MINUTES OF THE BOARD OF GOVERNORS MEETING Friday, December 14, 2012

Transcription

1 CITIZENS PROPERTY INSURANCE CORPORATION MINUTES OF THE BOARD OF GOVERNORS MEETING Friday, The Board of Governors (Board) of Citizens Property Insurance Corporation (Citizens) convened at the Peabody Hotel in Orlando, FL on Friday, at 9:00 a.m. (EDT). The following members of the Board of Governors were present: Carlos Lacasa, Chairman of the Board Nancy Baily, Vice Chair of the Board Chris Gardner Carol Everhart Tom Lynch John Rollins John Wortman Don Glisson The following Citizens staff members were present: Barry Gilway Sharon Binnun Curt Overpeck Dan Sumner Yong Gilroy Fred Deeb Eric Ordway David Boyle Joe Martins Lance Malcolm Barbara Walker David Boyle Steve Bitar Karen Holt Charles D. Johnson The following people were present: Brian Nelson Bill Williams Scott Cabalka Jeff Elsen Lisa Derryberry Greg Rokeh Florida House Representative Federation of Manufactured Home Owners of Florida RBC Capital FIU Wells Fargo Bank Watson Realty Corp/Florida Realtors

2 Susan Thorpe Wells Fargo Bank Nan Brunson MacNeill Group Kevin Tremor MacNeill Group Dave Newell FAIA Kevin Stokes Guy Carpenter Joseph Serrano Bankers Insurance Kapil Bhatia Raymond James Rick Patterson Raymond James Chris Tracy Wells Fargo Mark McLaughlin Wells Fargo David Abrams Jefferies and Co Keith Thompson Bank of America John Generalli Wells Fargo Annalise Manny FIRM Heather Carruthers FIRM/Mayor of Monroe County Tonya Cruise BinTech/Bankers Junious Brown Nabors, Giblin and Nickerson George Smith Bank of America Lloyd Stofko Towers Watson Bob Betz. Towers Watson Brian O Neill Towers Watson Jeremy Ginter Wills Re C. Mantson USAA Barbara Buck Regions Vladamir Munoz Regions Cheryl Cole-Johnson Connolly Services Nathaniel Johnson JP Morgan Robin Wescott Consumer Advocate s Office Call Meeting to Order Barbara Walker took roll: Chairman Carlos Lacasa, Vice Chair Nancy Baily, Carol Everhart, Chris Gardner, Don Glisson, Tom Lynch, John Rollins, and John Wortman were present. Chairman Lacasa stated, we have here with us the Chairman of the House Insurance Committee, Representative Brian Nelson. 1. Approval of Prior Meetings Minutes Vice Chair Baily made the motion to approve the September 7, 2012, October 19, 2012, and November 27, 2012 Board of Governors Minutes. The motion was seconded. All were in favor. Motion approved. 2. President/CEO Report Citizens Property Insurance Corporation Board of Governors 2

3 a. Year in Review Barry Gilway stated, as I approach my first six months at Citizens, I ll take note on what has been the absolute fastest six months of my life. I d like to review some things that happened in the last six months. The first is in depopulation, in which we focused on reducing the likelihood of the amount of assessments, while ensuring that we are meeting all statutory requirements. This also includes the reduction of loss causes. The current Depopulation Program has been extremely successful. We removed 277,000 policies in Five months ago, we set a goal of removing 200,000 policies, but by the end of the year, we will have removed about 300,000 policies. This resulted in an exposure reduction of $75 billion. The 1-in- 100 year probable maximum loss (PML) in the personal lines account (PLA) was reduced by $1 billion as a result of this year s depopulation activity. The exposure of the PLA decreased by 20% and the exposure in the Coastal Account has been reduced by nearly 10%. In January, there is another 45,000 policies that have been tagged for removal. Barry Gilway continued, to achieve our depopulation goals, we assessed viable depopulation options. Considerable time has been given to analyze programs such as the Surplus Notes Program, reinsurance options, the funding of companies, and the proposition that we will hear today from FIRM regarding Monroe County. We are open to listen to all options that have the potential of providing Citizens policyholders with more options and reducing the potential of assessments. While we ve had success in 2012, our focus in 2013 on depopulation needs to be on back-to-basics. The current depopulation program is not working as effectively as envisioned. Even as depopulation activities are accelerating and are resulting in an increase of policies being taken out, we continue to write 8,000 new policies a week. The projected number this year is 361,000 new policies. 285,000 policies are in the PLA alone. We believe the primary reason for this increase is that when customers leave Citizens through the Depopulation Program, they face rate increases at renewal and they return to Citizens because of the more attractive price. Sharon Binnun indicated that we currently have a retention study on the way focusing on exactly what is happening with these policies. The results will be ready in late January or early February. Barry Gilway continued, we also believe policyholders enter Citizens because their exposure is not shopped appropriately to all interested parties due to shortfalls in the distribution system. Chris Gardner, Chairman of the Depopulation Committee, has directed that we address the shortfalls of the current program through a comprehensive review of the program and provide recommendations of changes. A second initiative provided to the Depopulation Committee recommends development at the front end at Citizens that would ensure that customers receive the benefit that their policy be shopped to all interested companies prior to placing their policy into Citizens. This process would also be required of renewal policies. It would ensure that Citizens applicants have the very best price and coverage in the marketplace. It would provide insurance agents expanded access in the market and provide insurance companies with increased market distribution. It s going to be a win-win. Governor Scott made it clear that compliance with legislative intent that applications are shopped in a meaningful way in the private market and meet statutory requirements prior to coming to Citizens is essential. This structure accomplishes this objective in a positive way for all involved. Citizens Property Insurance Corporation Board of Governors 3

