MINUTES OF THE BOARD OF GOVERNORS MEETING Wednesday, March 18, 2015

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 Sheraton Orlando North in Maitland, Florida on Wednesday, at 9:00 a.m. (EST). The following members of the Board were present: Chris Gardner, Chairperson Gary Aubuchon Bette Brown Juan Cocuy Jim Henderson James Holton Freddie Schinz John Wortman The following Citizens staff members were present: Barry Gilway Jennifer Montero Barbara Walker Joe Martins John Rollins Brian Donovan Jay Adams Deborah Kearney Kelly Booten Steve Bitar Christine Ashburn Cindy McVay David Woodruff Bruce Meeks Michael Peltier Jeremy Pope Charles Johnson Hank McNeely Andrew Woodward The following people were present: Coleman Cordell Matt Williams George Smith Nicole Preston Doug Draper Bank of America Merrill Lynch Bank of America Merrill Lynch Bryant Miller & Olive, PA MacNeill Group RBC Global Asset Management

2 Matthew Sansbury Sarah Lehan Kapil Bhatia Fred Strauss Rick Patterson David Unsworth Kevin Stokes Nathaniel Johnson Nadin Mentor Henry Reyes Ken Vincent Ian Hansen Margaret Lezcano Phil Zelman Rick Patterson Stifel Nicolaus Aon Benfield Raymond James Raymond James JLT Re Guy Carpenter J.P. Morgan Ramirez & Co., Inc. J.P. Morgan Willis Re Willis Re Stifel Nicolaus PIA of Florida Raymond James Call Meeting to Order Roll was called. 1. Approval of Prior Meeting s Minutes A motion was made and seconded to approve the February 6, 2015 minutes. All were in favor. Motion carried. 2. Chairman s Report Chairman Gardner stated, Vice Chair Glisson isn t here today. If I cannot chair in the next three hours, can Dan Sumner advise us on who could step into my place? Dan Sumner stated, there would be no problem in having someone protend as Vice Chair. Chairman Gardner stated, I d like to have John Wortman to handle the gavel if I m unable to do so. My report is going to be brief. We re going to spend time on risk transfer next month. There is a lot of sentiment that there is a favorable market out there. In our conversations with the our bankers and reinsurance brokers, we have established a tremendous amount of credibility, particularly when you look back two and three years ago from depopulation, the Clearinghouse, the leadership, and to our risk transference program we have a long list of achievements and accomplishments. Barry, once again, hats off to you and your team for all the strategic initiatives you ve executed. 3. President s Report a. President s Message Barry Gilway stated, I appreciate the opening comments on my team. You just can t help but draw the conclusion that you need a phenomenal support group in order to accomplish what Citizens Property Insurance Corporation Board of Governors 2

3 we ve accomplished. I want to give a little history, talk a little about depopulation and then talk about the organizational changes that we re making. If you go back three years, we were at $3.18 billion in Direct Written premium when we reached a peak of 1.5 million policies and exceeded over $515 billion in exposure. That s a half a trillion dollars. While we can all agree that Citizens was never designed to provide a haven for 26% of all insureds in the Florida Market, and that the size of Citizens was totally counter to our mission of acting as the company of last resort, it is true that the scale of Citizens provided the financial and strategic opportunity to make major investments that have been transformational to the company. We don t have time to name all of these investments but let me list a few: The KPMG study provided direction for management on major improvements that were instrumental and transformational to Citizens becoming a more efficient and effective operation. The Core initiative was completed, with over $100 million spend, replacing our Claims, Commercial and Residential platforms. We invested over $46 million for Data Center consolidation and significant equipment upgraded our technical software in many areas. From , we invested over $977 million in reinsurance while offloading $7.2 billion in risk. Using simple math this equates to a 737% return; that return will be even more favorable this year. There were multiple investments in the Claims and Litigation Management arena. Claims is far more prepared for a major event as a result of investments in the Independent Adjusting Services contract leveraging firms to be there when we need them. o Quality assurance software ($550 million) o Satellite services ($2.7 million) o Generator services ($1.2 million) o New mobile units ($88,000) o Litigation Management investments included the Co-Coordinating Counsel program that has had a major impact on Sinkhole Litigation, reducing the outstanding litigated claims by 75%, and implementing a reorganization that ensures this area is adequately resourced. Field Underwriting teams were added; and for the first time we developed and implemented an Underwriter Training and Intern program. You will see the impact of decisions made to eliminate ceding commissions in the depopulation plan later in this presentation, that decision was a catalyst for depopulation. A major investment was made to develop and implement the Clearinghouse program that continues to deliver on the commitment to assure that only eligible policyholders enter Citizens. Three years ago we had no Agency Service or Field Agency Management capability, despite servicing over 8,400 Independent Agents, so significant dollars were spent to develop today s capabilities A Vendor Management division was created Forensic capabilities were added to our internal audit division Our market analysis capabilities were strengthened An Inspector General organization was funded And we have further invested in employee programs that have proven to improve employee retention as well as increase the learning and development opportunities for employees. Citizens Property Insurance Corporation Board of Governors 3

