MINUTES OF THE FINANCE AND INVESTMENT COMMITTEE MEETING Tuesday, September 29, 2015

Transcription

1 CITIZENS PROPERTY INSURANCE CORPORATION MINUTES OF THE FINANCE AND INVESTMENT COMMITTEE MEETING Tuesday, September 29, 2015 The Finance and Investment Committee (FIC) of Citizens Property Insurance Corporation (Citizens) convened at the Sheraton Orlando North in Maitland, FL on Tuesday, September 29, 2015 at 12:30 pm (EDT). The following members of the FIC were present: Chris Gardner, Chairman John Wortman Jim Henderson The following members of the Board were present: Gary Aubuchon Bette Brown (telephonically) The following Citizens staff members were present: Barry Gilway Jennifer Montero Barbara Walker Andrew Woodward Dan Sumner Michael Peltier Jay Adams Charles Johnson Bruce Meeks John Rollins Joe Martins The following Citizens staff members were present telephonically: Jonathan Norfleet Josh Bruce John Fox Mona Markell The following people were present:

2 Rick Patterson John Generalli Coleman Cordell Vladimir Munoz Matt Williams Doug Draper Mel Hamilton Mark Weinberg Henry Reyes Nathaniel Johnson Ken Vincent Margaret Lezcano Nadine Mentor Rawn Williams Adam Schwebach Subhashish Dutta Raymond James Wells Fargo BOA Merrill Lynch Regions Bank BOA Merrill Lynch RBC Capital Chandler Asset Citi Group JP Morgan JP Morgan Willis Re Stifel Nicolaus Ramirez Jefferies & Co. Guy Carpenter Guy Carpenter The following people were present telephonically: Kapil Bhatia Amy Michaliszyn Kyle Stewart Charles Elmore Raymond James Federated Federated The Palm Beach Post Call Meeting to Order Barbara Walker took roll. 1. Approval of Prior Meeting s Minutes Chairman Gardner made the motion to approve the June 23, 2015 Finance and Investment Committee (FIC) Minutes. John Wortman seconded the motion. All were in favor. Motion approved. 2. Market Update Chairman Gardner: Item number two is the market update. Rick Patterson is pinch hitting for Kapil today and Jennifer Montero, welcome. Rick Patterson: Good afternoon, Mr. Chairman and Governors. On the line with us today is Kapil Bhatia. Kapil and I are with Raymond James, financial adviser to Citizens. We would like to go very briefly through the current market update, but ask that you please stop us to interrupt if you have September 29,

