MINUTES OF THE BOARD OF GOVERNORS MEETING Wednesday, December 10, 2014

Transcription

1 CITIZENS PROPERTY INSURANCE CORPORATION MINUTES OF THE BOARD OF GOVERNORS MEETING Wednesday, The Board of Governors (Board) of Citizens Property Insurance Corporation (Citizens) convened in Winter Park at the Alfond Inn on Wednesday, at 9:00 a.m. (EST). The following members of the Board were present: Chris Gardner, Chairperson Don Glisson, Vice Chair Gary Aubuchon Bette Brown Juan Cocuy Jim Henderson James Holton Freddie Schinz John Wortman The following Citizens staff members were present: Barry Gilway Constance Josef Jennifer Montero Fred Deeb Barbara Walker Jennifer Montero John Rollins Jay Adams John Rollins Kelly Booten Steve Bitar Christine Ashburn The following people were present: Kapil Bhatia Rick Patterson Corise Morison Matt Willams Subhashish Dutta Mark Weinberg Celena Coldwell John Generalli Raymond James Raymond James USAA Bank of America Merrill Lynch Guy Carpenter Citi Bank of America Merrill Lynch Wells Fargo

2 Nan Brunson Scott Cabalka Matthew Sansbury Trevor Dorr Sarah Lehan Sharon Frawley Ayanna Louis-Charles David Unsworth Albert Del Castillo Greg Rokeh Kevin Stokes Tim Meenan Nathaniel Johnson Linda Vanderperre Vladimir Munez Henry Reyes Ken Vincent Margaret Lezcano Steve Korducki MacNeill Group RBC Global Stifel Nicolaus Aon Benfield Aon Benfield Lear and Associates Morgan Stanley JLT Greenburg Traurig Weston Realty Crop/Florida Realtors Guy Carpenter Meenan PA JP Morgan Ramirez and Co. Inc. Regions Bank JP Morgan Willis Re Stifel BMS Call Meeting to Order Roll was called. 1. Approval of Prior Meeting s Minutes A motion was made and seconded to approve the September 24, 2014 minutes. All were in favor. Motion carried. 2. Chairman s Report Chairman Gardner stated, we re really coming through a phenomenal year. I don t want to steal Barry s thunder, but we ve had some real, tangible results and things we can be proud of. We are going to hear from Barry about a very effective and successful Core implementation. We know how successful this transfer program is this year and we are looking forward to a similar result next year. We ve had phenomenal depopulation results. Barry has done a wonderful job building his executive leadership team. I would be remised not to mention the Clearinghouse. On behalf of the Board, thank you for a job well done this year. Citizens Property Insurance Corporation Board of Governors 2

3 3. President s Report a Year in Review Barry Gilway continued, we ve had an extraordinary year. Looking back over the year, we ve made significant progress in every single strategic and operational initiative. It s a result of a truly extraordinary executive team and the individuals who work with them. In past Board meetings, I spent time highlighting the major initiatives that we report on to each of you on a monthly basis. I m going to focus on four of those initiatives and recognize the employees who are responsible for them. I ll focus on depopulation, Core, Clearinghouse, and Claims Litigation Management. This is the ninth year that no major hurricanes hit the United States, making it the first time since records began in 1851 that the United States has gone this long without a Category 3 or stronger hitting Florida. The odds of that occurring are 1 in 5,020. The absence of hurricanes improved investor confidence in the Florida insurance market. We have benefited greatly from market conditions. Barry Gilway continued, depopulation is not a Citizens independent initiative. We must confirm all coverage eligibility for any incoming customers. It s the law. We are required to do that. In fact, the development of the Clearinghouse was really developed as a result of a way to validate eligibility. One of our primary objectives is to find and to identify private market coverage for Citizens customers who previously had no options other than a Citizens policy. Let me share with you briefly how we have responded to this objective through a review of a few select slides. This first slide shows that in August of 2012 we peaked at slightly more than 1.5 million policies. In a period of less than 30 months, as of November of this year, we have 727,000 policies in force. That is over a 50% reduction in Citizens policy count and while the depopulation of policies is slowing, as we begin to look more like the market of last resort we were created to be, we are still forecasting that we will reach 670,00 polices by year end The second slide shows that just three years ago Citizens had over a half a trillion dollars in exposure on our books. That s $510 billion. Today we are showing $229 billion, a 55% reduction in exposure. Barry Gilway continued, the third and final slide shows the assessment potential in the event of a year storm. Just 3 years ago we had $11.6 billion that would have been assessed in the event of a major storm. As of June, through a combination of reduced exposure and increased risk transfer, taking advantage of highly favorable reinsurance and CAT Bond market conditions, we were down to 1.6 billion and will be well below that number by year end. Current estimates indicate $1billion by year end. The budget I will present today targets the elimination of any assessment in the event of a 1-in-100 year storm contingent upon continued improvement in the pricing, terms, and conditions in our 2015 Risk Transfer Program that we are expecting and meeting our significantly reduced written premium objectives. This depopulation just does not happen it takes dozens of highly motivated employees to handle literally millions of transactions. I credit the leadership of Steve Bitar and Jennifer Montero with this important initiative and dozens of their employees who s behind the scenes efforts, dedication and intellectual contributions deserve a lot of credit. For Depopulation I will mention just two people. Bobbi Scott, Depopulation Manager oversees this highly visible area - the assumption process itself. This process effects hundreds of agents and dozens of insurers and despite the enormous volumes and tight deadlines Bobbi consistently led her team while moving policies to the private market. Citizens Property Insurance Corporation Board of Governors 3