4 Barry Gilway continued, the market is changing. It s changing dramatically. There was an interesting S&L article about a week ago that describes the Florida marketplace. It took 19 of the top companies in Florida and showed the improved profitability which came from Citizens. We returned about $1.6 billion into the marketplace in a non-wind scenario. We re not waiting for the size of Citizens to drop to pay cash. We need to make sure that we have a scalable organization that can move up and down and be prepared for that CAT. Mr. Henderson has asked me, How low can you go? Before we began to show a net decrease in policies, Citizens actually peaked in August of 2012 at 1.5 million policies. Through March of this year we dropped below 600,000 policies and exposure decreased to below $200 billion. For over a decade depopulation really focused on Personal Lines and the Coastal Account was frozen in the 460,000 range. If you take a look from 2012 to today, the Costal has gone down from 460,000 to 258,000 policies, of a 44% policy count reduction and over 50% of exposure reduction. Even in the Personal Lines Account (PLA) and Commercial Lines Account (CLA), we re seeing dramatic changes in appetite for those policies. We have companies interested in mobile homes policies. Barry Gilway continued, as you know from the committee meetings, Steve Bitar has done much to improve the depopulation program. Take a look at this. This shows that in 2014 alone over a million customers received depopulation letters. Although we did get some complaints, the number of complaints compared to the letters that went out is incontestable. This slide shows where you go from the Office of Insurance Regulation (OIR) number so to the final numbers that are taken out. It shows us that companies get to select a certain percentage of policies, customers/agents can choose to accept offers, and there are two 30-day opt out opportunities. We take a sophisticated look at where we are going to be two years from now. Barry Gilway continued, March Fisher, Director of Corporate Analytics, and her team used three independent methodologies to complete the forecast. The first was the Budget Projections created by Fred Deeb and I ll point out that Fred has been amazingly accurate taking into consideration new business, cancellations, non-renewals, depopulation and opt-outs over time. The second is a Gradient Boosted Model (GBM). This is a computer learning algorithm trained to predict depopulation policies by assigning a score indicating how attractive they are to takeout carriers. Obviously this involves evaluating the specific appetite of takeout carriers for each depopulation. The third is a Venn Diagram this partitions Citizens policies into categories following a hierarchy based upon trends and experiences. The Venn Diagram looks at groups of policies with similar characteristics that have shown to be of interest to companies. All three methodologies produced similar results with an indicated bottom being around 450,000 policies assuming the current environment remains the same. Barry Gilway continued, we believe there are about 150,000 policies that are highly marketable within Citizens. Why are they marketable? The benefits of doing a depopulation versus waiting for the Clearinghouse is the ceding commission point they can pick up policies with no servicing costs. They can choose policies in line within our operating strategy. There is no competition compared to the Clearinghouse. We re responding to the change and we are becoming smaller. Now we re focused on underwriting. In January, I communicated the realignment of underwriting functions between our Consumer and Agent Services and Corporate Risk Management divisions. Since that announcement Steve Bitar, has led a transition team to assess the underwriting business functions. The KPMG study recommendations as well as a balance between cost and service needs, continue to drive our strategic alignment of capabilities. Last week we announced the following organization changes as a result of this assessment: Citizens Property Insurance Corporation Board of Governors 4

5 The Commercial Lines team and functions will move intact to the Risk Management Division and Stephen Mostella, Sr. Director of Underwriting, will report directly to John Rollins. The personal lines U/W team will be split into two areas. 1. The technical, high-risk underwriting group, under the direction of Tom Popko, Sr. Director of Underwriting, will also report to John. These technical Underwriting teams will now sit strategically alongside Product Development, Actuarial Services, Corporate Analytics and Enterprise Risk management. Quite simply John Rollins Division is now a set of business units concerned with assessing, structuring, managing and reporting on the risks faced by the organization. 2. A second team focused on operational, transactional underwriting functions, under the direction of Sue Register, Assistant Director, will align with the Consumer and Agent Services Division and report to Steve Bitar. In Consumer and Agent Services we have now aligned an operational infrastructure that can be leveraged to better serve our constituents and take advantage of the technology investments Citizens has made, notably Citizens Insurance Suite, so effectively delivered by Kelly Booten and her teams. Following through with KPMG recommendations, there are a number of additional changes that will move us closer to the shared service model including flattening the organization by eliminating one Senior Executive position. This requires that Steve and John assume broader responsibilities and I have every confidence they are more than up for the challenge. Barry Gilway continued, as a result of growing surplus, risk transfer improvements, and depopulation, we ve reduced the assessment every single year. Going into this season, you can see the Probable Maximum Loss (PML) is down to $11.61 billion in 2011 to possibly being able to cover a 1-in-125 year storm for the Coastal Account. That does match with the Demotech single-occurrence limit that the average private market carrier is carrying for reinsurance. Jim Henderson stated, our company is a distributor to your company as an agent. Citizens was the market of last resort and was a not a great service partner, but you ve turned that around. It s really important to take care of the insured. The opt-out/opt-in is very important in that we put our hands into that. We need to make sure we re not dropping coverage. I commend you and the team for making this more about a partnership and it s made a difference. Gary Aubuchon stated, about a year ago, we talked about the bottom. We thought it would be 600,000 policies and today it s 450,000. Do you attribute that to the unexpected appetite in some of the Coastal properties? Where is this additional 25% coming from that we didn t expect? Barry Gilway responded, if you take a look at that S&L article, it reflects on the overall profitability of the marketplace of those 19 market places, many of which participated in the depopulation program. Let me give you some reinsurance numbers for that marketplace. Three years ago, a typical market was paying 47-cents on the dollar for coverage. Today they are spending 33-cents for coverage. They are buying more coverage because they are stronger. It Citizens Property Insurance Corporation Board of Governors 5