4 Barry Gilway continued, the second aspect of reducing costs over time is claims costs; it s a second area that can reduce assessments and costs. While the average indemnity payment in the industry has increased from $11,800 to $13,000, Citizens indemnity has decreased from over $19,000 to slightly more than $15,000, primarily due to the excellent work done by Yong Gilroy and the Claims management team. Implementation of far stronger oversight and an increased quality control program is really paying off. In addition, programs introduced in late 2012, including the Coordinating Counsel Program, new litigation management strategy, and sinkhole initiatives will continue to bring indemnity costs down. Barry Gilway continued, I d like to focus a little on corporate oversight. Shifting our focus a little bit, I ordered a thorough review on corporate oversight control procedures. It is absolutely essential that our customers, all Floridians, and the legislature are confident that Citizens is a company that adheres to the highest levels of credibility and integrity. Although it is clear that this is an area where much work needs to be done, I do think it s important to take a moment to look at what we already have in place. As members of our Board of Governors, all of the members have extremely strong financial and insurance backgrounds. You are actively involved in policy directions, oversee spending and rate initiatives, and sit as Board observers when requested by Chairman Lacasa. In addition, Citizens has a robust Office of Internal Audit (OIA) that reports directly to the Board. This office will grow from 7 employees to 13 employees in This growth includes the hiring of forensic auditors to complement existing audit staff. This expansion of the OIA will enhance our ability to ensure that Citizens operates with the highest levels of financial and corporate integrity. The forensic auditors will be in place during the first quarter of The OIA completed its executive personal expense audit, which resulted in a satisfactory rating with only minor recommendations for improvement. Barry Gilway continued, Citizens is also subject to and participates in several external audits and oversight procedures. In 2012, an independent firm Johnson Lambert conducted an annual external audit. The Office of Insurance Regulation (OIR) and the Auditor General conducted their own audits. Citizens ranked fourth among the top eleven Florida residential and commercial property insurers in terms of the number of complaints received. It speaks to the service that we are providing, which is competitive. The OIR completed the Market Conduct Exam on Citizens, and the results are expected in February. Barry Gilway continued, now let s look at areas where we need to improve. As a new CEO I have the responsibility to take a close look at all areas, and where necessary enhance oversight. Thanks to a large extent on the focus by the media, we ve accelerated the review of Citizens travel and expense policy and implemented a strengthened conservative and rigorous policy. We welcome any recommendations made in the audit review coming out of the Governor s office. Specifically, this issue has dovetailed the press thorough covering of the concerning actions of certain former Citizens employees. The actions of these employees had an extraordinarily negative impact on Citizens reputation. Let me be clear. I take our reputation seriously and understand the impact of these serious allegations. I am committed to ensuring that such actions are not repeated or tolerated. I ve ordered a comprehensive review of Citizens disciplinary and severance policies and procedures. Citizens is cooperating with the Chief Inspector General s expanded investigation. I welcome any discussion on ideas where Citizens procedures can be strengthened so we can ensure that Citizens never finds itself in this Citizens Property Insurance Corporation Board of Governors 4

5 same situation. I am supportive of any recommendations relative to improved governance. I am supportive of Governor Scott s recommendation regarding the addition of an Office of Inspector General s capability at Citizens. The caution I have is that as a $3 billion insurance concern, I believe it would be critical to continue a strengthened OIA to audit insurance operations. We cannot lose a step relative to our internal audit operation. If they can be strengthened in some way by recommendations that add governance, then I would be supportive of that approach. Barry Gilway continued, when I assumed this responsibility, I recognized several areas that immediately required my attention. One area was the compensation, health and benefits study that is currently under review and headed by Vice Chair Baily. Vice Chair Baily and I worked in tandem to stay on track to evaluate and streamline the compensation and benefit program in time to introduce changes in Revisions of the program brought the program closer in line to that of the marketplace. I thank Vice Chair Baily for her assistance in that regard. I also needed to review the executive level of structure. Key positions within the executive team were realigned after making a decision to replace two senior executives. A comprehensive review of our Human Capital Management (HCM) organization was the first step. This review was completed by Accretive Solutions, a management consultant firm. They offer many significant recommendations on how we can improve our HCM capability. I will be presenting today the initiative to conduct a comprehensive study on organizational structure. The procurement request was approved. This will be a top to bottom review that will identify efficiencies aimed at increasing our effectiveness. Barry Gilway continued, I also had a critical need to identify a top level Human Resources executive with experience implementing significant changes. I focused on an individual who could lead an organization through change. I am pleased to present Charles D. Johnson for ratification by the Board as Vice President of HCM. Charles will report to me and he will be located in Jacksonville. His short-term objectives will be to focus on policies and procedures that will help Citizens address areas of weakness that have been exposed over the past few months as well as other policies and procedures that will create a well-balanced environment for employees. We are looking for consistent, uniform, and stronger discipline and severance policies. I look forward to working with Charles to achieve the directives by the Board. I will ask Charles to speak following the conclusion of my remarks. Barry Gilway continued, finally in 2013, I plan to implement a strategic communications campaign under the direction of Christine Ashburn. So far, in my six months, I ve completed over 200 one-on-one visits with legislators, industry representatives, insurance executives, and consumer and agency groups. Our work in this area has just begun and has to continue and become stronger. In 2013, we will ramp up our communication plan for all audiences. In addition to a stronger policyholder communication, we plan to conduct editorial board visits and work closely with the House and Senate Insurance and Banking Committees. We need to share ideas and concepts for a more effective Citizens, as we listen and react to advice from others who want to help us achieve our goals. I cannot change what occurred in the past. I can and will identify the key issues going forward. My primary focus will be to regain Citizens credibility and public trust while exploring new ideas in bringing Citizens closer to its role as Florida s insurer of last resort. Citizens Property Insurance Corporation Board of Governors 5