4 Judy Vick, Depopulation Program Administrator also plays a critical role in the compilation and exchange of the massive amounts of data required to make the assumption process work. Working simultaneously with multiple insurers across multiple product lines, she ensures that millions of data points exchanged every month are accurately distilled to ensure that each and every policy is correctly placed with the private market or retained by Citizens. Barry Gilway continued, it is highly encouraging that the private market place is getting stronger with more restrictive financial requirements established by the Office of Insurance Regulation (OIR) and Demotech, Florida s primary rating agency. I will take an opportunity to make a very key point. Demotech, as a rating agency, has to satisfy Fannie Mae, Freddie Mac and all mortgage agencies, that an insurer is able to meet its claim paying obligations. They only recognize AM Best and Demotech. Weiss ratings have their place in ratings and assessing financial stability but they have to meet no one s standard and because they do not recognize the $16 billion reinsurance capacity of the Florida market provided by AM Best rated reinsurers they do not accurately assess the claim paying capability of Demotech A rated companies. The two primary sources for this evaluation in Florida are the OIR and Demotech. Unless depopulation companies meet their standards they cannot participate in depopulation. We are hard at work considering process changes that will make depopulation even more transparent and customer friendly. With Steve Bitar s lead we have formed a work group that includes representatives from all parties to consider these changes. Barry Gilway continued, Clearinghouse is my second area of comment. Our Clearinghouse program was recently recognized by Insurance Networking News (INN) Citizens was awarded 1st place for implementing the most innovative IT solution and recognized as one of the best IT solutions in the insurance industry nationally. Citizens was also among four companies recognized for their excellence in the growing importance of analytics for the insurance industry. The Clearinghouse implementation was an amazing accomplishment the team delivered a brandnew technology and built all of the necessary integrations to Citizens other systems, along with Bolt Technologies, built the integrations to multiple companies in only five months with a virtually flawless launch. Today we have 20 insurance partners participating with us providing private market options to Citizens customers. I would like to recognize four of the many excellent employees who developed this solution. Sarah Harrell, Enterprise Program Director was responsible for the overall Clearinghouse program implementation. Kyle Brown, Clearinghouse Manager was responsible for establishing the brand new Clearinghouse Business Unit, defining all related operational functions and processes. Laura Lawson, Senior Business Analyst lead the business analysts responsible for developing Clearinghouse requirements and business needs, our policy system requirements, data analysis and testing. And finally Ravi Tadiparthi, Enterprise IT Architect IT s single point of contact for Clearinghouse technical architecture and systems impacts. Barry Gilway continued, I am entering my 45th year in this fascinating business and have participated in the development and implementation of at least a half dozen major technology implementations; with the launch this past weekend of the Personal Lines module, it has brought a formal close to a program under development for seven years involving literally hundreds of employees and contractors that accomplished nothing less than the replacement of our entire customer facing technology. I have never experienced an initiative of this size and scope Citizens Property Insurance Corporation Board of Governors 4

5 delivered on time and on budget. Core Insurance Solution Implementation Program is Citizens next generation insurance operating system that combines current policy, billing, and claims systems into one integrated user-friendly platform. In addition to real and significant cost savings, implementation of this package software solution will allow Citizens to the following: Increase its flexibility to adapt as the Florida marketplace changes; Quickly implement rate and coverage changes; Achieve staffing efficiencies and increase productivity; Gain operational efficiencies for staff, agents and outsourced vendors from the use of one system platform; Facilitate depopulation through automation and improved data; Outsource additional functions, where appropriate; Improve data quality; and Provide better claims and policy service to policyholders and agents. Barry Gilway continued, in addition to Kelly Booten, our executive in charge of Systems and Operations, I would like to recognize just a few of the individuals responsible for this success: Constance Josef, Enterprise Program Director was responsible for the overall Core program implementation ensuring timely completion and co-ordination of all program components. Constance has been with this program from the very beginning through strategy development, solicitation of services and vendors, and implementation. Chris Jobczynski, Director IT Planning and Delivery was responsible for IT delivery of the new technology working with IT leadership, ensuring compliance with architectural standard and ultimately achieving program goals. Suzanne Cricks, Gary Watson, and Kelly Gudmunson are IT Managers who were with the program through the entire implementation working thousands of hours to ensure systems were developed, tested, and supported. And finally, systems this complex cannot be accomplished without the support of product owners who represented their business units and external customer needs: Angela Lockwood, Accounting, Sarai Roszelle, Product Development, Barbara Arnold, Consumer and Agent Services, Jan Klocko, Personal Lines Underwriting, Greg Rowe, Claims, Stephen Mostella, Commercial Underwriting, Clint Roszelle, Enterprise, and Dennis Royer, Document Management. Barry Gilway continued, we would also like to recognize our vendor partners who walked by our side and enabled us to reach our goals. Guidewire Software and Capqemeni. Citizens customers, agents, and employees will benefit from this platform for years to come. The last component of this initiative Personal Lines PolicyCenter and BillingCenter for the most complex was launched this weekend with over 8,000 policies, 4,000 per hour going through the system, with a 99.71% success rate. Absolutely incredible results! Over 560 agents went on line the first day of operation with no significant issues. Kelly and our Core Team have just done a fantastic job! Barry Gilway continued, and finally you cannot look back on 2014 without recognizing the enormous progress we have made in Litigation Management. Scott Link, Coordinating Counsel in Citizens Property Insurance Corporation Board of Governors 5

6 partnership with Dwane Tyson, Director Assistant General Counsel Claims, have worked closely with Plaintiff Counsel representing policyholders that have litigation disputes for sinkhole claims to attempt resolution without further legal proceedings to insure our policyholder s homes are repaired in a timely manner. Citizens entered settlement agreements with multiple Plaintiff Attorney firms which represented 2,451 litigated claims. Through November 2014, 1,516 settlement agreements have been entered which will provide stabilization services and cosmetic repairs and in turn settle the pending litigation. We are expecting additional positive results before this program is complete. Jeff Lambert, Assistant Director of Claims, has provided the leadership required from Claims in order to satisfy the settlement agreements as they are received and was key to helping to establish the Sinkhole Stabilization Managed Repair program that is utilized for conducting the stabilization repairs utilizing fully credentialed vendors that provide performance and payment bonding as well as a 5 year warranty to our policyholders. Kyle DeBoer, Claims Manager, has managed the actual repair process and scheduling of work assignments. Kyle s team is responsible for working with the policyholder until all repairs are completed and the final warranty is issued. Barry Gilway continued, needless to say I am extremely proud of our Citizens employees and Executive staff that are delivering truly extraordinary results for Citizens customers and, in fact, all Floridians. Now as we begin to close the books on 2014 we are already hard at work planning for the 2015 Annual Planning initiatives you have supported (included in your board book). So if you have no questions I would propose that we move to the annual plan and budget proposed for Jim Henderson stated, it s wonderful to hear a report that doesn t wear out the words I and my. Thank you for doing that and recognizing people. Barry Gilway stated, I appreciate the work of the team. b Annual Plan and Budget Barry Gilway stated, we provided each Board member with a budget package. Fred Deeb provided an extensive overview and commentary. We ve had individual discussions with each of our Board members. They provided enormous input in the creation of the budget. I want to thank every Board member for working with staff and providing input. It still amazes me how each Board member volunteers his/her time and it s not just for this meeting. The committee meetings are becoming more robust. We recognize that it takes an extraordinary amount of time and commitment. Staff would tell you that we know we have an extraordinary Board. Barry Gilway continued, we don t intend to spend a significant amount of time on the budget. I ll highlight some of the underlining assumptions. We want to continue to decrease policy count. We think it s going to slow down in 2015 as we come closer to being the residual market we re supposed to be. We are still servicing well over a million policies because we continue to service the policies until we meet the assumption date and the expiration date of the policy. We have a reduction of premium in earnings but we are still projecting $177 million in net income. Loss adjustment expense (LAE) and unallocated adjustment expense (ULAE) are the same in the budget. In the future, as we become more residual, you have to expect the LAE to increase. The Citizens Property Insurance Corporation Board of Governors 6