6 creates more opportunity. John Rollins showed the progression we made in terms of rate adequacy. Citizens announced a reduction in our rates for about 75% of our insured. The same thing is happening in the marketplace. The mobile homes have been an interesting phenomenon. We have a customer right now focusing on mobile homes built in 1994 and prior. Gary Aubuchon inquired, with that, what s the likelihood that we are sitting here next year and 450,000 is no longer the floor. Barry Gilway continued, we have done our best estimate. If you take a look at the different approaches, we evaluated every county and you still have a significant number of policies rated as inadequate on the coast. You still have sinkhole business. Companies are not stepping in. Improved market conditions can change that number. 4. Chief Financial Officer s Report a. Finance and Investment Committee (FIC) Update Chairman Gardner stated, yesterday the FIC met briefly. The main takeaway is that we probably will want to take a look at our Investment Policy six months ahead when we want to look at it again in December. Jennifer Montero stated, there were three updates I gave at the FIC. For the emergency assessment, the 2007 bonds legally defeased on January 27, The defeased bonds are deemed to have been paid are no longer deemed unpaid. The Insurance Commissioner signed the order to terminate Citizens Emergency Assessment in July Companies shall cease collecting Emergency Assessments by July 1 st. That s on new and renewal business. The second update was on risk transfer. In 2014, Citizens transferred $3.269 billion of risk for the Coastal Account and $1.59 billion in traditional and $1.75 billion was in the capital markets. For the 2015 season, we have $1.592 billion carrying over from 2014, which includes the $250 million for the CAT Bond. We also have the 2014 $1.5 billion Everglades Re CAT Bond and the $202 million multi-year traditional reinsurance. All of the reinsurance is aggregate. We have $1.317 billion coverage that is expiring before the start of the season. Jennifer Montero continued, our reinsurance strategy remains the same and it is to place expiring coverage, eliminate the potential assessment in a 1-in-100-year event, protect accumulated surplus, use of aggregate coverage to address the impact of multiple storms, protect the commercial non-residential exposure, optimize both the traditional and non-traditional capital market, and use the multi-year coverage to stagger the replacement coverage that expires each year. Jennifer Montero continued, for the update in the traditional market we met with reinsurers on our road show in late January. Our submission went to the market in mid-march. We re receiving quotes now and they are favorable. We will be coming back before the Board before we go to market. In the capital markets, the Everglades Re team met in late February for a structuring meeting. We will form a new special purpose vehicle. We will meet with investors on April 20 th and the current market conditions continue to be promising. On our pre-event financing update, we met with the rating agencies. We re going to update the documents to modernize the Coastal documents to mirror those of the PLA/CLA that were updated in The interest rates are low and it s a good time to go into the market. We ll need a special Board Citizens Property Insurance Corporation Board of Governors 6

7 meeting between April 6 th and 8 th to approve the documents, which will allow us to go to the OIR for approval. b. Financial Report Jennifer Montero stated, December 2014 marked the end of another successful year, characterized by several major accomplishments. Citizens maintains a significant and deployable capital base to meet its claims obligations due to the placement of the risk transference program. Heading into 2015, Citizens hopes to execute a risk transference program and for the first time in history we will eliminate the necessity of an assessment in the 1-in-100-year storm also marks the termination of the 2005 Emergency Assessment, which is two years ahead of schedule. Several highlights from 2014 are as follows: We ve had reductions in Direct Written Premium and in policies in force (PIF). It went down by 35% and exposure went down by 36%. Direct Written Premium went down by 25%. For the PLA, the PIF count was down by 40%, exposure by 43% and direct written premium by 35%. For the CLA, the PIF was down by 39%, exposure by 45% and direct written premium by 15%. For the Coastal Account, the PIF was down by 27%, exposure by 30% and direct written premium by 15%. Policy count and exposure are going down at a higher rate than the direct written premium due to the glide path. For depopulation, we ve had over 416,000 policies successfully leave the company. The main reasons are due to the success of the depopulation program, the removal of the ceding commissions, the announcement of the Clearinghouse, and our rates becoming more actuarially sound. Risk transfer we ve ceded just over $300 million in exchange for $3.269 billion risk transfer. Citizens risk transfer program consist of the 2013 CAT Bond ($250 million), the 2014 CAT Bond ($1.5 billion), and traditional reinsurance ($1.59 billion). Losses in loss adjustment exposure (LAE) have decreased as compared to year-end in However, the loss ratio and the LAE ratio increased during the current year. The increase is due to prior year litigated water claims; however, the sinkhole loss ratio declined from 873% to 84% over the prior three years. Administrative expenses decreased by 10% or $19 million in Decreases in contingent staffing and professional services comprised the majority of that decrease. Jennifer Montero continued, on January 27 th, Citizens legally defeased the 2007A Post-Event Bonds. We identified an accounting entry at year-end which recognizes the difference between the market rate and the stated rate of the bonds payable. It s a charge against surplus. Finally, over the last five years, surplus increased 13% per year as a result of favorable operating results over the same period. 5. Chief Systems and Operations Officer Report Citizens Property Insurance Corporation Board of Governors 7