6 Chairman Lacasa commented, Barry, I really appreciate the amount of attention you re giving to our efforts to restore the credibility of this company in the eyes of the public. That is our paramount mission going into We have a lot of good things to talk about and to boast about with regard to our services and products and the way we manage this company. b. Vice President of Human Capital Management Barry Gilway stated, introducing Mr. Johnson, he is currently the Vice President of Human Resources for American Express in South Florida. He s responsible for providing end-toend employee responsibilities for the global service delivery, new accounts, billing and payment services, and Ft. Lauderdale service center. He leads the HR support for approximately 15,500 employees throughout North American and 15 other countries. Mr. Johnson provides strategic advice and leadership services for the executive teams he supports. The key issue for me in bringing in a top-notch candidate was for someone who had gone through many change management situations. Mr. Johnson brings this to the team. Charles Johnson stated, I d like to thank you for this opportunity to be able to serve in this new role as VP of HCM. I know that there are a lot of challenges ahead but I look forward to meeting them head on. Let me tell you a little bit about my background. I have more than 20 years of experience in the private sector where I supported companies like American Express, Office Depot, and AT&T Wireless. I started my career in the public sector where I spent six years in Allendale. In all of those roles, I ve been able to specialize in areas like employee relations, talent management, organization development, and change management. I am sure with the challenges of this role that I will have to draw on all of those skills at some point. A priority for me will be to look at our policies and procedures. I will look at creating an opportunity where we can have balance and a great work environment for all employees at Citizens. I know that there are two areas of interest to you, which is to look at our progressive discipline policy as well as our severance administration. Barry mentioned the Accretive Solutions report, and I look forward to taking a close look at it. I think they made some analyses and recommendations on how HCM can better support Citizens and how to move forward. Charles Johnson continued, I know that Mr. Gilway s goal is to take a look at the entire Citizens organizational structure and to make sure that we align the organization so it is more productive and where we can actually exceed the expectations of our customers and create a great work environment for all of the employees. I am excited about the opportunity and I look forward to working with Mr. Gilway, the Board, and all of the employees. Thank you. Chairman Lacasa asked, procedurally, do we require approval by the Board? Barry Gilway responded, yes. A motion was made to approve the ratification of Charles D. Johnson as the new Vice President of Human Capital Management. The motion was seconded. All were in favor. Motion carried. Citizens Property Insurance Corporation Board of Governors 6

7 c. Organizational Review - KPMG Barry Gilway stated, previously, I came to you to proceed with a procurement relative to an organizational review. The action item was approved on September 7 th by the Board. I am looking for a detailed assessment of the current organization and provide recommendations for more efficient operations. We opened this as a state contract procurement. The selected vendor of KMPG will provide significant experience in both insurance industry and organizational design. The big difference between KMPG and the other participating companies was the level of insurance capability and the background of the individuals assigned to the project. I m looking for recommendations on state agencies that can scale rapidly and recommendations for a framework for balanced staffing resources. We have a significant balance at Citizens between permanent staff, temporary staff, and vendor contracts. We need to look at all of those aspects. We need a high level evaluation on talent, vendor management strategy, multi-location strategy, etc. My recommendation is that the Board approve Citizens ability to contract with KPMG in an amount somewhere between $400,000 and $500,000, depending upon the final contract terms, and that you authorize my approval to take the proper steps to engage in negotiations with KPMG. Tom Lynch commented, it says that it is going to take up to a year. Will there be interim help along the way? Barry Gilway responded, there are certain areas that I would like to see prioritized in the process. One of the areas where we have an enormous spend... given the spend in CORE area, is in the IT area, this needs to be one of the key areas of focus. It is also an area where we have contingent employees because of the nature of the build. There will bepriorities set so we can take an advantage of the work that s being done. We don t intend to wait until the end of the organizational review. John Rollins inquired, the timeframe being what it is, can I get a little more insight...? We have a lot of reviews and oversight initiatives going on at Citizens and some of them overlap. Can you give me a sense of the need for an organizational review by KPMG and the areas you think will bring unique value and not duplicative of other initiatives that we have discussed in the past three months? Barry Gilway responded, when I step back as a new CEO and take a look at the organization, I think there are areas in the organization where I have a good comfort level. There are other areas in the organization.... and you can take a look at the budget and see where we are spending money. I would say there are areas where I have particular concerns. I think I mentioned one of them. We have an IT spend. We have 217 employees in IT. We have an equal number of contingent employees in IT. We have vendor contracts within the IT arena. That is one area where I think we need to take a hard look at the structure. We have significant changes in addition to that. We have significant changes in the Claims management arena. We will look at whether we should have an internal group. Lance Malcolm has done a great job doing organization changes relative to how we manage sinkhole operations. All of these are run somewhat independently and in a vacuum. Citizens Property Insurance Corporation Board of Governors 7