7 book of business is a more suspect book of business. We don t anticipate in seeing that in 2015 but it will be a discussion in We are looking at a reduction in the claims count. Two years ago, we have 75,000 claims and we anticipate 32,000 this year. Barry Gilway continued, one-time costs are included in the budget. Things like the Jacksonville relocation is a one-time cost of $5.6 million. Even with that $5.6 million in costs, the numbers provided initially of $13.4 million in net savings still hold. We still think the consolidation will result in the savings. Jennifer will go over things that are increasing costs for good reasons, such as the expansion of the Clearinghouse and its products. Inspector General costs will be going forward. Core implementation and training costs will be there. Agents have indicated that they wish private companies could come close to the level of training Citizens provides. We still present an Administration budget that s down to $12 million, which still remains three to four points lower than the private market. Jennifer Montero stated, there are three key points that went into the budget. The first would be our annual plan initiatives. From our KPMG study, we did an outsourcing versus insourcing. The third thing would be depopulation. With the annual plan initiative, it would be the Core implementation of the Personal Residential Billing. It went live on Monday. This causes a large decrease in our contingency staff for our 2015 budget. We do have $9.8 million budgeted for enhancements and training. You ll see a large decrease in other processing fees in the administrative section of the budget. This is the retirement of our old legacy systems. You will see this benefit over the next couple years. The Core expenses will roll into the normal operating expenses. We also have the Clearinghouse initiative. We are expanding the policy forms to include DP in We ve budgeted approximately $3.7 million for the 2015 budget. Jennifer Montero continued, with regard to the one-time costs, the Jacksonville relocation consolidation is $5.6 million. Juan Cocuy asked a question in the Audit Committee meeting yesterday about our administrative expenses going up, but we do have these one-time costs like the relocation. A large recruiting expense for the relocation includes the relocation costs. We have an Enterprise Resource Planning (ERP) solution for the first year at a budget of $1.2 million. As Barry mentioned, the Inspector General office will be staffing up during the first quarter. We expect to have an addition of five people, adding $800,000 in expenses. Another initiative we have is COSO. In 2015, we have approximately $400,000 budgeted for that and we expect about $1 million in total spend over the course of multiple years. For the KPMG this is our outsourcing versus our insourcing. You ll see an increase in salaries but you ll see an offset in contingent staff. Our positions are going from 1,332 to 1,380. We also have a decrease in servicing carrier fees because we are cutting back on some of that outsourcing. We are looking at $6.4 million at the end of 2014 and we are budgeting about $3.9 million for Jennifer Montero continued, the final point was depopulation. We have a reduction in our policies in force (PIF) count. We expect to be at 721,000 in 2014 and projected to be at 629,000 in We had about 400,000 in depopulation counts in 2014 and we expect that to drop to 75,000 next year. We did have an increase in ceded premium. The projected ceded premium in 2014 was $939 million but we budgeted only $676 million due to the unanticipated growth in depopulation. The final point is that because our depopulation increased our net premium and written premium has gone down, the expense ratio has gone up. Citizens Property Insurance Corporation Board of Governors 7

8 John Wortman commented, the general expense ratio is in the low- to mid-twenties, so we are significantly under that number of a private carrier. Do you think we should take a look at combining the three pools? I know we talk about it over and over but it s like keeping three sets of books. Jennifer Montero responded, we can work with our financial advisor and run the numbers. James Holton asked, do you expect the LAE to go down when all the sinkhole ligation has gone through its process? Jennifer Montero responded, yes. Barry Gilway added, yes; however, you will see an increase in LAE because of the settlements. On the tail-end of that, you ll see the expense go down. Jim Henderson asked, what is the scenario that Citizens begins to contract and likely to end up with a tougher class of risk that would demand higher loss ratios? What does Citizens look like three years down the road with that scenario? What does Citizens look like when the storms hit? John Rollins responded, while the forecasting for budget is as scientific and as wideranging, I would point out that the budgeted slight increases in loss ratios reflects actuarial assumption in increased frequency rates on the remaining book in We did budget for a claim frequency. Barry Gilway added, we just started to make progress in terms of the analytics. For the first time this year, we came out with some estimated bottom numbers with how low can we go. It has been a moving target. There is increasing interesting in additional lines of business. Mount Beacon has been approved by OIR for taking out mobile home business. They are focusing on older mobile homes. John and his team are doing the analytics associated with that. The history of Citizens has bene a roller coaster ride. We don t see the magnitude of the impact of a major storm. There will be impact on reinsurance capacity. We need to do scenario planning in the event of a major storm. Jim Henderson made the motion to approve the 2015 Operating Budget. The motion was seconded. All were in favor. Motion carried. 4. Chief Financial Officer s Report Chairman Gardner stated, we had a good Finance and Investment (FIC) meeting. We had bankers and investors in attendance. One of the things I want the Board to discuss today is to affirm the direction we re taking in the Risk Transfer program as well as the Pre-Event Liquidity Program. I think we are moving in the right direction and I think we re getting great guidance at Raymond James. Citizens Property Insurance Corporation Board of Governors 8

