Jeanne, and Karl. Eight named storms (hurricanes and tropical storms) made landfall in the United States this year Bonnie, Charley, Frances, Gaston, Hermine, Ivan, Jeanne, and Matthew. This is the most storms to make landfall in the United States in one year since 1916 when eight named storms also made U.S. landfall. In total, the 2004 hurricane season had fifteen named storms (hurricanes and tropical storms) with seven reaching hurricane status. Six of the seven hurricanes were major storms reaching Category 3, 4, and 5 on the Saffir-Simpson Hurricane Scale. The Atlantic hurricane season runs from June 1 through November 30. 4

9 Saffir-Simpson Hurricane Scale Category Wind Speed (mph) Central Pressure > > 155 < 920 Hurricanes Triggering FHCF Coverage The four hurricanes that impacted the state of Florida were among the most expensive in U.S. history. Their accumulated losses, in all the states they affected, exceeded those of Hurricane Andrew adjusted to 2004 dollars. These losses are exceeded only by losses from the terrorist attacks on September According to the Florida Department of Financial Services, total estimated insured losses for the state of Florida are $21.5 billion, one in every five homes were damaged statewide, and policyholders are expected to file claims in all 67 Florida counties. Hurricanes Charley, Frances, Ivan, and Jeanne are the first hurricanes to trigger FHCF coverage since hurricanes Erin and Opal in Hurricane Charley strengthened rapidly just before making landfall at Charlotte Harbor on Friday, August 13, 2004, as a Category 4 hurricane on August 13: Hurricane Charley September 5: Hurricane Frances 5

10 the Saffir-Simpson Hurricane Scale with 145 mph winds. Charley cut a path across the state causing substantial damage from Punta Gorda and Port Charlotte to Orlando and Daytona Beach before it exited into the Atlantic Ocean. Charley was not finished as it made three additional landfalls before dissipating on August 15th. The high winds, heavy rain, and storm surge caused flooding and extensive damage. Total insured industry damage estimates from Charley are $8.1 billion, making it one of the most expensive hurricanes to hit the United States, second only to Hurricane Andrew in Hurricane Charley activated the FHCF to the most significant extent since its creation in Hurricane Frances made landfall near Sewall s Point on Sunday, September 5, 2004, as a Category 2 storm with winds at 105 mph and tracked slowly across the state causing extensive damage as it moved west-northwest before exiting into the Gulf of Mexico. Frances made a second landfall on September 6 near St. Marks in the Florida panhandle as a tropical storm and dissipated later that day. 1 Total insured industry losses from Frances are estimated at $5.3 billion. H urricane Ivan reached Category 5 strength three times before it made landfall at Palm Shores, Alabama on Thursday, September 16, 2004, as a Category 3 storm with 130 mph winds. Damage was particularly extensive in the Florida panhandle with Pensacola experiencing significant destruction. Ivan weakened to a tropical depression later that day as it moved northeastward through Alabama. The remnants of Ivan continued northeastward off the Mid-Atlantic coastline and then drifted southwestward across the state of Florida into the Gulf of Mexico. Ivan reintensified and made a second landfall as a tropical storm in Louisiana on September 23rd. The storm dissipated on September 24th. 1 Total insured industry damages from Ivan are estimated at $3.9 billion. September 16: Hurricane Ivan September 25: Hurricane Jeanne 6

11 Hurricane Jeanne made landfall near Stuart on Saturday, September 25, 2004, as a Category 3 storm with winds at 120 mph at almost the same location Hurricane Frances landed just 20 days earlier. Jeanne followed a path similar to Frances as it moved rapidly across the state causing considerable damage. Jeanne dissipated on September 26th as it moved across the state of Georgia. 1 Total insured industry damages are estimated at $4.2 billion for Hurricane Jeanne. more than 1.7 million claims, with the number expected to exceed 2 million. As of December 31, 2004, of the 223 FHCF participating insurers, 133 are expected to trigger coverage and 55 insurers are expected to exhaust their FHCF maximum limits of coverage. For each hurricane event, insurers are required to absorb a retention, which acts like a deductible, prior to triggering FHCF coverage. Total FHCF loss payments as of December 31, 2004, were $1.5 billion. It is important to note that The Florida Department of Financial Services reported that the 2004 hurricane season resulted in Total Estimated Insured Losses State of Florida (in billions) all losses have not been paid, and the true liability of the FHCF will not be known for some time. FHCF Participating Insurers Expected FHCF Losses - All Hurricanes As of 12/31/04 Source: Florida Office of Insurance Regulation 7