8 James Holton stated, I d like to offer a lot of thanks to Jim Harty. He s resigning from the Information Systems Advisory Committee (ISAC). Jim has been with the ISAC from the beginning and provided valuable service. We wish him heartfelt thanks. Kelly Booten stated, we started the ISAC in 2007 and Jim was an original member of the technical advisors we had on the team. With the Charter approval, we re recommending that we go with two technical advisors in the future. We appreciate everything he s done. The technical advisors that we do have remain on the ISAC. They are from Blue Cross Blue Shield and from the Department of Rehabilitation. I think we are well equipped. We do have the report from the ISAC, which met on March 4, The first item is the Charter review. There is one change in the committee composition section. It states that the Board Chair will appoint no less than three industry advisors. We recommend that the change be that the Board may appoint an additional, third advisor. A motion was made and seconded to approve the reviewed ISAC Charter. All were in favor. Motion carried. Kelly Booten continued, in addition to the Charter, we reviewed the Core program update. We went live on the last leg of it in December We converted over 200,000 policies and we will be running conversions at approximately six months. We ve implemented additional fixes as needed and we ve been working with the Agent Round Table on any issues that have come up. The final program budget was presented to the ISAC. We ve kept it under the three year budget; there were only $7,000 minor invoices that did not accrue that carried over into the next year. This will be the final Core program update as we transition into normal operations. Kelly Booten continued, we also have an update on the Enterprise Resource Planning (ERP). The Invitation to Negotiate (ITN) is set to be released in mid-april, and we will work toward narrowing the vendor pool. Curt Overpeck briefed the committee on the 2015 IT plans, which are calibrated with the enterprise plans. We had two action items for Board approval. The first is for desktop and tablet replacements. The equipment was included in the 2015 budget approved in December. It is to refresh aging technology. A motion was made and seconded to approve the Replacement-Notebook/Tablet PC s and Desktop Equipment refresh (budgeted) spend authority in the amount of $1,100,000 for vendors Dell and Microsoft and/or successor state contracts: 250-WSCA-10- ACS Miscellaneous IT Equipment; National IPA City of Tucson, Az. Contract # ACS; 252 GSA Schedule 70 Information Technology Equipment, Software and Services. Alternative vendors listed on the referenced contracts may be substituted, based upon vendor offerings, performance and cost. All were in favor. Motion carried. Kelly Booten continued, the next one is the Language Translation and Interpretation Services. Citizens needs the services of qualified vendors to provide accurate and timely telephonic interpretation and transcription services. Citizens has utilized a State of Florida Department of Health (DOH) contract #DOH with the approval of the Department of Management Services for the last three years. This DOH contract expires in June With this knowledge Citizens issued a request for proposal, to procure vendors that comply with Citizens specific requirements. These procured services will enable Citizens staff to better communicate with our Citizens Property Insurance Corporation Board of Governors 8

9 multi-lingual customers, as well as provide translation of voice recording to documents, and vice versa. The amount is $62,500 and it was included in the budget. This action item is for eight years for a total of $500,000. A motion was made and seconded to approve RFP # for Language Translation and Interpretation Services (budgeted) to be awarded to Optimal Phone Interpreters and Telelanguage, Inc. and recommends Citizens Board of Governors approve this item. All were in favor. Motion carried. 6. Chief of Internal Audit Officer s Report Juan Cocuy stated, yesterday the Audit Committee met. Jennifer Montero presented the December 31 st financials. Debby Kearney presented the Ethic and Compliance Officer s Update. John Rollins presented the Enterprise Risk Management (ERM) Update. We have to review and approve the Audit Committee and Office of Internal Audit (OIA) Charters. We also approved the performance evaluation of the Chief of OIA. You can read the minutes but we acknowledged his accomplishments and great performance. Joe Martins stated, at the committee, we recognized the progress in the current Audit Plan. We highlighted one specific audit that we focused on which is the Network Security Controls. We assessed the strength of the IT controls, managing internal and external and wifi security. There are a few areas that need attention. We use an external supplier to help us with that specific assessment. At the meeting, we referenced the Internal Control Framework Project, which focuses on strengthening the Internal Control Framework. We completed our first pilot program. It was done in the Claims Litigation Support area. We also focused on efficiency resolution. We highlighted on recovering money back form attorney firms. Progress has been made on assessing the damage made by these firms. One of the firms settled with us and two of the firms are looking at mitigation. Joe Martins continued, we also highlighted five open items that are overdue. Four of these are referred to IT security issues that need to be addressed. Within the work we completed in the Network Security, we highlighted that the progress in this area. The policies they are implementing are taking time but they are being addressed. We also have an open item for a social media policy. That is also receiving attention and rules are being developed. 7. Chief of Risk Office Report a. Actuarial and Underwriting Committee (A&U) Report John Wortman stated, the A&U met yesterday. We did review three action items and we did support staff s recommendations. John Rollins stated, the first item is an action item. Insurance Company Financial Data Services is tied to our market analysis. If you recall, our strategic plan falls for market product analysis, which means Citizens needs to monitor the private market. We put out a competitive solicitation and received one response from SNL Financial, LLC, which is an incumbent with us. It is a three year contract with one two-year renewal. Citizens Property Insurance Corporation Board of Governors 9