9 a. SERIES 2007A DEFEASANCE AND ELIMINATION OF EMERGENCY ASSESSMENT Jennifer Montero stated, Citizens Board of Governors previously approved the legal defeasance of the Series 2007A post-event bonds and authorized staff to prepare and bring to the Board the defeasance documents for final approval. The Bond Council approved the attached resolution and Escrow Deposit Agreement to execute the legal defeasance of the Series 2007A post-event bonds. There has been one update to the summary that has not been included in your materials. Integrity Public Financing Consulting has been appointed as the verification agent. This procurement happened after the Board materials were distributed. It is in section seven. Albert Del Castillo, with the law firm Greenburg Traurig, is our Bond Counsel. Jim Henderson made the motion to approve the attached defeasance documents and authorize staff to deposit any remaining funds or excess collections of the Emergency Assessment in a restricted account for any future claims or any other legal purpose. The approval includes that staff may seek direction and approval from the Florida Office of Insurance Regulation to consider the appropriate application of any remaining excess amounts, net of refunds. John Wortman seconded the motion. All were in favor. Motion carried. b. Layer Charts Jennifer Montero stated, the 2014 layer charts have been updated using June 30, 2014 Probable Maximum Loss (PML) and updated CAT Fund premiums. The Coastal Account is now covered for a 1-in-77 year storm. There is also an assessment chart and it s updated using June 30 th data. The assessment potential dropped to $1.69 billion which is a 69% annual assessment reduction. We expect further reduction by year end down to $1 billion. c Risk Transfer Program Jennifer Montero stated, in 2014, Citizens transferred $3.269 billion of risk for the Coastal Account: $1.519 billion in the traditional reinsurance market and the remaining $1.750 billion in the capital markets. For the 2015 season, Citizens will have a portion of the 2014 risk transfer remaining within the Coastal Account in the amount of $1.952 billion consisting of the following risk transfer vehicles: $250 million Year 3 of the year capital markets transaction Everglades Re; $1.5 billion Year 2 of the year capital markets transaction Everglades Re; $202 million Year 2 of the 2014 traditional 2-year reinsurance. All of those are in the aggregate. Jennifer Montero continued, we will propose a preliminary strategy in 2015 to replace all expiring reinsurance and to evaluate market conditions for the purchase of risk transfer to reduce and/or eliminate the potential for assessment for a 1-in-100 year storm. This will allow Citizens to utilize both markets to develop a cost effective risk transfer program, especially in the market conditions where the costs are low and the demand is high. Chairman Gardner requested, for the benefit of the Board, would you describe the amount of CAT Bonds maturing? Citizens Property Insurance Corporation Board of Governors 9

10 Kapil Bhatia from Raymond James stated, I will give a brief risk transfer market update. As the Chairman stated, $5 billion worth of CAT Bonds are maturing during the first half of next year. There is a huge capital sitting on the sidelines waiting for issuance into the marketplace. We expect pricing to go down and we expect 2015 pricing to be significantly lower than The market is very robust and we are looking for favorable pricing. Chairman Gardner commented, this is a very fluid process. We have an idea we d like to use but market conditions do change. Bette Brown commented, last year we were at a 1-in-77 year storm. Jennifer Montero responded, it was 1-in-71 year storm using 2013 data. When we update it for the June data, we updated it to the 1-in-77 year storm. Bette Brown asked, so now we are at 1-in-100 year storm? Jennifer Montero responded, that s our goal. A motion was made and seconded to approve moving forward on the development of the 2015 risk transfer program for the Coastal Account by using both traditional and capital markets at a most efficient cost, with the understanding that the risk transfer program must be brought back to the Board of Governors for final approval prior to the execution of any financial transaction. All were in favor. Motion carried. d Pre-Event Liquidity Program Jennifer Montero stated, pre-event liquidity provides a bridge to the CAT Fund s mandatory layer as well as some of the other Citizen claims paying resources that are not readily available in cash after a storm. This allows timely payment of claims after an event while offering timely issuance of bonds if needed. Kapil Bhatia added, right now we have $2.6 billion in pre-event bonds in the Coastal Account and our PML is $11 billion. We expect the PML to go down; however, $500 million of the $2.6 billion is maturing in 2015, so it won t be available in the 2015 season. In addition, the $1.7 billion remaining is maturing on June 1, The current pre-event liquidity program is winding down over the next two years. The markets with low interest rates but the rates are expected to go up in the third quarter of We think it s a good opportunity from a market standpoint to lock in the low rate to boos our liquidity and so that we have sufficient resources. We expect the pre-event liquidity to cost 1.4% net. We expect to pay about 2.5% to 3% in terms of maturity during the duration of the bonds. The net cost will not go beyond 1.4%. Jim Henderson commented, having served on the CAT Bond Board, the process for going out for pre-event funding is a great strategy on our part. You borrow money before you have to have money. With the CAT Fund, there is a projection that the organization issue bonds for 3.5% to 4%. The timing of the market was almost double of that. When it s not raining, let s take Citizens Property Insurance Corporation Board of Governors10

11 advantage of that. Let s take as much pre-funding as feasible. I d hope that we look at our needs to make sure we are covering our cash flow requirements. Kapil Bhatia stated, we think $1 billion will give us sufficient liquidity. Juan Cocuy made the motion to approve moving forward with the pre-event liquidity financing for the Coastal Account in an amount not to exceed $1 billion and a final maturity not to exceed 10 years, with the understanding that the pre-event liquidity financing must be brought back to the Board of Governors for final approval prior to the execution of any financial transaction. Jim Henderson seconded the motion. All were in favor. Motion carried. e. Disclosure Counsel Jennifer Montero stated, Bryant Miller Olive is our Disclosure Counsel. This is an extension for six months so that we can align the Disclosure Counsel with the Bond Counsel. We want to procure them both next year together. This is a timing issue. A motion was made and seconded to approve the six (6) month extension to the Disclosure Counsel Services Contract # on the same terms and conditions. All were in favor. Motion carried. f. Investment Policy Jennifer Montero stated, each year staff works with our financial ad visor and external money managers to review our four different investment policies and we bring it to the Board with any suggested changes we have. You have all four investment policies in your book redlined with any changes. Kapil Bhatia stated, we have three objectives for the Investment Policy: Safety of principal: Liquidity, so that operating expenses and claims can be paid in a timely manner; and Competitive returns. We have two taxable policies and two non-taxable policies. We have two liquidity policies and two claims-paying policies. We developed this over the last ten years as the market conditions change each year. The two liquidity policies are the first lines of defense after an event. We are proposing to increase that policy of 365 days to 397 days to make it more like a true money market fund. The two claims paying funds are longer term with a duration of 39 months and we want to increase it to 42 months, which will allow us to maximize our returns. Kapil Bhatia continued, we have a couple more changes. We are increasing diversification by credit. We are allowing for BBB credit only at additional 5%. Right now the investment allows for 5% BBB credit and we want to increase that to 10%. We want to increase final maturity. All of the policy changes are maintaining the safety of the principle and liquidity but taking advantage of what the market is giving us. We have 10 investment managers and we work closely with them. We expect these changes to generate or yield an additional $10 million investment income over the next year. Citizens Property Insurance Corporation Board of Governors11