12 Operational Activities In addition to activities related to the hurricane season, other major FHCF activities for the past fiscal year included: Five meetings of the Advisory Council Monitoring and responding to proposed legislation Development of the 2004 premium formula Publication of bonding capacity estimates in May and October Adoption of six rules Upgrades of FHCF credit ratings from S&P, Fitch, and Moody s Introduction of the Loss Reimbursement Preparedness Program Phase 2 A Strategic Planning Summit A Participating Insurers Workshop An Examiner Training Conference Staff support to the Florida Commission on Hurricane Loss Projection Methodology (FCHLPM) Updating and maintaining the FHCF and FCHLPM web sites 143 Contract Year 2003 company exams of exposure data were conducted representing 99.34% of FHCF premium. 8

13 Legislation growth of insured values, and reset Old and New Capitol Buildings, Tallahassee, Florida the insurance industry aggregate retention (deductible) to $4.5 billion which is designed to grow with exposure growth. The emergency assessment authority was increased to finance the increased capacity to 6% per year and 10% aggregate on all lines of property and casualty business excluding workers compensation and medical malpractice. The emergency assessment base was expanded to include surplus lines, but the medical malpractice line was excluded from assessments for three years. This temporary exclusion is applicable to any covered event occurring prior to June 1, A change was also made in the way the emergency assessment is remitted by the insurer. During the 2004 legislative session, the passage Other changes included increasing the exposure of CS/CS/CS/CS for Senate Bill 2488 brought considerable changes ticipation from limit for insurers who choose to be exempted from par- to the Florida Hurricane Catastrophe lion, broadening $500,000 to $10 mil- Fund with a June 1, the selection of 2004 effective date. reinsurers, providing for rulemaking The bill expanded the capacity of the authority to allow FHCF from $11 billion to $15 billion, terest on late remit- the charging of in- allowing capacity tances, providing to grow with the for rulemaking authority to exclude certain deductible buy-back and commercial residential excess policies, and providing greater flexibility for covering additional living expenses. In addition, language was removed that required recoveries from reinsurers in situations where recoveries exceeded 100% of the insurer s losses, and the word audit was replaced with examination to avoid confusion between the FHCF s program compliance examinations and financial audits. The bill also provided some important clarifications. It clarified that emergency assessments may be used for debt service coverage and to refinance debt and that mitigation appropriations are to be based on the most recent fiscal year-end audited financial state- 9

14 ments. In addition, the bill helped clarify how excess recoveries will be allocated between Citizens accounts. The bill also provided greater specificity regarding the process for the publication of bonding capacity estimates and notification requirements to insurers. Due to the natural disasters that occurred during the 2004 hurricane season, Senate President Tom Lee and House Speaker Allan Bense called the Legislature into a Special Session in order to address hurricane related issues. House Bill 9A created a program to reimburse policyholders of residential property insurance for multiple deductibles applied by insurers for two or more hurricanes after the policyholder had absorbed one full hurricane deductible. The bill was signed by the Governor on December 21, The Department of Financial Services is authorized to administer the program, which will be funded with up to $150 million out of the FHCF. The FHCF is allowed to increase its premiums to recover the cost over a five-year period beginning June 1, The bill also provided that in the future, insurers will be required to apply the hurricane deductible only once in a season followed by application of the non-hurricane perils deductible on all other losses. Peak 1 min Hurricane Winds over Florida,

15 History of Legislative Changes 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 assessments for all years Limited insurers payout except for FRPCJUA and FWUA (now known as Citizens Property Insurance Corporation) 2002 Added coverage for Additional Living Expense (ALE) Added coverage for certain Collateral Protection Insurance Policies Provision established for inclusion of a rapid cash buildup 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 allows subsequent season capacity to expand to $15 billion Insurance industry aggregate retention was reset to $4.5 billion and is 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, 2007 Exemption exposure limit increased to $10 million Selection of reinsurers broadened Rulemaking authority allowing for interest charges on late remittances Rulemaking authority allows for excluding 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 11

16 Rulemaking 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. Each of these meetings is 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. The following rules were adopted by the SBA this past fiscal year , F.A.C. Reimbursement Contract Adoption of the Reimbursement Contract , F.A.C. Procedures to Determine Ineligibility for Participation and Exemption from Participation in the FHCF , F.A.C. Issuance of Revenue Bonds , 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 Emergency Rules In response to 2004 Legislation, Emergency Rules 19ER04-1 (Reimbursement Contract) and 19ER04-2 (Data Call) were promulgated on May 12,