3 any questions at any time. I will start by saying that as an overview probably the two words that best describe the current U.S. global markets are uncertain and skittish and that is not likely to change anytime soon. Beginning with the U.S. at its September meeting, 16 of 17 of the Federal Reserve s open market committee members voted to keep rates near zero at least for the foreseeable future. The U.S. stock market fell precipitously on the news but rebounded after Chairman Yellen's comments during the speech the following week where she detailed her arguments for potentially raising rates in the near future. As of yesterday morning the Fed funds futures market which is where market participants actually put up their money showed an implied probability of 49 and a half percent that the next hike won't happen any earlier than January of next year. In any event we expect rates to remain low regardless of when and if the Fed ultimately raises rates by 25 basis points. On the unemployment front, August unemployment figures were mixed. Payrolls rose less than expected, but unemployment rates fell more than anticipated. August unemployment rate at 5.1 percent was the lowest since April rather of 2008, down from a high of 10 percent in October of A slack continues to remain in the unemployment market. However, with labor force participation rate at only 62.6 percent. Shifting to the global economy, Euro zone economy grew more rapidly than previously estimated last quarter, GDP growth for the second quarter was revised upwards from.3 to.4 percent, and the.5 percent Euro zone growth rate in the first quarter marked the most solid pace of growth that the Euro zone has seen since Most of that resulting from increased exports. In China the roller coaster ride continues though. The Shanghai composite that you have seen has tumbled roughly 39 percent from the year's peak last year in June down one and a half percent for the year. Deflation continues to slow China's economic growth considerably. This is important in the big picture since China accounts for roughly one third of the global market growth over the last decade compared to just 17 percent for the U. S. In the interest rate market, to touch briefly on the U. S. Treasuries. They continue to remain well below their ten year averages, the one, five, 10, and 30 year treasuries are currently at 78 percent, 39 percent, 34 percent and 24 percent lower respectively than their ten year average and as we indicated earlier we expect rates to continue to remain very low. Finally, looking at the risk transfer market, we would like to touch briefly on what is happening there. Very healthy retained earnings for the insurance industry aided by the low cost average catastrophe losses, unrealized investment gains and continued influx of non traditional capital have all contributed to growth of insurer and reinsurance capital. Reinsurance capital is currently pegged at roughly $565 billion of which nearly $70 billion comes from the non traditional capital market. In the CAT market 2015 year to date issuance has been roughly 6.1 billion, approximately 25 billion outstanding currently represented all time for CAT bonds. CAT bond pricing continues to decrease. We have seen decreases from 2012 to 2015, with the average coupon falling from nine percent in 2012, to five percent year to date for 2015, a decrease of 46 percent. Pricing multiples for CAT bonds also down considerably, nearly 50 percent from a 4.4 four times multiple in 2012, to 2.54 percent year to date so far. We believe that we are approaching the floor for CAT bond prices but not quite there. We are expecting another five to seven percent of rate fall in 2016, which is, as you know, a much smaller decrease than we have seen over the last four or five years. With that we will conclude our market update. We would be happy to answer any questions that the Governors may have. September 29,

4 Chairman Gardner: Members, any questions? Thank you very much. Rick Patterson: Thank you Reinsurance Summary Jennifer Montero: Thank you and good afternoon, committee members. If you will turn to tab three of your FIC book you will find the 2015 reinsurance summary. As you recall I presented a similar document at the June 23 FIC meeting that was prepared using December 31, 2014, data. Since then we have prepared updated layer charts using the June 30, 2015, data. If you will turn to page 3. Some of the more significant changes to the layer charts using the more recent June 30, date are as follows. The CAT fund layer changed due to both last a minute elections by private insurers to reduce their CAT fund coverage and due to greater gross exposure reductions for Citizens than expected. For the Coastal account these two items approximately offset leaving us with lower retention and costs but similar coverage. The PLA/CLA also has some somewhat lower retention and costs but also greater coverage than anticipated. Due to the CAT fund layer changes the wrap layer now attaches above the CAT fund attachment point. We believe this is okay as we allowed for a margin of error when setting the attachment for the wrap layer. The CNR book is increasing as a percentage of total loss from 14 percent to 14.5 percent. This increase is due to less depopulation and exposure reductions in the CNR book. The 2015 CAT bond now approaches higher than anticipated and extends beyond the 1 in 100 year storm. Though the coupon does not adjust this year, next year we can fully adjust the layer due to the term sheet changes we implemented this year. We can push the layer down on top of the final year of the 2014, $1.5 billion CAT bond attachment and cap it at the 1 in 100 year storm widening the layer horizontally to compensate adjusting the coupon accordingly. If you please turn to page 5 of the presentation you will fund the private risk transfer impact analysis which illustrates the risk transfer amount, the spend and rate online over the last five years. In 2011 Citizens purchased $575 million of reinsurance for a cost of $124 million or approximately 22 percent rate online. In 2012 Citizens increased our reinsurance purchase to $1.5 billion for a cost of $276 million or approximately 18 percent rate online. We continue to increase our reinsurance purchase in 2013 to $1.851 billion for a cost of $310 million or approximately 17 percent rate online, and as you can see the rate online in 2014, dropped to approximately nine percent for $3.269 billion of risk transfer for $304 million in ceded premium. And in 2015 we purchased $ billion of risk transfer for a rate online of approximately eight percent or $332 million. The reduction exposure from December 2014, to June 2015, and continuing through September 2015, is expected to reduce our anticipated 2015 private reinsurance cost possibly by upwards of 10 percent or $15 million. Finally, if you will turn to page 6 of the presentation, you will find the risk transfer and assessment reductions which illustrate the exposure reductions and reduction in assessment potential over the last five years. As our surplus has grown and our risk transfer has increased along with increased depopulation efforts, which decreases our exposure, the potential assessment has been eliminated in a 1 in 100 year storm for the first time in September 29,