12 Chairman Gardner stated, you described this well yesterday as a living document. It is modified from time to time and I know you look carefully at it each year. Jim Henderson inquired, in the portfolio, is it market to market or is it amortized? Kapil Bhatia responded, we reflect both. We show both returns. John Wortman made the motion to approve the proposed changes to its Liquidity and Claims Paying Fund investment policies. Freddie Schinz seconded the motion. All were in favor. Motion carried. g. Financial Statements Jennifer Montero stated, December 1 st marks the pass of another storm-free season. The absence of storms has allowed Citizens to continue to build surplus to meet claims paying obligations. The moderate but stable growth in surplus, reductions in policy count driven by a successful depopulation and Clearinghouse initiatives, and the expanding use of Risk Transfer mechanisms have collectively reduced Citizens assessment footprint in Florida. Since 2011, Citizens reduced assessment risk funding by 85%, which is approximately $10 billion. Surplus has steadily increased during that time. Although it has been a consistent theme, it bears repeating that Citizens stands the best financial position in its history. Jennifer Montero continued, during the last quarter, I presented to the Board the Quarterly Financial Analysis (QFA), which will replace the mid-year Management Discussion and Analysis (MD&A). I previously noted the effects of the Clearinghouse and private market growth in part due to depopulation activity, which results in the continue declines of Citizens direct written premium. The first nine months of 2014 shows a decline in direct written premium by 25%. The PLA experienced the largest decline by 36% compared to 10% and 16% for the Commercial Lines Account (CLA) and Coastal Account. These declines are tempered by the earnings process, where direct written premium declined by 18%. As we continue to experience declines in policy count, direct earned premium will continue to outpace direct written premium during May through July. Jennifer Montero continued, overall reductions in exposure have caused a reduction in the CAT Fund Premium. The decrease in the CAT Fund premium is offset by the increase in reinsurance premiums resulted from the 2014 Risk Transfer Program. Citizens transferred about $3.269 billion of risk transfer into the traditional and capital markets compared to $1.8 billion the year before. Citizens expense ratio trends continue as expected. Administrative costs tend to be least liquid compared to the flux you see in premiums. Citizens expense ratio has a slight increase as a result of a declining premium base when considered against administration costs. The expenses through September were approximately $11 million, or 8% less than the same period a year ago. A decrease in expenses such as underwriting fees, servicing carrier fees along with overall reductions in contingent staffing have been the primary drivers behind the reduction in administration expenses. Jennifer Montero continued, the sinkhole loss ratio has decreased 89% in 2014 as compared to 109% in 2013 and 324% in Despite the overall reduction in sinkhole losses, an increase in Citizens Property Insurance Corporation Board of Governors12

13 reported water losses have caused an increase of 2% in the attritional loss ratio. An increase in the LAE in prior year sinkhole claims has caused an increase of 1% in LAE attrition from the prior quarter. Overall reductions in newly reported claims as well as the impact of the 2013 and 2014 rate increases have contributed to the overall decline in loss activity and loss ratio. Despite the decrease in overall writing, Citizens cash in claims paying ability remains strong compared to year-end The first fiscal half tend to yield incremental larger cash flows compared to the second fiscal half due to CAT Fund premiums and reinsurance obligations. Chairman Gardner asked, have we attempted to quantify the net benefit of the settlement of these sinkhole claims? John Rollins responded, we will be more prepared to talk about this in March, primarily because we do a reserve analysis every quarter. Your instincts are right. We have a response in LAE ratios and in reserves. h. Independent CPA Auditing Services Jennifer Montero continued, we did a Request for Proposal (RFP) in September for Independent External CPA Services. We had six respondents. This is to award Dixon Hughes Goodman the contract. It s a three year with two one-year renewals. Vice Chair Glisson asked, what was the expense during the last few years on this? Jennifer Montero responded, this year it ll be $374,000. This is a decrease in cost. Vice Chair Glisson made the motion to approve the recommended award and resulting contract including renewal periods, for RFP No to Dixon Goodman Hughes, as set forth in this action item and to authorize staff to take any appropriate or necessary action consistent with this action item. Freddie Schinz seconded the motion. All were in favor. Motion carried. Chairman Gardner stated, I want to say that a year ago, Barry and I had the hardest time convincing Jennifer in taking this job. It s incredible how you have thrived and what a wonderful job you re doing. Job well done. 5. Chief Systems and Operations Officer Report Kelly Booten stated, the Information Systems Advisory Committee (ISAC) met on December 2 nd and discussed a number of topics, including the Core program. Since we have gone live, it s been very successful. I want to recognize Constance Josef who has been the tenacious individual who has made sure that everything happened according to plan. It s hard because there are so many people I want to recognize, but she stands out. Chris Jobczynski, Constance and I have been joined at the hip for the past five years during the implementation. Congratulations to everyone involved. I also want to thank everyone else who did not work on Core who kept everything else running. Citizens Property Insurance Corporation Board of Governors13