17 FHCF Participating Insurers Workshop The FHCF hosted its Fourth Annual Participating Insurers Workshop on May 20 and 21, The workshop is designed to be an educational opportunity for participating insurers, to provide an avenue for the FHCF to receive additional comments on its rules and documents, and to focus on the activities of the FHCF and the insurance industry. This year s workshop opened with guest speaker Kevin McCarty, Director of the Office of Insurance Regulation. Other topics were: key legislative changes impacting the FHCF and insurers changes to the upcoming contract year s Reimbursement Contract and Insurer Reporting Requirements (Data Call) overview of the FHCF examination program history of the FHCF and its coordination with private reinsurance ratemaking and the use of models Florida Department of Financial Services emergency response system and coordination with the Insurance Disaster Assessment Team the loss reimbursement process and a practice drill Comments and suggestions regarding changes to the rules, documents, and other statutory changes were solicited and discussed. Also noted were changes in the documents that resulted from suggestions made by participants during workshops in prior years. Sessions were provided on exposure reporting and loss reimbursement reporting to the FHCF. Phase II of the Loss Reimbursement Preparedness Program was also introduced at the workshop. 13

18 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 participating insurer compliance with FHCF data reporting requirements. Every participating company is required to report its exposure data annually and at that time to generate an examination file. All records, including exposure filings, policy files, and any other supporting documentation, must be retained with the examination file. 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. These include, but are not limited to: 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), failure to report percentage deductibles. The SBA has also developed and implemented an examination program to ensure proper reporting of claims to the FHCF. Companies are required to retain complete, accurate, and detailed records, at the policy level, of all reported exposures and reported claims until the FHCF has completed an examination of these specific records. Retention of records is imperative since an examination may result in a resubmission, other corrective action, or an adjustment to a company s FHCF premium or loss recovery. 14

19 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 $1,854, ($3,474,562.17) ($1,619,592.97) The FHCF conducted 18 examinations related to losses reported as a result of Hurricane Erin and Hurricane Opal in All outstanding claims from Hurricane Erin and Hurricane Opal were closed this fiscal year. The FHCF will begin the examinations of companies reporting claims as a result of the 2004 events in mid

20 FHCF Loss Reimbursement In prior years, only two hurricanes had resulted in reimbursement to participating insurers; however, the 2004 hurricane season brought numerous loss recoveries from the FHCF. On August 20, ties 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. 2004, just one week after the occurrence of Hurricane Charley, the FHCF issued its first loss payment. For companies submitting complete requests and having no outstanding FHCF issues, disbursements were made within 2-6 business days. A recap of FHCF reimbursements to participating insurers as of year end follows: Fitch upgraded its credit rating from A+ to AA. In 2004, the FHCF Finance Corporation obtained an upgrade in its credit rating from Moody s, Standard and Poor s, and Fitch. Moody s upgraded the FHCF credit rating from A1 to Aa3, Standard and Poor s upgraded the FHCF s credit rating from A+ to AA-, and Number of Total Recovery Companies with Paid (Excess of As of FHCF Recoveries Retention) 1995 Erin, Opal 9 $13,133, Charley, Frances, Ivan, Jeanne 63* $1,451,905,978 TOTAL $1,465,039,951 *133 insurers are expected to seek loss reimbursement from the FHCF 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 coun- The FHCF Finance Corporation has validated the issuance of up to $10 billion of revenue bonds with the Florida Supreme Court. The FHCF Finance Corporation also 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, The FHCF has prepared preliminary bond documents and has a team of professionals in place to facilitate a series of bonding transactions should a major hurricane occur that requires bonding. The bonding team was very active during the 2004 hurricane season. Fortunately, the FHCF will be able to pay all reimbursements out of the FHCF s cash balance and bonding will not be required. 16

21 Estimated FHCF Claims Paying Capacity ($ billions) Projected Initial Subsequent 12/31 Season Claims Season Claims Year Bonding Capacity Fund Balance Paying Capacity Paying Capacity 1994 $2.0 $0.3 $ May October $ 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. 17

22 Litigation The FHCF was not involved in any litigation during the fiscal year. 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. 18

23 2004 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 Total Funds provided to State of Florida from FHCF $109,052,909 19

24 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 to meet their responsibilities to Florida residential policyholders following the catastrophic hurricanes that hit Florida. 3) 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. 4) 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. 5) 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. 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: 1) 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. 2) The FHCF does not include a factor for profits in its rates, neither does it pay reinsurance brokerage commissions. 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 business (excluding medical malpractice for three years and workers compensation, but including surplus lines). Emergency assessments have never been levied, but would be required in situations where the available cash balance of the fund is insufficient to reimburse losses to insurers. 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 as well as a current listing of FHCF participating insurers. If you have additional questions, please feel free to contact the FHCF staff. 20