5 As you can see, exposure has decreased from $24.52 billion in 2011, to $10.18 billion for 2015, for a 1 in 100 year storm. Additionally the potential of an assessment in a 1 in 100 year storm went from $11.61 billion in 2011, to the elimination of potential assessment in a 1 in 100 year storm in In fact, the Coastal account is projected to support a 1 in 100 year storm followed by a second storm of approximately 1 in 14 years. The PLA/CLA is projected to support a 1 in 100 year storm followed by a second storm of approximately 1 in 95 years. We are looking towards surplus protection and we are trying to prepare for a second or multiple storms. If you don't have any questions that completes the risk transfer update. Chairman Gardner: Members, any questions for Jennifer? Governor Wortman: None. Chairman Gardner: Great, thank you. 4. Reinsurance Advisory and Brokerage Services Jennifer Montero: Citizens posted a competitive solicitation, an Invitation to Negotiate (ITN) number on July 1, Vendors were asked to submit proposals for evaluation by July 31. Five vendors submitted proposals and all five are moved forward for evaluation. The top four vendors moved forward to negotiations. The action item seeks Board approval to engage the services of reinsurance advisory and brokerage vendors to provide services that include advising and assisting Citizens in all matters related to the transfer of risk of loss from catastrophic events. Duties include assisting Citizens in planning its annual risk transfer program, marketing efforts, analytical, actuarial and modeling services for Citizens three accounts, the PLA/CLA and the Coastal account. On the contract term is anticipated to be a three year contract with two optional one year renewals. Fees for the reinsurance advisory brokerage service are contingent upon Citizens purchasing reinsurance, and the total amount for the contracts for co brokers is not to exceed $15 million over five years. With the four finalists that went into negotiations we moved forward with two to go through further negotiations and the vendors were Willis Re and Guy Carpenter which are incumbent brokers. So it is recommended, would you like me to read the formal recommendation? Chairman Gardner: If you would, please. Jennifer Montero: it is recommended that Citizens' Board approve the recommendation, the recommended reinsurance advisory and brokerage service award and resulting contracts for ITN to the recommended vendors as set forth in this action item which are Willis Re and Guy Carpenter and authorize staff to take any appropriate or necessary action consistent with this action item. Governor Wortman made a motion that the Finance Committee recommend to the Board approval of staff's recommendation. Second, all were in favor. Motion carried. September 29,