14 Constance Josef stated, so for stats, we ve had a few more renewals that came in this morning about 11,800. This first seven days is really important for us because we are bringing in almost 70,000 policies. We had over 11,800 this morning, with a 99.76% success rate. We re pleased about that. The teams have been incredible. Over 1,600 agencies have registered for the webinars that will start today. Kelly Booten added, the Training Department has been outstanding. We ve had a lot of training opportunities. From a budget perspective, we are on target for what we projected for the three years. We had an update from Sarah Harrell on the Enterprise Resource Planning (ERP). The kickoff has kicked off. Curt Overpeck provided an IT update on the development of the Enterprise Data Incidence Response Plan, which will be a responsibility of Mitch Brockbank in IT. He gave us a status update on Status of the Systems and Operations Organization Consolidation in Jacksonville. We also gave an update on the Progress on the Data Center Consolidation Project. Kelly Booten continued, there are four consent items that I know we are not going to vote on now. They are in the back of the books. We had substantial conversations about these at the ISAC meeting and we did update the recommendation with the scenarios you asked for on the contingent support services. They ve all been updated. James Holton stated, I d like to thank Kelly and her team for their exceptional job and for being ahead of schedule on a lot of stuff. Juan Cocuy asked, when you say 99.76% success rate, can you define what is success and what is failure? Constance Josef responded, we have two parts to the conversion. We have the conversion itself, whereby you want to make sure everything coming out of epas as a policy gets transferred to PolicyCenter. In that effort, we re seeing about a 2% failure rate. Those are predominantly around addresses. They are also around mortgage changes. Those are held and contained in a console where people in accounting will update them. Those will then cycle through and come back through PolicyCenter. The second part is the auto-renewal part to make sure they are renewed. It s in that effort where we are seeing the 99.9% success rate. For the five this morning that did not make it, they need underwriting review. It s normally about making sure the address and information are correct, pushing a button, and everything going through. Our benchmark was 98% and I can tell you very early on that we were not sure if we were going to meet such a high rate. It can be in the 70% that you ll find yourself due to the data. We have had a tremendous team that went to work in February this year and worked diligently to make sure all of the data issues were addressed. Kelly Booten added, the downside is that the Underwriting Team has to have more resources to work the backlogs. Hopefully, you ll see a positive budget impact there. 6. Chief of Internal Audit Officer s Report Citizens Property Insurance Corporation Board of Governors14

15 Juan Cocuy stated, yesterday, the Audit Committee met and we took care of a few matters. We approved the budget of the Office of Internal Audit (OIA). We approved the 2015 strategic audit plan. We reviewed the progress to date for 2014, with regard to what s open. We also discussed the Coastal framework, which I believe will be an important initiative for Citizens to have internal control similar to size as a public company. Controls over legal fees were discussed and we reviewed the initiatives over IT fraud. Joe Martins stated, I d like to address the Control Deficiency Resolution. We highlighted two high rated open items as well as three open items that are currently overdue. Of the remaining issues, there are two high rated items related to: 1) the Legal Billing system does not provide regular standardized reporting to aid in the monitoring of legal expenses, and 2) follow up and possible recovery of overbilling by attorneys. For the Legal Billing system, it s foreseen that it will be implemented in early 2015, which will give them the ability to manage attorneys on a daily basis and give them access on what s accrued weekly, monthly, and yearly. For the second item, we are currently progressing recovery from three terminated firms. We could recover $ million from the tree firms; we ve made our demands and are waiting for their responses. We ve taken the data from these firms and passed that on to another firm that does a detailed analysis if we do not get a settlement. There are also three suspended firms. These firms have the opportunity to do their own audit and assess their processes. We are not comfortable with the data they provided us. We told the firms we will continue with the detailed analysis. Joe Martins continued, three other relatively minor issues are overdue. These include: 1) security mechanisms not implemented based on data sensitivity; 2) development of an enterprise employee telecommuting policy; and 3) the annual review and recertification of system access for the epas application was not performed in 2013 in accordance with the computer access management process. These issues are receiving heightened management attention and we expect all issues will be fully remediated. The first one came up after there was seen for a need for standards and guidance policies. They are coming up with a plan and it s foreseen that the plan will be ready at the end of this year. The second one came about after a complaint from a staff member stating that we are not consistent with applying telecommunicating policies. HR is working on it. Joe Martins continued, the last item is under Tab E, which is the Corporate Legal Services Item. I would like Dan Sumner to present it to the Board. Dan Sumner stated, on behalf of the OIA, the General Counsel s Office has engaged three law firms on consultation basis in support of the OIA s Claims Billing Audit follow up services. These serves will only be provided to OIA for this one project. The three firms are Keller Landsberg, PA; Andrews, Crabtree, Knox & Andrews, LLP; and Mandelbaum, Fitzsimmons, Hewitt & Cain, PA. Vice Chair Glisson stated, I m a little uncomfortable with open-ended amount. I would prefer to see a cap and if we exceed that, then we can come back to the Board. Dan Sumner responded, we do have set fees at $300 an hour for Keller Landsberg and $250 for the other two. Citizens Property Insurance Corporation Board of Governors15

16 Joe Martins added, if we continue with the exercise, it s about $100,000 per firm. The total for the assessment would be around $600,000. We might be able to go into a settlement with some of these firms and we might be able to close the assessment sooner. I think we should break even given the settlements. It s really about making an example of attorneys who are egregious with Citizens. Vice Chair Glisson responded, I agree wholeheartedly on accountability, but I think at some point, you need to see where the cutoff is in expenses. I hate to spend $600,000 to get $300,000 back. Dan Sumner stated, with Joe s comments, we can recommend that the approval be to engage these firms for this targeted consultative services with a maximum of $600,000 but with the desire to make that number less through settlement. Vice Chair Glisson made the motion to approve a legal services contract with the firms: Keller Landsberg, PA; Andrews, Crabtree, Knox & Andrews, LLP; and Mandelbaum, Fitzsimmons, Hewitt & Cain, PA for this targeted consultative services with a maximum of $600,000 but with the desire to make that number less through settlement. The motion was seconded. Gary Aubuchon stated, I think it s really important that we pursue fraud and abuse; it s important that we go after the firms that have abused Citizens. Jim Henderson stated, I would amplify those comments. Thank you for policing our law firm vendors. It s a terrible statement that we have to be in this position to put Citizens money to police our own vendors. Dan Sumner agreed, that s a very good comment. There will be a much more robust legal counsel scorecard. Jay Adams and talk about that but there will be an evolution for a Claims Bill Audit. There will be a much more robust accountability and scoring of attorney performance. Between the technology and that sort of measurement of performance, we will have a better oversight of legal counsel. Chairman Gardner asked, are there any existing metrics on how we re doing compared to other carriers out there in terms of legal expenses? Dan Sumner responded, I don t have that information handy, but I think in putting together the attorney scorecard might help. All were in favor of the above said motion. Motion carried. [10 minute break] 7. Chief of Risk Office Report Citizens Property Insurance Corporation Board of Governors16