8 Barry Gilway continued, my desire is to step back and take a look at all of these. I have five or six areas where I m just not comfortable from a governance standpoint. I would like to dig a little deeper in looking at what is happening today and come up with a design for the optimal model. The difference in costs associated with outsourcing versus insourcing is huge. Coming up with an optimal relationship between contingent and internal employees will be critical. I think there may be opportunities to insource versus outsource. Chairman Lacasa added, as you know, Mr. Rollins, as I considered whether this action item should go on agenda, I thought of those very same issues you were talking about. I can t help thinking that the president s bandwidth has really been taxed this year in a very short period of time. We are sitting on an almost $140 million budget proposal. I can t help thinking that a little outside consulting on a non-reoccurring basis would be helpful. I had a good conversation with the president that I would like the company to look at involving our underwriting and claims units and I know that they ll be doing that. John Rollins responded, that s an excellent answer, Mr. Gilway. What I m hearing is that you want a comprehensive strategy that connects-the-dots of the many investigative activities that are going on at Citizens. A motion was made and seconded to approve President Gilway to continue with the organizational review project as previously approved on September 7, 2012 and consistent with the update outlined in the action item, and to authorize President Gilway to take appropriate or necessary actions consistent with the action item, including engaging KPMG as the selected professional consultant for this project. All were in favor. The motion carried. 3. CFO s Report a. Finance and Investment Committee Update Chairman Lacasa asked, we had only one action item from the Finance and Investment Committee (FIC), right the Investment Policy? Sharon Binnun responded, we had two action items, but we took off one with respect to the Investment Policy change and one that we passed with respect to Bloomberg. There is an action item regarding an Investment Policy change. We look at our Investment Policy every year and we make tweaks based upon opportunities we see out there that do not conflict with our priorities. We had some recommended tweaks and the FIC felt more comfortable deferring the decision. Chairman Lacasa added, the resolution of the FIC was to bring it back in the first quarter for reconsideration. Sharon Binnun continued, we have an action item for Financial Research Services, which will allow us to access Bloomberg terminals at our office. It s a service we currently have but the contract terminated. We had a competitive solicitation, and Bloomberg got the highest score. Citizens Property Insurance Corporation Board of Governors 8

9 A motion was made and seconded to award the resulting contract, including renewal periods, for RFP to Bloomberg Finance LP as set forth in this action item and authorize staff to take any appropriate or necessary action consistent with this action item. All were in favor. The motion carried. b Budget Sharon Binnun stated, I will ask Fred Deeb to come up here with me. He is our Assistant Director in Accounting, and he leads the budget effort with me and does an excellent job. You have the 2013 recommended operating budget. The Board did review an operating budget several weeks ago. When the documents were reviewed, it included the budget and the Management Discussion and Analysis (MD&A). We brought that document to the Budget Workshop so there was not a lot of opportunity for the Board to read and review them to ask questions. What you have before you is a revised budget with certain changes I want to highlight. I want to go through the big picture items. Sharon Binnun continued, here is what is different from the budget you saw about three weeks ago. We updated the policy in force (PIF) count. We made some changes to the 2012 administrative expenses. We took the October expenses and annualized those. We had some costs like the consultants on the Depopulation Project that were never on the books... so we made adjustments on the big things. When we made the updates, the current year projections went up and we instantly arrived at the 3% reduction that the Chairman asked for. But my belief is that the spirit of the recommendation... that this was not the way to get there. It was an honest and concise projection. I recognize the spirit was to further reduce costs. We adjusted budgets downward in IT and Insurance Operations. Claims did have to bring back an emergency procurement for satellites and generators. From our perspective, that is something new that was a little more discretionary. I pulled it out of the budget. It was budgeted for $800,000 in the Claims budget, and it was my error to pull it out. Sharon Binnun continued, we added, at Mr. Wortman s request, some rows showing new and renewal business. We think we ll have 284,000 new policies come into Citizens this year. We think the number of new business will go down next year. That projection is not based on the clearinghouse concept that Mr. Gilway will discuss. We don t know when that will start. This is based upon the various groups that study policy count. We are getting less new business. We ve added the contingency budget as if there was no hurricane, and if there was a hurricane. Loss Adjustment Expense (LAE) would go up along with other costs in managing things after a hurricane. We gave you a sense of what it would be like in different types of hurricane levels. You ll see a difference between a 1-in-10 year storm and a 1-in25 year storm. It takes almost a 1-in-10 year storm for the Florida Hurricane Catastrophe Fund (CAT Fund) to trigger. The net loss for a 1-in-10 year will be $2.3 billion and for a 1-in-25 year will be $2.9 billion. That is not because we do not have losses. That means we have more CAT Fund reimbursements. Our strategy for risk transfer has been to exhaust surplus, the CAT Fund, and then the reinsurance. The plan is to take the $500 million layer of reinsurance for the Coastal Account at the $7.3 billion layer and move it down to the CAT Fund. We would shift the purchase to a lower layer. It will cost more but after a small storm we will have some surplus remaining for the next year Citizens Property Insurance Corporation Board of Governors 9