6 5. Indenture Trustee services Jennifer Montero: Citizens released a competitive solicitation, a request for proposal number on April 27, Vendors were asked to submit proposals for evaluation by June 1, This action item seeks Board approval to engage the services of a successor and indenture trustee to provide trust administration and related services in conjunction with the debt obligations issued and outstanding under the trust indentures. The relevant trust indentures are the high risk account, the coastal trust indenture and personal lines account, commercial lines account, trust indenture. These are taxable and/or tax exempt bonds or other debt instruments may be issued from time to time either trust indenture for which the indenture trustee will be required to enter into supplemental indentures and other instruments required in connection with those financings. There are no fees charged to Citizens. The contract item is anticipated to be five years and at Citizens sole discretion may have an optional two year renewal term, and the recommended vender is Regents Bank which is also the incumbent. Would you like me to read the recommendation? Chairman Gardner: Please. Jennifer Montero: It is recommended that Citizens' Board approve the recommended indenture trustee services award and resulting contracts for RFP to the recommended vendor as set forth in this action item, which is Regents Bank, and authorize staff to make any appropriate or fees action consistent with this action item. Chairman Gardner made a motion that the Finance Committee recommend to the Board approval of staff's recommendation. Second, all were in favor. Motion carried. 6. Investment Performance/Compliance Jennifer Montero: The last item is the investment performance compliance. It is behind tab six in your books and we will briefly go through it. On slide one the total portfolio is $13.87 billion. The taxable portfolio is $9.1 billion or approximately 66 percent of the total portfolio, with the tax exempt portfolio being approximately $4.76 billion or 34 percent of the portfolio. The total return is 1.05 percent the taxable portfolio return is 1.3 percent and the tax exempt portfolio return is.75 percent. The market rates are low and are expected to remain low, at least until the end of 2015, and now maybe until Moving to slide three, the 10 year Treasury rates are marginally lower as compared it a year ago, 2.62 percent in September of 2014, and 2.15 percent now. Again, we don't expect any significant change until early to middle of On slide four the portfolio summary, over 90 percent or $12.6 billion of the portfolio is externally managed by 15 managers. Approximately 10 percent or $1.3 billion of the portfolio is internally managed, consisting of operating funds, emergency assessment funds, debt service funds and debt service reserve funds. Slide five reflects how the portfolio is distributed among the 15 portfolio managers. It is very diversified, balanced, liquid and stable with strong returns. The taxable portfolio has strong credit quality with 37 percent invested in Treasury and agency securities and approximately 52 percent is rated AA or higher. September 29,

7 On slide seven the tax exempt portfolio also has very strong credit quality, 82 percent of the portfolio is rated AA or higher. Slide eight reflects the total portfolio return summary. We had over one percent of the total and income return over the last 12 months with duration of 1.8 years. Slide nine reflects the taxable liquidity portfolio, it is the first source of funds for liquidity and claims after an event. It is very liquid portfolio with strong credit quality the duration is.9 years. The taxable portfolio has total return of 62 basis points over the last 12 months or 30 basis points above the one year Treasury. Slide 10 reflects the taxable claims portfolio. This portfolio is stable, liquid and of very high quality. The duration is 2.3 years and the total return is 1.53 percent or 45 basis points above the three year Treasury. Slide 11 reflects the tax exempt claims portfolio which is stable, liquid and very high credit quality. The duration is 1.8 years and the total return is.63 percent and income return of 1.09 percent. On slide 12 the portfolio maturity distribution, approximately 30 percent of the portfolio matures in less than nine months, 58 percent of the portfolio matures between one in four years and the average duration is 1.8 years. In the final slide, slide 13, these are the downgraded securities (excluding the legacy assets) which are less than.2 percent of the portfolio. They are currently trading above cost with stable pricing and positive to mark to market value. The legacy assets are old securities and represent approximately.75 percent of the portfolio. They are currently trading significantly above amortized cost. All downgraded and legacy securities are liquid and generating strong positive returns. It is an overall stable diversified portfolio with strong credit quality. And if there are no questions that completes my report. Chairman Gardner: Any questions? Governor Henderson: Jennifer on the investment vise on the mix of the portfolio between tax and tax exempt, the recommendation on that balancing, is that done by each adviser or collectively for all advisers? Jennifer Montero: Well, currently all the tax exempt are pre event financing, they are bonds and the taxable is operating income. Governor Henderson: Okay, so it is the pre exempt that would trigger income taxes because of the Jennifer Montero: When we issue pre event bonds we have to invest it in tax exempt. So that is how they are separated. Governor Henderson: It creates the requirement. Good, great, thank you. Chairman Gardner: Any new business? Great, hearing none I am going to adjourn the meeting. Thank you. (Whereupon, the meeting was adjourned.) September 29,