25 FHCF AT-A-GLANCE Fiscal Year (as of ) Created: November, 1993 No. of Participating Insurers: 223 Premium Billed: $ million Exposure: $1,317.9 billion Projected Fund Balance: $6.1 billion Mitigation Funding for 2004: $10,000,000 Claims Paying Capacity: Initial Season Subsequent Season $15 billion $15 billion Bonding Capacity: Initial Season Subsequent Season $8.88 billion $14.37 billion Emergency Assessments (available): $1,610.7 million (6%) Initial Season (required) $595.5 million (2.22%) Subsequent Season (required) $979.7 million (3.65%) Assessment Base: $26.8 billion includes Surplus Lines and all P&C lines except worker s compensation, and accident and health, and medical malpractice until June 1, Retention Multiples: $11 Billion xs $4.866 Billion $15 Billion xs $4.5 Billion 90% % % Payout Multiple: Moody s, Standard & Poor s, and Fitch Ratings: Aa3/AA-/AA Tax Status: Tax-Exempt Trust Fund Tax-Exempt Bonds 21

26 STATISTICAL INFORMATION 2004 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 $1, % 2003 Exposure Concentration by County ($ billions) Total % of Total County Exposure* Exposure Palm Beach $ % Broward Miami-Dade Orange Hillsborough Pinellas Lee Duval Collier Brevard Other Total $1, % *Updated as of 12/31/04 22

27 Participating Insurers by Coverage Option Selection FHCF Premium by 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/ % 1.56% 1 0.4% 0.000% % 98.44% 2004/ % 1.00% 1 0.5% 0.000% % 99.00% 23

28 Statistical Summary as of 12/31/04 ($ billions) October Projected Claims Projected Contract FHCF Bonding 12/31 Paying Payout Number of Year Premium (1) Capacity Fund Balance (2) Capacity (3) Multiple Exposure (4) Participants (a) (b) (c)=(a)+(b) 95/96 $0.439 $4.0 $0.9 $ $ / / / / / / / , / , /05a /05b , (1) - FHCF premium for contract years 95/96, 96/97, and 97/98 are as of 12/31/03. - 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. (2) Beginning with Contract Year 02/03, Fund Balance represents the Net assets: Unrestricted as reported on the 12/31 FHCF Statement of Net Assets. (3) The 1999 Legislative Session resulted in limiting the overall single-season capacity to $11 billion and provided for subsequent season capacity. (4) Excludes Section II (Excess insurance). Retention Multiples Contract Year 45% 75% 90% 95/ / / / / / / / / /05 $11B xs $4.9B /05 $15B xs $4.5B

29 2004 TROPICAL CYCLONES IN THE ATLANTIC BASIN H Alex TS Bonnie H Charley H Danielle TS Earl H Frances TS Gaston TS Hermine H Ivan* H Jeanne H Karl TS Lisa TS Matthew TS Nicole TS Otto TS Tropical Storm H Hurricane Storms making landfall in Florida *made landfall in Alabama with extensive damage in Florida The FHCF was required to pay losses for the 2004 hurricane season TROPICAL CYCLONES IN THE ATLANTIC BASIN TS Ana TS Bill H Claudette H Danny H Erika H Fabian TS Grace TS Henri* H Isabel H Juan H Kate TS Larry TS Mindy TS Nicholas TS Odette TS Peter TS Tropical Storm H Hurricane Storms making landfall in Florida *made landfall in Florida as a Tropical Depression The FHCF was not required to pay losses for the 2003 hurricane season. 25

30 THE PEOPLE WHO MAKE IT POSSIBLE STATE BOARD OF ADMINISTRATION OF FLORIDA Trustees The Honorable Jeb Bush Governor, State of Florida The Capitol Tallahassee, FL Florida Hurricane Catastrophe Fund Staff 1801 Hermitage Boulevard, Suite 100, Tallahassee, FL Jack E. Nicholson, Ph.D., CLU, CPCU Senior FHCF Officer Ph: (850) Donna Sirmons Management Review Analyst Ph: (850) The Honorable Charlie Crist Attorney General, State of Florida The Capitol Tallahassee, FL The Honorable Tom Gallagher Chief Financial Officer, State of Florida The Capitol Tallahassee, FL Executive Director Coleman Stipanovich State Board of Administration of Florida 1801 Hermitage Boulevard, Suite 100 Tallahassee, FL Ph: (850) Anne T. Bert, CPM Director of Operations Ph: (850) Tracy L. Allen, J.D., LLM Senior Attorney Ph: (850) Gina Wilson, CPA (GA), CPM, CPCU, ARe Manager, FHCF Audit Program Ph: (850) Ramona A. Worley Budget Analyst Ph: (850) Marcie Vernon Audit Program Analyst Ph: (850) Patti Elsbernd Management Assistant, Audit Program Ph: (850) (as of 12/31/04) 26