10 or the next storm. The losses go up but you have significant reinsurance and CAT Fund reimbursements to help. Sharon Binnun continued, Mr. Gilway is moving more in the direction of accountability of spending. Mr. Lynch has focused on this in the past. When a business unit in the past has needed something to make an enhancement or improvement, the entire cost was borne by the IT budget. The budget has been responsibility based. Mr. Gilway directed us to go forward in taking the IT budget spends of a business unit, so that it comes out of the that business unit s budget. The IT budget goes down $5.6 million and those costs get allocated among the business units. It s a good governance and cost management methodology. Sharon Binnun continued, within each division, there are many business units. You can see a pie chart of various centers within a particular division. One of our larger divisions is Insurance Operations. You have many cost centers within that division. You will also see administrative expenses and the ratio of it as a percent of direct written premium. The next page is administrative expenses per full time employee (FTE). If you look at the data below, you ll see the complete 2013 budget that includes Core. You ll see the 2013 budget excluding Core. Without Core, the administrative expenses stay relatively flat. Tom Lynch added, thank you very much. It s a well done budget. When you come back to us in March and talk about the reinsurance purchase, what you did on pages 52 or 53, would you please do another column showing a second storm? That s the part that scares me the most. Sharon Binnun responded, absolutely. We will the Board the 2013 storm scenario pie charts when they are ready because we have not transferred risk, yet. Many small storms hitting us is almost worse because we only hit the CAT Fund with stronger storms. We will look at possible assessments. Tom Lynch continued, on page five, I appreciate that you broke out under Insurance, the Claims, Underwriting, etc., because last year you showed that 36% of our employees were under Insurance... I think you did a wonderful job with the budget and you cut out a lot of expense. I can t support it with all due respect to you or Barry. If 56% of your employees are doing insurance work...i cannot support a budget that doesn t show at least 70% of your employees doing insurance work. Sorry. Chairman Lacasa stated, the bulk of the rest of the employees are in IT, obviously. That is the next largest item. After the Core project is completed by the end of next year, will that percentage change? Sharon Binnun responded, I will ask Curt Overpeck to correct me if I m wrong. I do not believe it will change immediately. In IT, you see actual Citizens employees. There are several hundred other people that work for our IT group. If you look at the IT budget, nearly 100% of the outsourcing is for various IT personnel to perform work for Citizens to keep it going and to make changes. Once we get off the old system and get onto Core, we have got to fulfill the Citizens Property Insurance Corporation Board of Governors 10

11 commitments we made to reducing headcount because that is the biggest chunk of the savings with Core. Barry Gilway added, one of the difficult things to get a handle on in the budget is the fact that... is the number of temporary employees or staff augmentation that are operating within Insurance Operations, Claims, and IT. When you take a look at the total number of temporary employees and incorporate the vendor contracts and with the actual employee count, I think you will see that it will more than meet the direction that you believe should exist under the budget. I don t think we show the true allocation of total costs with Insurance Operations versus staff. The staff percentage would be in the 25% to 30% relative to staff. Tom Lynch responded, I can only vote on what I see. Sharon Binnun commented, when you look at the FTEs in Insurance Operations, we have to take into consideration that close to 100% of PLA Underwriting is outsourced. The Underwriting group is getting a lot of work done but they are not included in the employee count. They are in the vendor fees. 100% of the CAT claims and two-thirds of daily claims are outsourced. Those are in LAE. We can show a better perspective of employee counts. If we were to bring it all in-house, I would believe Insurance Operations would be around 80% or more of the budget. Chairman Lacasa added, if you allocate the activities of the IT unit to Insurance Operations, then you get a different result. It is a way to put that into perspective. Curt Overpeck stated, with respect to the allocation of IT and IT as an administrative expense, 60% of the IT budget is dedicated to Insurance Operations. I want to assure the Board that we are on schedule for the cost benefit analysis presented with Core to achieve the savings that have been projected. At the end of 2014, the current Core cost centers go away. Those costs come back into IT. Our goal is to hold our IT budgets flat or as close to steady as we can. John Rollins added, I was going to use a fishing analogy. If Citizens were a shrimp boat, you d have departments dedicated to finding where the boat should go, departments mending nets, etc. The problem with IT budgeting is that it is essential for mending the nets. The operation doesn t work if you don t mend nets once in a while. The policyholders benefit from the capabilities that depend on IT. We are already starting to see opportunities to depopulate Citizens that, to some degree, are on a timeline that turns on our ability to implement the need in a green screen system. I will make a process comment as well. The Information Systems Advisory Committee (ISAC) spent a tremendous amount of time going over the details of the IT budget and the Core budget. Within this document, the Core portion of the budget has received scrutiny by the ISAC. While it s true that we rely on our technical advisors to vet the specific spends, there is plenty of oversight on the mending of nets. Chris Gardner commented, I feel fortunate to have three seasoned CEOs from the insurance industry in Mr. Gilway, Vice Chair Baily, and Mr. Wortman. My question to the group is that when you look at the PNL, do you see a temperature running in administrative expense? I am comfortable with the budget. Citizens Property Insurance Corporation Board of Governors 11