10 A motion was made and seconded to approve the recommended award and resulting contract including renewal period, for RFP No to SNL Financial LC, as set forth in this Action Item and to authorize staff to take any appropriate or necessary action consistent with this Action Item. All were in favor. Motion carried. John Rollins continued, the second item is a change to our products, specifically a policy form change dealing with our appraisal language. Citizens policy forms for personal lines coverage currently contain provisions offering appraisal as an alternative method for resolving claims disputes. Through joint efforts between Claims, Legal, Legislative and External Affairs and Product Development, Citizens staff has drafted refinements to Citizens current appraisal language. The change is for the ability of either party to demand an appraisal. That s a little different from the language we have now where we have to agree. The business impact is that it ll be a bit more consumer-friendly and might avoid any future litigation. The appraisal works in which each side chooses an appraiser, detailed claims assessments are submitted, and there is an umpire in which decisions become binding. Refinements include: Improved standards for requesting appraisal Details for appointment of a disinterested and impartial umpire Timelines to allow review and negotiation of claims disputes between policyholder and company Standards for payment of agreed amount of loss Proposed revised appraisal policy form language is included as Exhibit A. Exact contract language may change based on feedback from the OIR. John Wortman stated, I think it s a positive change for our customers and for Citizens. A motion was made and seconded to approve the policy form change: Appraisal Language as set forth in this action item and for staff: Upon approval by the Board to submit a policy form filing to OIR, appropriate filings will be made with OIR. Exact contract language may change based on OIR feedback. Upon OIR approval, necessary system changes required for implementation will be scheduled for the earliest feasible date. All were in favor. Motion carried. John Rollins continued, my final item has to do with individually rated risks for Commercial Residential Mutli-Peril (CRM) and Commercial Residential Wind-Only (CRW) Policies. Individually rated buildings (also known as Advisory or A-rated risks) are not subject to the insurer s filed rates, rating schedules, rating manuals or underwriting rules. Citizens has designated buildings with a Coverage A amount of $10 million or greater as A-rated. These A- rated buildings are not subject to the 10% statutory rate cap nor are the rates for these risks subject to approval by the OIR. Brian Donovan stated, today we bring before you rate changes for individually rated risks for Advisory or A-rated risks. These risks are not filed with the OIR and are not subject to approvals. Citizens defines any residential buildings valued greater than $10 million as subject to A-ratings. CRM are separate from CRW rates. The following factors were considered. We looked at the historical premiums and losses, the output for four models accepted by the Florida Commission Loss Projection, the inclusion for private reinsurance, the inclusion of a risk level for a 1-in-100-year storm, and actual cost data. Basically, we have a range for CRM between 1% and Citizens Property Insurance Corporation Board of Governors 10

11 25%; it is not an exact one number. Within that range, we make a selection. For CRM, 15.8% is our indications. Brian Donovan continued, as mentioned previously, A-rated policies are not subject to OIR approval or the glide path. However, determining the final rate change, we are keeping up with the spirit of the glide path. We determined that the rates will not go up to more than 10%. The proposed rate change will be at 6%, which is an average and will vary by territory. If you look on page three, you ll see that there are six CRM territories. These are broad territories and over 90% of the business is in Seacoast Zone 1, and most of those changes are 5.9%. We took that zone and turned it into 11 separate territories which correspond to the Coastal territories. The actual average is 4.4% to 9%. Brian Donovan continued, for CRW, we have a rage from -14% to 9.5%. Within that range, the consensus of the model came up to -6.3%. Similar to CRM, we are recommended that the full rate indication not be implemented. We are recommending no changes at this time. Chairman Gardner asked, what is your estimated increase in premium? Brian Donovan responded, roughly, $6,000 in average premium per building for the CRM risks. John Wortman stated, staff did look at the various models. It s a wide range. They used a practical approach to this. A motion was made and seconded to approve the proposed rate changes for Commercial Residential Multi-peril and Commercial Residential Wind-only policies; both overall and by territory: Upon approval by the Board, appropriate changes will be applied to CRM A- rates rates by territory as described herein resulting in an average rate increase of 6.0%. A rate change of 0.0% will be applied to CRW A-Rated risks. All were in favor. Motion carried. Chairman Gardner stated, John, you re an incredible pro and a true talent. You re doing a great job in what you do. John Rollins responded, what we do in my area is support a lot of the teams in Citizens. I have to defer any credit to my team because you have Brian Donovan and Paul Kutter. It is a real team effort. 8. Chief Claims Officer s Report Gary Aubuchon stated, a couple years ago, the problem was sinkhole; today, it s water damage in the tri-county area. This will be an enlightening presentation. Jay Adams asked, the Claims Committee met telephonically on March 5th. An update was provided that focused on 2014 results and included non-litigation sinkhole agreements, litigation claims, Special Investigative Unit (SIU), and brief look into For the non-litigated sinkhole agreement update, Jeff Handy Senior Director of Claims provided a summary on the Citizens Property Insurance Corporation Board of Governors 11