31 FHCF Advisory Council Members John Auer, CPCU American Strategic Insurance Corp. St. Petersburg, FL Jim W. Henderson, CPA, CPCU Brown & Brown, Inc. Daytona Beach, FL Leslie Hudson WESH-TV Winter Park, FL William H. Huffcut (Chair) Tallahassee, FL Yolanda Cash Jackson, Esquire Becker & Poliakoff Ft. Lauderdale, FL Larry Johnson, FCAS, MAAA Allstate Insurance Company Northbrook, IL Robert M. Peduto GE Insurance Solutions Overland Park, KS Michael J. Svaldi Miami, FL Joseph Varon, P.E. (Vice Chair) The Haskell Company Jacksonville, FL FHCF Service Providers Financial Services: Raymond James & Associates 880 Cavillon 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) Examination Services: Kevin Machia, CFE Montgomery, VT Wendell McDavid, AIE Ellenwood, GA Timothy J. Butler, CFE, ARe, CPM President Regulatory Insurance Consulting Services, Inc. Tallahassee, FL James E. Salter, CPA, CFE President BD Regulatory Services, LLC Williston, VT Harold S. Tattershall, AIE San Antonio, TX Financial Auditing Services: Ernst & Young LLP Minneapolis, MN 1 Source: Summary of 2004 Atlantic Tropical Cyclone Activity and Verification of Author s Seasonal and Monthly Forecasts, 19 November 2004, William M. Gray and Philip J. Klotzbach with special assistance from William Thorson 2 Good Riddance by Chris Krideler, Florida Today, November 29,

32 AUDITED FINANCIAL STATEMENTS Financial Statements and Other Financial Information Florida Hurricane Catastrophe Fund Years ended June 30, 2004 and 2003 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 as of and for the years ended June 30, 2004 and These financial statements are the responsibility of the Florida Hurricane Catastrophe 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 1, the financial statements present only the financial position of the Florida Hurricane Catastrophe Fund and are not intended to present fairly the financial position of the State Board of Administration of Florida and the results of its operations and cash flows of its proprietary fund types and nonexpendable trust funds, 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 Florida Hurricane Catastrophe Fund as of June 30, 2004 and 2003, and the results of its operations for the years then ended, in conformity with accounting principles generally accepted in the United States. In accordance with Government Auditing Standards, we have issued our report dated September 7, 2004, on our consideration of the Florida Hurricane Catastrophe 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. September 7, 2004, except for Note 9, as to which the date is October 28, A Member Practice of Ernst & Young Global

33 Florida Hurricane Catastrophe Fund Statements of Net Assets (In Thousands) June Assets Current assets: Cash and cash equivalents $ 35,005 $ 3 Short-term investments 3,477,920 2,286,248 Security lending receivable 1, Security lending pending investment sales 4,499 Security lending collateral 954, ,094 Accrued interest 8,383 12,483 Premiums receivable, net Total current assets 4,476,605 3,164,198 Long-term assets: Long-term investments 1,989,587 2,644,432 Capital assets, net of accumulated depreciation of $85 and $109 for June 30, 2004 and 2003, respectively Total long-term assets 1,989,602 2,644,461 Total assets $6,466,207 $5,808,659 Liabilities and net assets Current liabilities: Obligation under security lending agreement $ 951,017 $ 847,344 Premium refunds payable 214 Accrued expenses 1,134 1,143 Pending investment purchases 34,998 Security lending pending investment purchases 2,781 16,846 Total current liabilities 989, ,547 Long-term liabilities: Compensated absences, net of current portion Total long-term liabilities Total liabilities 990, ,639 Net assets: Unrestricted 5,476,155 4,942,969 Invested in capital assets, net of related debt Restricted for hurricane mitigation Total net assets 5,476,192 4,943,020 Total liabilities and net assets $6,466,207 $5,808,659 See accompanying notes. 29