12 John Wortman commented, I d like to see estimated reinsurance costs if we purchased reinsurance like a normal, regulated company. We under-purchase reinsurance and we don t include that in our budget, which makes our results look better. I think we ought to keep that in mind all the time. The administrative expenses are being managed pretty efficiently. I think that what Barry wants to do with KPMG will help this process. Vice Chair Baily added, I m generally comfortable with it as well. I struggle a little with the amount of outsourcing that we have. It looks very expensive. The ratios are a little different from what I m used to seeing because of the level of outsourcing. The level of allocation back to the units on everything.... once we push everything back to the business units, our administrative expenses will look better. I know Barry is headed in that direction. John Wortman added, I understand the debt difference between the various plans but I think we ought to keep on the table, consolidating the plans. Instead of keeping three different books, we should keep one. You can reduce the expenses by combining the plans. The other issue that gives me concern is that LAE looks high. If I were the CEO, I would keep LAE on the radar. Sharon Binnun responded, LAE is something I did cover with the Audit Committee yesterday. Those are very good points. I think the KPMG study will be helpful because it will look at the right balance between outsourcing and insourcing. It is less expensive for our organization to doing everything in-house, but we also need to have flexibility to grow or shrink. Barry Gilway stated, Vice Chair Baily, I share your comments. I don t have major concerns to the overall direction in terms of administrative costs. It s been pushed very hard. One of the difficulties I have is that I never operated under a responsibility based budget. I always operated under an allocation system. We have to get to a fully allocated budget to any given area which forces decisions to be made in the most prudent manner. In my opinion, it will take two years to get there. It is a huge initiative. IT was a massive issue but over the next two years we will get to a fully allocated method. I also share Mr. Wortman s issue on the allocated LAE. It s a heavy area of focus for us. Don Glisson stated, one thing I ve always found helpful when serving on corporate boards is pure analysis. We can identify three to five peers in the insurance industry and benchmark ourselves against those companies. It gets difficult to look at this when we don t have anything to benchmark it against. Barry Gilway responded, that was included in our first initiative with the review with Accretive Solutions. I agree with you completely. A pure analysis was done with the Perr & Knight report, but the conclusion was that we came out as a less expensive organization; however, the conclusion was that if you don t buy reinsurance then you will be less expensive. The KPMG study will include a pure analysis by division and incorporate that analysis across the board and by area. Citizens Property Insurance Corporation Board of Governors 12

13 Don Glisson added, they can give you a template and you can use that going forward. I think it s something we should see annually. Chairman Lacasa stated, Sharon and Barry, I want to thank you for finding better than three points. It s not that 3% is a huge number but it is a trend in a different direction, looking for savings anywhere we can find them. It s about the mentality. A motion was made and seconded to approve the proposed 2013 budget. Chairman Lacasa, Vice Chair Baily, Carol Everhart, Chris Gardner, Don Glisson, John Rollins, and John Wortman voted for approval of the budget. Tom Lynch voted against the motion. Motion carried. [There was a break in the Meeting] c. Depopulation Committee Update Chris Gardner stated, thanks to those who attended yesterday s meeting. Barry, would you like to speak now or would you like for me to run through the agenda? Barry Gilway stated, before we discuss the details of Depopulation and the results of the meeting, I asked for a few minutes on the agenda to describe a concept and attempt to get an approval by the Board. We re calling it the Clearinghouse. Last year we wrote 361,000 new policies. Of those 361,000 policies, close to 52% of them did not get shopped effectively in the private marketplace before entering Citizens. These are the same policies that we are incentivizing to get taken out under the Depopulation program. Barry Gilway continued, there are two questions every applicant should be asked before entering into Citizens. What was done to find a private insurer to find a policy? Do I have a choice other than Citizens? FMAP, at this point, has been reactive, inviting assistance when asked. With advances in technology, an enhanced relationship among the key stakeholders, agents, private insurers, and Citizens... we can do so much more. I am not suggesting FMAP as the vehicle. I am suggesting that FMAP provides part of the solution. Today, looking at the current FMAP law, every insurance agent must participate in FMAP. These are very powerful tools that exist right now -agents who are part of an association for another group. I am not discounting the potential of that association adding real synergy to this program and I look forward to working with those folks. I refer to the structure as a clearinghouse, which brings to mind a discrete entity within either Citizens or FMAP that all Citizens applications and renewals pass through for the sole purpose of private insurers evaluating the policy and making an offer of coverage if they are interested in writing the risk. This portal for shopping applications will not substitute for the existing agent-client relationship. It will facilitate that relationship giving agents greater access to markets. If a private market insurer is willing to provide insurance to an applicant coming through the clearinghouse, then this is something the consumer needs to know. This is something Citizens needs to know to consider eligibility. The potential for a centralized, efficient process to bring property owners and insurers together in one place is absolutely enormous. It can have a huge impact. The Governor made it clear that compliance with the legislative intent that applications are shopped in a meaningful way in the private Citizens Property Insurance Corporation Board of Governors 13