12 sinkhole settlement agreements. In February 2014, Citizens had its first sinkhole settlement agreement with a law firm, Boyette, Cummins & Nailos. Since then, agreements have been met with 12 additional firms. As of February 2015, 1,084 sinkhole claims have entered into the program. In order to support these agreements, Citizens crated a Sinkhole Stabilization Manager Repair Program to provide below-ground repairs. Currently, there are 25 vendors that participate in this program. To date 822 policies elected to have homes stabilized under the program. Jay Adams continued, under our litigation claims update, Elaina Paskalakis Vice President of Claims provided an update on the litigation and reorganization and related results. She started with the investment in leadership positions needed to provide the appropriate oversight in litigation strategies and transitioned in the claims segregation that resulted in improved results during the second half of She explained that our pending reached an all-time high in May 2014 with over 13,600 matters. We ended the year around 10, 600 matters, which was a 23% reduction. It s the first time we ve seen the 10,000 numbers in a long time. All of this was done while our new suit volume continued to increase at a rate of 4.6% during the year. All of this translated into better customer service for our policyholders with timely resolutions without the need for litigation and with cost containment through early identification of early-settlement candidates. Jay Adams continued, Latrice Calhoun Assistant Director of Vendor Relations discussed two vendor action items that will be presented at the end of the meeting. The two items are related to Independent Adjuster (IA) Services and General Adjust and Executive General Adjusting Services, all of which are related to claims handling. We gave an SIU update, provided by Assistant Director Joe Theobald. Traditionally SIU has been a claims initiative and focused on fraud only. The focus is now also on agency and underwriting fraud. Efforts are underway to provide additional data mining efforts, to include data mining enterprise focus. Jay Adams continued, we also spoke about the additional 2015 initiatives that we are currently working on. We are working quickly to release the emergency services solicitation, which would include water extraction, boarding up, tarp application, and tree removal. We are establishing a new quality assurance program based on a recently awarded contract with End Point that will provide consistent scoring and reporting for all of our claims handling groups. We continue to do CAT planning and testing. We are working toward to transitioning into our new IA contracts. We are back in the evaluation phase of that and hope to have that wrapped up in early April. We ll continue to focus on our litigation strategies. Jay Adams continued, I d like to move into a quick discussion about water claims. I m going to cover the presentation that we presented to the House, Banking and Insurance Subcommittee. I want to point out that water claims make up over 70% of the newly received claims. 56% of those claims are related to non-weather, such as water pipe breaks. The next slide represents the same information, except this breaks things down to the tri-county area (i.e., Miami-Dade, Broward, and Palm Beach). The peril of water makes up a total of 79% of the newly reported claims, which is 9% higher than the remainder of the state. When we look at the peril of water only, the tri-county area represents 72% of all new claims. Slide five shows new claims reported with representation, which can be a public adjustor or an attorney. The tri-county area represents 93% of all claims received, where we yet have representation. Slice six shows new water claims with representation. The tri-county area represents 98% of all water claims received. Citizens Property Insurance Corporation Board of Governors 12

13 Jay Adams continued, during the second half of 2013, the litigation team conducted an in-depth review of the litigation. The tri-county area represented 43% of the total policies in force, represented 93% of all pending litigation, and represented 96% of all water litigation. Slide eight represents paid allocated loss adjusted expenses, comparing Miami-Dade to the rest of the state. Miami-Dade as a disproportionate total claims expense compared to the remainder of the state across all perils. In March of 2014, we created a triage team that reviews all incoming new lawsuits. They utilize the collected statistics by the claims business to refine our business practices. In December, 562 new suits were received, and water claims represented 91% of those suits. The tri-county area represented 98% of the suits. 85% of those suits had representations during the first notice of loss (FNL). Water claims with representation during FNL increased 24% in 2014 alone. Jay Adams continued, slide 10 represents claims that have an assignment of benefits, which typically means the vendors on the claim usually a water mitigation vendor - they have the insured sign the assignment of benefits and the insured assigns their policy rights to the vendor. The tri-county area represents about 90% of the vendors. Slide 11 contains an assignment of benefits of increased ALAE costs. The percentages of ALAE claims to the total number of water litigated claims are rising. ALAE severity for a litigated AOB claim is 60%higher than a litigated claim without an AOB. The last three slides are different slices of information contained on this slide. This represents calendar year non-wind/non-sinkhole loss and LAE combined. In 2013, if we removed the results without Miami-Dade would have been 23.4%. For Miami-Dade as a standalone county, the ratio is 49.7%. The total for the entire state, we have a loss ratio of 31.9%. The losses in Miami-Dade are the driving factors. Jim Henderson, it is very interesting. With respect to our language, particularly on the water damage, is that part of the driver with respect to creating litigation? Do we have a more liberal policy with respect to that definition? Jay Adams responded, what I d tell you is that water is the most difficult peril to adjust. Over the years, we ve changed our product language to 14 days and hidden vs. non-hidden damage. We utilize and leverage a lot of IA to handle the majority of our claims adjustment. As we learned from our triage results, that this pocket of drivers for litigation... they are all being overseen by Citizens staff. The idea is that we can provide better training, resourcing, and oversight to make better decisions. In looking at over 3,500 water losses in litigation, we have struggled to make appropriate claims decisions. We ve denied things that have loss potential, where an expense payment or an indemnity payment is due. We are trying to create a platform to make appropriate claims decision on the front end. 76% of these water claims are represented as if they are being set up for suit during FNL. The solution is that we are creating an emergency services program. We are releasing a contracted repair program later this year. We re working with Steve and the agency force to create a campaign to call Citizens when there is a loss to engage these programs. If we can get in front of the representation, we can settle the claims on the front end. Jim Henderson stated, the ALAE is the defense cost that we re paying to for the plaintiff side to investigating the litigation. Jay Adams stated, the ALAE include any experts we may hire. It would include our defense costs. Our attorneys are paid through indemnity. Citizens Property Insurance Corporation Board of Governors 13