34 Florida Hurricane Catastrophe Fund Statements of Revenues, Expenses, and Changes in Net Assets (In Thousands) Year Ended June Operating revenues: Current contract year premium revenue $ 488,465 $ 498,367 Prior contract year adjustment: Premium billed 1,729 1,302 Premium refunded (1,612) (1,466) Premium interest (27) (30) Net premium revenue 488, ,173 Total operating revenues 488, ,173 Operating expenses: Hurricane losses (301) Administrative and actuarial fees 2,305 2,340 Other professional fees Personnel expenses Depreciation Other Total operating expenses 3,928 3,781 Operating income 484, ,392 Nonoperating revenue (expense): Investment income 56, ,818 Investment advisor fees (882) (838) Security lending income 10,864 7,077 Security lending expense (8,808) (6,118) Security lending net appreciation Total nonoperating revenue 58, ,551 Income before transfers 543, ,943 Transfers to other funds (10,000) (19,075) Change in net assets 533, ,868 Net assets, beginning of year 4,943,020 4,362,152 Net assets, end of year $5,476,192 $4,943,020 See accompanying notes. 30

35 Florida Hurricane Catastrophe Fund Statements of Cash Flows (In Thousands) Year Ended June Operating activities Premium received $ 488,459 $ 498,151 Hurricane losses paid 72 Administrative and actuarial fees (2,219) (2,317) Other professional fees (810) (961) Personnel expenses (648) (617) Other operating expenses (149) (166) Net cash provided by operating activities 484, ,162 Investing activities Purchases of investments (65,142,090) (84,224,537) Sales and maturities of investments 64,618,062 83,684,629 Interest received 83,276 64,716 Investment advisor fees (879) (767) Security lending 2, Net cash used in investing activities (439,620) (475,080) Financing from noncapital activities Transfers to other funds (10,000) (19,075) Financing from capital activities Purchases of capital assets (11) (5) Net increase in cash and cash equivalents 35,002 2 Cash and cash equivalents at beginning of year 3 1 Cash and cash equivalents at end of year $ 35,005 $ 3 See accompanying notes. Florida Hurricane Catastrophe Fund Reconciliations of Operating Income to Net Cash Provided by Operating Activities (In Thousands) Year Ended June Operating income $484,627 $494,392 Adjustments to reconcile operating income to net cash provided by operating activities: Increase in premiums receivable, net 118 (16) Decrease in premium refunds payable (214) (6) Decrease in unpaid hurricane losses (229) Increase in accrued expenses 87 7 Depreciation Net cash provided by operating activities $484,633 $494,162 See accompanying notes. 31

36 Florida Hurricane Catastrophe Fund Notes to Financial Statements 1. Organization Business June 30, 2004 The Florida Hurricane Catastrophe Fund (the Fund), which was created in November 1993 during a special legislative session following Hurricane Andrew, provides catastrophic reinsurance coverage to all primary insurers of habitational structures with wind/hurricane coverage in the state of Florida. Premiums are calculated for each of the approximately 230 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, and coverage deductibles. The Fund is administered by the State Board of Administration of Florida (SBA), which has contracted administrative and actuarial services. 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. The statement of revenues, expenses, and changes in net assets 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. The financial statements presented herein relate solely to the financial position and results of operations 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 GASB pronouncements and only Financial Accounting Standards Board pronouncements issued before December 1, 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; and the amount of mitigation funds appropriated for the then-current state of Florida fiscal year. If revenue bonds are issued under authorization of Section (6) of the Florida Statutes, the SBA shall direct 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. 32

37 If bonds are 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. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Although estimates are considered to be fairly stated at the time the estimates are made, actual results could differ from those estimates. 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, 2004 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. Security Lending The Fund, under authorization of Section (16) of the Florida Statutes, engages in security lending. In a security 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. 33

38 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 2004 and $27,000 in 2003, is included in accrued expenses on the statements of net assets. The remaining liability is included as compensated absences with long-term liabilities on the statements of net assets. 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. 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 its 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 were too high, interest is returned to the insurer on the overpayment. Likewise, if estimated premiums were underpaid, interest is charged to the insurer with the November installment. For the contract year ended May 31, 2004, the interest rate was 1.65% for overpayments of premium and 4.65% for underestimated payments. For the contract year ended May 31, 2003, the interest rate was 2.16% for overpayments of premium and 5.16% for underestimated payments. 34