14 market is essential. We are ready to make that happen with the proposal that we are making today. Barry Gilway continued, there are, of course, applicants who are not going to qualify in the private market and those are the ones that should be coming into Citizens. I d like to draw your attention to the presentation in the book. The goal is to ensure that every Citizens applicant has access to every single insurance option before choosing Citizens. That is not happening today. We want to ensure that all renewal customers have expanded access to every possible insurance option before being renewed at Citizens. This provides insurance agents expanded market access. It provides carriers expanded market distribution. It ensures that only policies that are statutorily eligible for coverage at Citizens are being written. Barry Gilway continued, the concept utilizes technology that did not exist two years ago. There are three parties that we had discussions with regarding technology that exists today. Using technology, Citizens could provide a real time solution for risk submission that validates whether the capacity is available in the private market. The system would check the risk against a set of underwriting and exposure criteria provided by participating carriers. You have 50 carriers participating. They file a map of the type of coverage they would like to sell in the marketplace and every applicant is validated against that map. Simultaneously, a system would prepare a Citizens rate indication for competitive purposes. All rates will be sent to the agent in a comparative form that includes coverage pricing. One of the major issues is coverage and making sure the insured really understands the coverage they are receiving and the consumer understands the assessment load they are assuming relative to the private marketplace. This solves this issue. If there is private market capacity available and if the rate is less than 115% of the Citizens rate, the agent may place the business with one of the carriers. Their access to Citizens epass is declined. If there is capacity but the premiums are greater than 115% of Citizens rates, it doesn t stop there. A quote will be offered there along with Citizens quote. The policyholder looking at all conditions may elect to place the business with the private market or with Citizens. Barry Gilway continued, this would be an opportunity for new and renewal customers. I put a couple of brief graphs in front of you to show fundamentally how this might work. If a captive agent or a large independent agent submitted a risk, then that brokerage facility would have relationships with private market companies and would be able to shop for those risk coverage. There is a lot of work to be done to assess the viability. Carol Everhart stated, in looking at this, I m impressed that we can put this together. What scares me are the details. Will the agents put down the correct information? There are so many aspects that go through this. I hope we do a study with agents and with other carriers at the same time so that we make sure going forward if we do proceed that the details are worked out well in advance. There is a lot of buy in on this. I like the idea. I hope we can get it to work. The concept on this is that if they are eligible for a carrier, then are they locked out of epas and they are locked out of Citizens. Barry Gilway responded, correct. One point of clarification, it s if they are eligible for a carrier and the premium quote meets statutory requirements. Citizens Property Insurance Corporation Board of Governors 14

15 Carol Everhart continued, right now as an agent I see comparative coverages. What I might see as comparable, someone else might not. Barry Gilway responded, this is an issue that has to be resolved for depopulation, whether there is a clearinghouse or not. One of the fundamental problems with depopulation today is that there is no ability for a price and coverage comparison at the point of sale. The same technology and techniques to solve that issue can form the basis for a clearinghouse basis and a solution to the depopulation program. Vice Chair Baily commented, I did not think of applying it to renewal businesses until yesterday. When a policy is in Citizens, the agent does not own the renewal rights to that policy. For it to work, we have to find a way for agents to maintain a level of renewal rights that they desire. Barry Gilway responded, we would agree with that. Tom Lynch commented, if this concept was around in 1993 for the JUA, I don t think we would be here today. I think it s a great idea. I just want to be sure that Citizens will never be the clearinghouse or the broker. Barry Gilway responded, in order for this to work, Citizens would have to be the broker. Tom Lynch responded, I have trouble with that. Our goal is to shrink Citizens, and you would be expanding Citizens to accomplish the program. We want to get out of the retail aspect of the business. 361,000 policies are expected for I think you told me that about 52% are coming from direct writers. I do think that on the renewal issue it does become more complicated. I do think that for new business, you can do something similar with what you do with MacNeill today. Otherwise, you re back to FMAP that has never worked under Citizens control. Barry Gilway responded, the concept here is that Citizens provides a brokerage facility. The serving relationship would be between the agent and the writing company. This is a placement and shopping facility to align an interested company and a Citizens applicant together. Tom Lynch continued, so let s say the application is completed by an agent, then it would go to a clearinghouse. The clearinghouse would be Citizens? Barry Gilway responded, right. Tom Lynch continued, we don t even do that in the underwriting business. We have MacNeill. Why do we want to do another business? Barry Gilway responded, this does not entail the reengineering of processes. We are interested in a shopping or clearinghouse facility that is put in place. It does not change the Citizens Property Insurance Corporation Board of Governors 15