14 Jim Henderson stated, certainly during post-storms there was a great deal of activity dealing with roof damage. Your team made it through that. Perhaps the language change and arbitration will avoid expensive defense. Jim Holton asked, is the water emergency litigation costs higher in Miami-Dade than in the state? If someone has a pipe break, are the vendors pricier? Jay Adams responded, that would be a trend we would have to investigate. The majority of our claims for water come out of South Florida. Many of them have the AOB because the vendor does not feel like Citizens will compensate for the work they ve done on the job. John Wortman inquired, I m sure the glide path has impact on the Miami-Dade ratios? John Rollins responded, the glide path does apply to water claims. The standard policy includes water. The only standard peril not under the glide path is the sinkhole. In terms of achieving rate adequacy and to match our revenues to our costs, we are constrained there in the tri-county due to the glide path. Gary Aubuchon inquired, in the tri-county area, are the private carriers seeing similar conditions? Jay Adams responded, I would not be able to speak to the private carriers. I would have to believe it is similar across all insurance policies. Jim Henderson there is various definitions in terms of water coverage and sub-limits. They have very limited coverage in this area. Jim Henderson inquired, there could be a potential red herring here with regard to representation and when Citizens knows of a loss for the first time. Are we taking a look at the causes of the water damages in the home? Is there a commonality in construction methods leading to this? Barry Gilway responded, we conducted an intensive litigation study. What is interesting is that the risk characteristics in Miami-Dade there are no difference in the risk in Miami-Dade and outside the county. There is no difference in the construction of the homes. The only distinction we found is the legal climate. We do not have a change to get in front of the claim. Jim Henderson is there any indication that there is a solicitation of claimants with respect to the adjusters that they are already locked into litigation? Jay Adams responded, no. We investigate the claim, make the settlement, and somewhere between two to three months, a suit is filed. [10 minute break] 9. Vice President of Consumer and Agent Services Report Steve Bitar stated, Chairman Squire of the Market Accountability Advisory Committee (MAAC) asked me to provide the update of yesterday s meeting. Carl Rockman Director of Citizens Property Insurance Corporation Board of Governors 14

15 Agent Services provided an overview of the agent training that occurred in support of the Insurance Suite rollout. More than 2,300 people attended those webinars. We also conducted live training classes in January with over 900 attendees. We also had an update from Kelly Booten with regard to the progress on the Insurance Suite implementation. Christine Ashburn provided an update on the Technical Education and Communications that her team created during 2014 and upcoming plans in The MAAC terms are coming to an end. I ve been directed by the chairman to send out the appointment letters, seek the reappointments, etc. The only other topic we covered is depopulation. Steve Bitar continued, on January 13 th, the Depopulation Workgroup was pulled together to meeting on the issues in the depopulation world. We had a historic year with the number of policies removed 416,423. It s the same thing for exposure removed - $117 billion. With that comes a lot experience. We pulled together Steve Burgess (Consumer Advocate), Jay Neal (FL Association for Insurance Reform), OIR, agent associations, top insurers, and Citizens leadership. We came up with suggestions and ideas. Three principles surfaced. Allow the free market to do what it needs to do. Learn from the lessons. Embrace technology. Allow consumers and agents to have a say prior to assigning that risk and not just rely on the algorithm. Steve Bitar continued, behind the Clearinghouse update, this is a high level overview. On slide two, from a new business perspective, starting January 27 th through the end of February, 75% of the risks coming in through the front door are receiving no new offers. That s to be expected in the marketplace. 25% is receiving some interest. Roughly 8.3% of the policies are being deemed as ineligible. You ll see a map of Florida. 466 policies have been bound and received coverage offers through the Clearinghouse that prevented these Coastal policies out of Citizens. From a renewal process we have many policies that are not going through the Clearinghouse because of depopulation. 1.4% of policies being pushed through the Clearinghouse are being deemed as ineligible. 5,658 policies have been confirmed bound by the private market. What s next for the Clearinghouse? We have DP1 and DP3 to be added in April. We will start with three insurers for new and renewals. We re adding two lines later this year. We have 22 contracted to participate. Steve Bitar continued, the final topic is my Clearinghouse Report that I provide to the Board on a monthly basis. I believe we are shifting into normal procedures. I d like to recommend that I send this report to you quarterly rather than monthly before any upcoming Board meetings. Chairman Gardner responded, I m okay with that. 10. Legal Services Update Dan Sumner stated, staff has taken a methodical approach to assessing options for Cyber Risk Insurance. We began as a group to reach a consensus on what Citizens Cyber Risk Insurance needs were. We put together a laundry list of what comprises the components of that. We met with each of our insurance agents and briefed them so they understood our needs. The agents shopped the market. We are close to concluding that process and we plan to present a recommendation at the next Board meeting. We have eight quotes which reflect the best of Cyber Insurance. Some quotes went up to $50 million in coverage if we need it. Some companies differentiated themselves with regard to their in-house, risk management services in the event of a breach. There are also various approaches to post-breach activities. We are looking for a combination of our own capabilities. Citizens Property Insurance Corporation Board of Governors 15