39 Hurricane Losses Losses include amounts paid during the fiscal year for hurricane losses from the current and prior contract years that exceeded the participating insurers individual company retention levels. In addition, a provision for future payments on hurricanes that occurred prior to the end of the fiscal year is included in losses. There were no hurricane losses for the year ended June 30, Hurricane losses for the year ended June 30, 2003, were $(301,000), comprised of a $229,000 decrease in unpaid hurricane losses (resulting from participants reporting a reduction in outstanding losses) and a recovery of $72,000 (resulting from participants reporting a reduction in paid losses). Operating 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 $19,075,000, 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, 2004, ending net assets for future transfer. Income Taxes The Fund is exempt from federal and state income taxes. This tax-exempt status was affirmed by a private letter ruling obtained from the Internal Revenue Service in November 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. As of June 30, 2004 and 2003, the Fund s deposits are entirely insured or collateralized with securities held by the Fund or by its agent in the SBA s name. The Fund s investments are classified by level of risk assumed by the Fund at year-end. Custodial credit risk is defined as the risk that the Fund may not recover securities held by another party. The level of custodial credit risk assumed by the Fund is categorized as follows: Category A includes investments that are insured or registered or securities held by the Fund or its agent in the Fund s name. Category B includes uninsured and unregistered investments for which securities are held by the counterparty s trust department or agent in the Fund s name. Category C includes uninsured and unregistered investments for which securities are held by the counterparty or by its trust department or agent, but not in the Fund s name. 35

40 The risk category and fair value of the Fund s investments were as follows (in thousands): Risk Category Fair A B C Value June 30, 2004 Certificates of deposit $ 274,951 $ $ $ 274,951 U.S. government and federally guaranteed obligations 99,180 99,180 Federal agencies 89,406 89,406 Commercial paper 2,276,465 84,378 2,360,843 Repurchase agreements 1 1 Bonds and notes 1,520, ,134 1,705,998 Total classifiable investments $4,260,866 $269,512 $ 1 4,530,379 Investments held by others under security lending agreements: U.S. obligations 99,008 Federal agencies 838,120 Invested security lending cash collateral: Security lending short-term collateral investment pool 954,050 Total unclassifiable investments 1,891,178 Total investments $6,421,557 Risk Category Fair A B C Value June 30, 2003 Federal agencies $ 908,948 $ $ $ 908,948 Commercial paper 1,618,925 1,618,925 Repurchase agreements Bonds and notes 1,405, ,770 1,573,224 Total classifiable investments $3,933,327 $167,770 $10 4,101,107 Investments held by others under security lending agreements: U.S. obligations 829,573 Invested security lending cash collateral: Security lending short-term collateral investment pool 860,094 Total unclassifiable investments 1,689,667 Total investments $5,790,774 36

41 The risk category and fair value of the Fund s investments were as follows (in thousands): June Short-term investments Investments: Certificates of deposit $ 224,951 $ Commercial paper 2,360,843 1,618,925 U.S. government and federally guaranteed obligations 198,188 50,672 Repurchase agreements 1 10 Corporate bonds and notes, fixed rate 28, ,904 Corporate bonds and notes, variable rate 665, ,737 Total short-term investments $3,477,920 $2,286,248 Long-term investments Investments: Certificates of deposit $ 50,000 $ Federal agencies 927,527 1,687,849 Corporate bonds and notes, fixed rate 46,494 Corporate bonds and notes, variable rate 1,012, ,089 Total long-term investments $1,989,587 $2,644,432 Security lending short-term collateral investment pool $ 954,050 $ 860, Security Lending The Fund has a contract with Deutsche Bank through March 3, 2003, and Dresdner Bank beginning December 4, 2002 (collectively referred to as the Banks), to act as a lending agent in the performance of security lending transactions. Under the security lending program, the Banks deliver various U.S. Treasury 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 the Banks credit department and the Banks are 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 U.S. Treasury 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 The collateral held represents 101% in 2004 and 102% in 2003 of the market value of the securities lent. The Banks monitor daily the market value of the securities lent and request 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, 2004 or 2003, because the amounts the Fund owes the borrowers exceed the amounts the borrowers owe the Fund. The collateral held as assets are recorded in the balance sheet 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, 2004 and 2003, are as follows (in thousands): 37