16 underlying processes in place today. It allows Citizens to have a relationship with a multiple number of carriers and allows them to shop that business with multiple carriers. We are nowhere close to looking at the operational end of this. There are agents associations that echo your recommendations. I hesitate to use the word MGA, but that is conceptually what it will be. Tom Lynch stated, for the record, I m 100% behind it. I think the idea is a great concept. You won t have depopulation. I m just opposed to Citizens being the clearinghouse. John Wortman stated, I support this concept. It makes a lot of sense. My experience, however, is that the agents control the placement of the business and not the companies. I would encourage you to work with the agents. You need their approval prior to takeout or you won t keep out. Agent approval needs to happen before you allow takeout. Chris Gardner stated, I don t even think this is even close to being quarter-baked let alone half-baked. We re looking to begin this process and there will be lots of dialogue. There is some posturing already. There will be spirited conversations. John Wortman made the motion to support moving forward with the Citizens Policy Shopping Clearinghouse concept and developing a detailed project plan for future consideration by the Board. Chris Gardner seconded the motion. John Rollins commented, I do competitive rating analyses for a living. That s only one component of the technological knowhow in a clearinghouse. One thing I find is that clients are always stunned by the variation in premium for similar risks. The implication is that there is tremendous benefit to consumers to create a win-win situation where the consumer can pick the lowest price. I believe there is a lot of unplowed ground in getting consumers to understand the wide variation in prices for similar coverage. A comment about getting consensus I read a news story about policyholders and Shawn Shaw making positive comments about this idea. When you have someone, like myself, agreeing with policyholders of Florida, I think we have a start. The devil is in the details. With all due respect to the agents on the Board and elsewhere, the conversation that I hear from agents is controlling the business. I understand what that means but consumers need to be in control when we implement this program. We need to keep in mind who the ultimate customer is and that is the consumer. A vote was taken on the motion. All were in favor of the motion. Motion carried. Sharon Binnun stated, we included some key slides for informational purposes. It s the end of an interesting year and we got so much done at Citizens. The first slides cover a lot of things on the Board level that were done a year ago. If you don t focus on an issue, then you don t solve the issue. There was a lot of focus by the Chairman, Chris Gardner, and the entire Board to focus on depopulation. Barry included a letter to policyholders who were receiving offers of coverage to give them some information to help them shop and understand the opportunity. He provided information that could be found on the Consumer Advocate s Office and the OIR. People don t really understand assessments. If a policyholder can get a policy from us for $1,000, that policyholder could be subject to a maximum of 45% surcharge. That Citizens Property Insurance Corporation Board of Governors 16

17 policy becomes $1,450. That policyholder may also not get as much coverage. Barry s letter reminded people of the 45% assessment. We had a total of 277,000 policies come out of Citizens. 25,000 of the policies were out of the Coastal Account. $76 billion has been taken off the books. $1 billion have been taken off the PML. We still need to see if these policies will be kept out. Sharon Binnun continued, a lot of work was done internally by Citizens and the Depopulation team. Steve Bitar led the team. Our IT group worked on two different systems. There were a lot of unknowns in making this work seamlessly. It was a risk addressed and identified. We knew a year ago that there was a company interested in doing a wind-only Commercial depopulation. That is a different system. We needed to make adjustment to that system so we did not lose that opportunity. I m pleased to report the results. In the president s section, I think we included historical counts over time. If you compare the end of 2011 to the third quarter of this year, the exposure has gone down by 20%. The Coastal Account has come down 10%. Did this Board move the needle? I believe so. Chairman Lacasa stated, the chart on page three tells the story. I want the Board to recognize that you stepped into this project midway this year and you did it with a capital program and all the other things that taxed your bandwidth. Hats off to you and your team for working so well. Hats off to Chris Gardner for chairing the committee. Chris Gardner commented, sometimes I read the paper, and I m not sure if I attended the meeting that was held yesterday. I m curious to know if we resolved anything on Surplus Notes. Did we back away from it? Are we still in the information gathering mode? Barry Gilway responded, the position we took at the Depopulation Committee meeting is that we have not completed analyses. It is still a work in progress. The recommendation is that given that we will not have the full output until January or February, we will not be able to draw a reasonable conclusion regarding Surplus Notes. More significantly, when the Surplus Note Proposal was developed by Ms. Binnun and her team, we established a program that had significant benefits in terms of PML reduction for Citizens. But, it had some rigorous financial requirements for those carriers who would assume that business. At the end of the day, the companies that initially had interest... based upon the financial requirements that we believed were essential in order to deploy the level of loan activity suggested by that program... we believe if those requirements remain in place, we ll have no takers. Given that information and the uncertainty of the input of the analyses, we don t think we re ready for a vote. We will move it to Chairman Lacasa stated, the bottom line is that the Surplus Note Program is a meritorious attempt at leveraging the company s capital to assist in depopulation activities, but it is not ready for prime time. Chris Gardner asked, are we going to vote at this committee or will it be in the procurement section? Chairman Lacasa responded, we will vote now. Citizens Property Insurance Corporation Board of Governors 17