16 Jim Henderson commented, I m very pleased. It is money well-spent. I appreciate the priority. Jim Henderson stated, I would submit that the language be paramount in that contract. Services is certainly a key but the coverage language is important. Chairman Gardner stated, I would encourage you to the extent that Jim is available to use him as a resource. Dan Sumner continued, the next item we have is an action item. It s a conflict of interest policy. This is the first of two items coming before the Board with regard to promulgating procedures and ethics. We will have a proposed new code of ethics at the June meeting. Under Section 7 paragraph 7 in Citizens Plan of Operation is to adopt policies to prevent conflicts of interest. It is now a tight and readable policy. Deborah Kearney stated, this document is essentially a cleanup. It refreshes, reformats and basically recreates the policy as a clear, in plain English, conflicts of interest. In addition to the, like I said, clean-up, there are a couple of things we incorporated two stand-alone policies, one on secondary employment and one on insurance licensure conflicts that are essentially conflicts of interest policies, but have so far remained separate. So, we wanted to consolidate everything into one clear Conflicts of Interest Policy. We ve also added nepotism as a specific conflict of interest that allows us to define the scope of relatives that would extend in that sort of thing. Once this is adopted, we do intend to incorporate it. It will be a stand-alone policy; it would be available to our employees on our portal with the other policies. It will also be incorporated into a code of ethics that will have the niceties of the mission goals, letter from the President. It will also include more information on how to report the kinds of things you should report. It will have a section that you ll probably be most interested in. And that is, just an explanation of those features of the State Code of Ethics that the Board Members and Senior Managers are additionally subject to. Dan Sumner [inaudible] Jim Henderson asked, do we require employees to acknowledge that they received and have read the policy? Deborah Kearney responded, yes we do. It s statutory that they acknowledge the policy every year. Bette Brown commented, I compliment you on the clarity of the content. It s a great improvement. Good job. A motion was made and seconded to approve the Conflicts of Interest Policy. All were in favor. Motion carried. Dan Sumner stated, the final item I have is an action item for court reporting services. We entered into a competitive solicitation for court reporting services statewide. Those services will be used for all of our claims litigation and other court reporting needs. There is a fee schedule and all of the court reporting services. We will meet that fee schedule or discount it by 5% to 10%. There will be price uniformity. Citizens Property Insurance Corporation Board of Governors 16

17 Jay Adams added, over the past year, Legal and Claims forged a deep partnership. We created a Vendor Management Program. We are moving the defense counsel into that program now. We decided the court reporting services would be a good fit into this program. A motion was made and seconded to approve the recommended award and resulting contracts, including renewal periods, for RFP No: for Court Reporting Services to the selected vendors listed in Exhibit A ; and to authorize staff to take any appropriate or necessary actions consistent with this Action Item. All were in favor. Motion carried. 11. Vice President Communications, Legislative and External Affairs Report Freddie Schinz stated, the one thing we ll do is be very brief. Christine will brief us on a new insert into the policies so that it makes it easier. Christine Ashburn stated, the Consumer Services Committee (CSC) met yesterday afternoon. We have a new project the committee is looking into; trying to leverage the print services to further our communications. There is a huge desire to remind folks on their FNL to call us first. This would be a good opportunity to roll this out through that. CSC got a preview of the new website design, which will launch later this year. Steve Bitar provided a Clearinghouse and Depopulation update. We recently engaged and sent postcards to our mobile home policy owners announcing that we will accept alternative forms of valuation beyond the 360-tool. Christine Ashburn continued, I have a brief legislative update. The 2015 legislative session began March 3 rd and will conclude in May 1 st. I provided you with key bills of interest to Citizens. We ve listed some of the key bills. There is legislation moving forward, that we are in favor of, in which they are moving the coastal construction line in CVRS boundaries that was deferred last year. There is legislative moving forward regarding changes to depopulation. One concerning area is that there is discussion to change the process we currently use for an opt-out process to an opt-in process. We are concerned about it and are working on it. 12. Consideration of Consent Items Barbara Walker presented the following agenda items: Independent Adjusting Services o Approve the recommended six (6) month extension of the Independent Adjusting Services contracts; o Authorize staff to take any appropriate or necessary actions consistent with the attached Consent Item; and o Approve this amendment not to exceed $45,000,000. General Adjuster & Executive General Adjuster Services o Approve the recommended six (6) month contract extension under the existing terms and conditions of the active Contract No: General Adjuster & Executive General Adjuster Services; o Authorize staff to take any appropriate or necessary actions consistent with this Consent Item; and o Approve this Consent Item not to exceed an estimated cost of $400,000 Kronos Annual Support and Professional Services Citizens Property Insurance Corporation Board of Governors 17