42 Fair Value Cash Fair Value of Underlying Collateral of Collateral Securities on Loan Securities Lent Held Investment Pool 2004 U.S. obligations $937,128 $951,017 $954, U.S. obligations 829, , ,094 As of June 30, 2004 and 2003, the Fund held $951,017,288 and $847,343,750, respectively, of cash collateral from the Banks. The cash was reinvested in various short-term instruments as authorized by the security 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. 5. Capital Assets A summary of the Fund s capital assets and the related accumulated depreciation for the years ended June 30, 2004 and 2003, is as follows (in thousands): Accumulated Equipment Depreciation Net Balance as of June 30, 2002 $122 $ (95) $27 Additions 16 (14) 2 Sales or disposals Balance as of June 30, (109) 29 Additions 1 (15) (14) Sales or disposals (39) 39 Balance as of June 30, 2004 $100 $ (85) $15 6. Compensated Absences Compensated absences were as follows (in thousands): Balance as of June 30, 2002 $112 Increases 58 Decreases (51) Balance as of June 30, * Increases 63 Decreases (54) Balance as of June 30, 2004 $128* *Includes long-term and short-term balances, of which $43 and $27 is estimated due within one year of June 30, 2004 and 2003, respectively. 38

43 7. Premium Revenues Fiscal year premiums, net of prior contract year adjustments, as reported in the operating statements, relate to contract years as follows (in thousands): Year Ended June Contract year 2003 $488,329 $ Contract year 2002 (28) 498,298 Contract year Contract year 2000 (37) (435) Contract year 1999 (1) Contract year 1998 (1) Contract year 1997 (1) Contract year 1996 (1) $488,555 $498, Related Parties The Fund paid the SBA approximately $957,000 and $913,000 in the fiscal years ended June 30, 2004 and 2003, respectively, for investment advisory services. 9. Subsequent Events The state of Florida was hit by four hurricanes during August and September of 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. It is currently estimated that the Fund s liability for losses in excess of participating insurers retention is $1.957 billion. This estimate is based on interim loss reports, which are nonbinding, and is subject to change as participating insurers continue to provide updated loss reports and more information becomes available. The Fund anticipates that it has sufficient unrestricted net assets to cover this liability. 39

44 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 audit was conducted for the purpose of forming an opinion on the financial statements taken as a whole. The accompanying supplemental revenues, expenses, and claim development information of the Florida Hurricane Catastrophe Fund (the Fund) is presented for purposes of additional analysis and is not a required part of the Fund s financial statements. Such information has been subjected to the auditing procedures applied in our audit of the Fund s financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the Fund s financial statements taken as a whole. September 7,

45 Florida Hurricane Catastrophe Fund Supplemental Revenues, Expenses, and Claim Development Information The table below illustrates how the Fund s earned revenues and investment income compare to related costs of loss and other expenses assumed by the Fund as of the end of each year since inception of the Fund (in thousands). Fiscal Year Ended June Net earned required contribution and investment revenues $556,790 $610,680 $613,940 $665,390 $618,968 $388,668 Unallocated expenses 13,618 11,038 19,008 10,184 5,682 11,399 Estimated incurred claims and expenses, end of year 13,134 13,134 13,435 13,435 13,105 13,495 Paid (cumulative) as of: End of policy year One year later 9,413 9,413 9,413 9,413 9,413 9,413 Two years later 12,056 12,056 12,056 12,056 12,056 12,056 Three years later 12,318 12,318 12,318 12,318 12,318 12,318 Four years later 12,967 12,967 12,967 12,967 12,967 Five years later 13,206 13,206 13,206 13,206 Six years later 13,206 13,206 13,206 Seven years later 13,134 13,134 Eight years later 13,134 Reestimated incurred claims and expenses: End of policy year 8,801 8,801 8,801 8,801 8,801 8,801 One year later 11,117 11,117 11,117 11,117 11,117 11,117 Two years later 13,336 13,336 13,336 13,336 13,336 13,336 Three years later 13,495 13,495 13,495 13,495 13,495 13,495 Four years later 13,105 13,105 13,105 13,105 13,105 Five years later 13,435 13,435 13,435 13,435 Six years later 13,435 13,435 13,435 Seven years later 13,134 13,134 Eight years later 13,134 (Decrease) increase in estimated incurred claims and expenses from end of policy year (301) 329 (390)

46 Report on Compliance and on Internal Control Over Financial Reporting 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, 2004 and 2003, and have issued our report thereon dated September 7, 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. Compliance 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 that are required to be reported under Government Auditing Standards. Internal Control Over Financial Reporting In planning and performing our audit, we considered the Fund s internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements and not to provide assurance on the internal control over financial reporting. Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control over financial reporting that might be material weaknesses. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the internal control over financial reporting and its operation that we consider to be material weaknesses. 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. September 7,

47 Hurricane Ivan Tropical Storm Jeanne PHOTO CREDITS: FEMA, NOAA, Kinetic Analysis Corporation