17 John Rollins stated, yesterday, the Actuarial and Underwriting Committee (A&U) met yesterday to consider product changes and to receive some closure on the 2015 approved and established rates. During 2011 and 2012 Citizens undertook a large slate of changes to modify its insurance coverage to levels more appropriate for its position as a market of last resort. We have two proposed changes. The first change is to restore optional additional coverage for detached structures. In 2012, Citizens eliminated the option to schedule specific detached structures with additional maximum coverage amounts up to 70% of Coverage A (Dwelling). At this time, the only available coverage for detached structures is the blanket Coverage B (Other Structures), with available limits of 2% -10% of the Coverage A amount. This change created situations where policyholders may not be able to obtain adequate Citizens coverage for free standing structures such as guest houses, garages and workshops. Stand-alone coverage is not generally available in the private market for property at the same address. John Rollins continued, the second change is to update contract language regarding exclusion for Attached Structures and Screened Enclosures. Effective January 2012, specific policy language was introduced to eliminate coverage for various attached structures. While the coverage change was appropriate and followed similar industry changes, the contract language does not employ commonly utilized terminology. This has generated agent and policyholder questions. John Rollins continued, our proposal is as follows: Restore increased Coverage B limits for detached structures, with an available optional coverage limit up to 50% of Coverage A. This coverage will be available at the insured s request and offered at new business, renewal or mid-term. The existing basic blanket Coverage B amount will remain available at 2% of Coverage A, with the option to request additional blanket coverage up to 10%. Actuarial analysis will be completed to determine appropriate rate level. Modify current contract language excluding attached structures to utilize more commonly understood terminology. The intent of the coverage exclusion will remain the same. John Wortman made the motion to approve the Product Change recommendations; upon approval, appropriate rate, rules, forms and processes will be established and relevant filings will be submitted to the Office of Insurance Regulation. Bette Brown seconded the motion. All were in favor. Motion carried. John Rollins continued, the final part of my report is on the 2015 established rates. Nothing has changed since the last Board meeting. We received final approval. The effective dates will be February 1, The average approved rate changes for Personal Lines is -3.7%. The average approved rate changes for Commercial Lines is 3.3%. The average approved rate changes for Personal and Commercial Lines combined is -2.6%. Chairman Gardner stated, I think wholesale communications on rate decreases and increases can be misleading. If you re a policyholder, you might not be experiencing that. I don t know a better way to communicate it but we need to think of how to do that. 8. Chief Claims Officer s Report Citizens Property Insurance Corporation Board of Governors17

18 Jay Adams asked, would you like for me to elaborate more on the Legal Billing issue? Jim Henderson stated, any color you can add would be great. 2004/2005 was a tough time for the state and this organization. It sounds like you really buttoned down the house to deal with that. Who can play in the league with you? I am in the industry. I can tell you one of the most difficult things to achieve is to become a law firm that represents high-end insurance companies. I think we should be as tough for those that want to represent Citizens. They need to need to meet those high qualifications to represent us. Jay Adams stated, I agree with that. We plan on in the first quarter to give an in-depth overview with how we are in litigation. In Legal Bill defense, we were using software called Visibility, and that software was doing all the legal billing for us. In 2013, we changed to Acuity, which gave us more depth of entries. One of the issues that came out of the audit was cross-billing. You d have multiple adjusters working with the same attorney. There is no way an adjuster can monitor how many hours that attorney billed across multiple files and users. This new software package gives us that ability. It also gives us the ability to limit the number of hours an attorney can bill; and alert will go off in the system. We were also building a litigation vendor management program. Claims and Legal had partnered in We are pulling vendor management into this arena. Within that program, we will build out scorecards and metrics to look at billing hours, cross-file billing, trial outcomes, quality assurance (QA scoring), etc. to get a comprehensive view of a firm. We hope to have this stand up during the first quarter. Jim Henderson stated, it s really amazing that you find out a third party really has control over our checkbook. If they are going to have our checkbook, we want to make sure they are doing it right. Jay Adams continued, one of the things we are doing with the litigation organization, we are segmenting the claims into what we want to settle now, due diligence, or take to trial. We are setting up budgets for the case specific file. If anything goes over the budget, it comes back to Citizens to make the final decision. That had not been done in the past. Jay Adams continued, the Claims Committee met last Thursday. We discussed three action items. If you turn to the QA Software tab... the ability for Citizens to conduct QA review timely is critical in tracking and measuring performance of our claims handlers and outside vendors. The QA groups are currently using a web-based software tool Survey Monkey to complete assurance audits. Through the basic functionality of the tool, our ability to provide the level of support to the operations is limited. There is also no ability to integrate the tool with the Claims Management System (CMS) or our Data Warehouse. Inpoint, Inc. s QA tool is a solution that will be able to integrate with the CMS and Data Warehouse. It offers a scalable solution that will meet Citizens needs in the event of a CAT, and it will greatly improve the level of data complexity and detail that Citizens will now be able to capture for reporting purposes. Additionally, it also allows for multiple division usage, so in the future, additional platforms could be added to accommodate other internal business unit s QA solutions. The estimated cost for this contract is a budgeted item. The estimated cost of the contract is $1.1 million. The contract is for five years with two two-year renewal options. Citizens Property Insurance Corporation Board of Governors18

19 Vice Chair Glisson stated, a five-year based term... the world changes in five years. I wonder if you could negotiate a three-year based term. A motion was made and seconded to approve the recommended award and resulting contract, including renewal periods, for ITN No to Inpoint, Inc.; to authorize staff to take any appropriate or necessary action consistent with this Action Item; and to approve the contract not to exceed $1,100,000. All were in favor. Motion carried. Jay Adams continued, The Citizens Special Investigation Unit (SIU) is a dedicated unit, which conducts investigations pertaining to fraudulent or false insurance claims and other fraudrelated actions against Citizens throughout the insurance cycle. The SIU maintains four teams: Major Case Unit, Field Investigations, Outsourcing/Investigative Research and Agency/Underwriting Investigative Team. Investigations are triaged and assigned accordingly. When the investigative field team reaches their case load limit or there are assignments outside the zones where Citizens has field investigators, an approved Special Investigative Services Vendor will be used to handle those assignments. The use of a Vendor at that time will maintain the efficiency and effectiveness needed in order to detect, deter, and prevent insurance fraud from being perpetrated against Citizens. Citizens has issued a Request for Proposals (RFP) No: , for Special Investigative Services. Responses were received and were evaluated by an Evaluation Committee. The Evaluation Committee recommended five (5) Vendors for contract award: ICS Merrill; Ethos Risk Services; HUB Enterprises; Fraudulent Claims Investigations; G4S Compliance & Investigations. The contract has a three (3) year base term with one (1) optional 2 year renewal. A motion was made and seconded to approve the recommended Vendors; ICS Merrill, Ethos Risk Services, HUB Enterprises, Fraudulent Claims Investigations, G4S Compliance & Investigations, for award and resulting contract, including renewal periods, for RFP ; to authorize staff to take any appropriate or necessary action consistent with this Action Item; and to approve the contract not to exceed $1,500,000. All were in favor. Motion carried. Jay Adams continued, In accordance with Florida Statute Citizens is required to obtain the title of any mobile home that has been determined by a Claims Adjuster to be a total loss. Upon notification of a total loss, it is Citizens responsibility to ensure proper destruction, removal and disposal of the mobile home. Citizens has issued a Request for Proposals (RFP) No: , for Mobile Home Demolition Services. Responses were received and were evaluated by an Evaluation Committee. The Evaluation Committee recommended three (3) Vendors for contract award: SRD Construction & Development Corp.; Tropical Demolition, Inc.; WHM Foundation Stabilization, LLC. The contract has a five (5) year base term with one (1) optional 2 year renewal. A motion was made and seconded to approve the recommended Vendors; SRD Construction & Development Corp., Tropical Demolition, Inc., WHM Foundation Stabilization, LLC. for award and resulting contract, including renewal periods for RFP ; to authorize staff to take any appropriate or necessary action consistent with this Action Item; and to approve the Citizens Property Insurance Corporation Board of Governors19

20 contract not to exceed $2,345, Vice Chair Glisson abstained from the vote to avoid conflict of interest. All were in favor. Motion carried. 9. Vice President of Consumer and Agent Services Report Vice Chair Glisson stated, depopulation is working. The results were phenomenal. We might be getting to the point where the policyholders we have left who will stay with Citizens. However, I ve been surprised before. Steve Bitar stated, in the last Depopulation Committee meeting, we did talk about trends in depopulation activity. There are four enhancements that have gotten some media attention. There is the addition of premium estimates to the communications sent by the takeout companies to the consumers. OIR requires it. There has been confusion with regard to consumers knowing where to go to get their opt-out form. We have those posted on our website and added a quick link to the Citizens homepage. We ve changed the timing of the encouragement letter that is sent by Citizens. The first letter a consumer receives is from Citizens, so the consumer is prepared. I did announce that will be forming a Depopulation workgroup in January that will be made of key stakeholders. Steve Bitar continued, for the Market and Accountability Advisory Committee (MAAC) meeting, we discussed several initiatives related to depopulation. We also provided a Clearinghouse update. We did talk about the launch of the Personal Lines PolicyCenter and the training related to it. Steve Bitar continued, we ve included some consumer friendly overviews of the Clearinghouse. They give a high-level of the process for new and renewal process and what the three possible outcomes are in relation to the Clearinghouse. We have 21 companies registered for the Clearinghouse, 13 are on the new business side and eight are on the renewal side. The first two months of the Clearinghouse renewal program % of the existing HO3 book of business is not even being sent to the Clearinghouse because they are assumed through depopulation. Gary Aubuchon inquired, I was speaking to an agent and she said she was having a binding issue on the website. Is that an anomaly? Steve Bitar responded, I would love to talk to her personally. We also have an 800 number if agents need support. 10. Vice President Communications, Legislative and External Affairs Report Freddie Schinz stated, I want to thank Christine for the work she s done. We ve made a lot of progress in specialized areas. 1 Vice Chair Glisson abstained from the vote to avoid conflict of interest. Form 8A provided on last page. Citizens Property Insurance Corporation Board of Governors20

21 Christine Ashburn stated, the Consumer Services Committee (CSC) met via teleconference last week on December 3 rd. The CSC received a brief update on the social media program progress. The committee has taken interest in some of the mobile home issues. We are excited to make the Board aware that Tom Popko and Product Development has done a good amount of research about a way we are establishing stated value for Coverage A mobile home. We ve learned that some of the 360 value numbers are significantly lower for the older homes than what s established in the private sector. Our rules allow us to be flexible to accept other methodology beyond the 360 tool. We will work on a campaign that will educate our agents and customers on the other tools they can use. The mobile home market in Florida is very different from the rest of the country. You have parks that are very well maintained with lots of great services. They are on the water in many cases. These are wonderful communities. Jim Henderson stated, you are doing a great job getting the policies taken out but keep in mind that some of these companies are relatively immature. Many of these companies are not there, yet. We have to look beyond this transfer and look at the service and relationship with the customer. Are they in good hands? Chairman Gardner stated, I would agree to that and would add another level. We are put in a tight spot because we are not a regulator and we are unable to make assurances with respect to prices. I think we are sometimes confined to this space where the media and our customers put us in a difficult position. Barry Gilway stated, one of the advantages is that we have been building a market capability that never existed before. We have more input into the service provided by these companies. We don t have the legislative authority to get involved in that arena. But, we do have an opportunity to stay on top of market conditions. Steve Bitar added, it s important to note that before any companies are approved to participate in a depopulation, OIR does have standards that must be met by these companies. We will hear from our customers if there is a complaint. Christine Ashburn stated, I can touch upon the legislative constraints. There has been discussion about how the program works and confusion about what we do versus what OIR does. We will be getting with the new chairs and members to provide education on what we do in depopulation. 11. Consideration of Consent Items Barbara Walker stated, we have six consent items. Maintenance Support and Advisory Services for Citizens Insurance Suite, Guidewire Partner Connect Vendor Contingent Support Services (Vendor: Guidewire Software, Incorporated) IT Infrastructure, Software and Professional (Spending Authority) IT Staff Augmentation Services January 2015 Corporate Insurance Renewals Office Supplies & Consumables Citizens Property Insurance Corporation Board of Governors21

22 A motion was made and seconded to approve the consent items. All were in favor. Motion carried. New Business Chairman Gardner stated, I want to recognize Barbara Walker who makes sure the meetings run on time. She is a phenomenal custodian to Barry Gilway and these meetings cannot go so well without you. [meeting adjourned] Citizens Property Insurance Corporation Board of Governors22

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