Florida Hurricane Catastrophe Fund

1 Florida Hurricane Catastrophe Fund Advisory Council Meeting October 9, 2003

2 Introductory Comments Administrative Matters: -- Meeting scheduled from 9:00 a.m. until 4:00 p.m., 15 minute break at 10:30 a.m., 2:30 p.m. One hour lunch break from noon until 1:00 p.m. (see Patti for your lunch order). -- Introductions & overview of today s agenda Jack Nicholson -- The meeting is being audio-taped

Agenda 3 1. Call meeting to order -- Larry Johnson, Chair 2. Roll Call -- Larry Johnson, Chair 3. Approval of May 20, 2003 Minutes -- Larry Johnson, Chair 4. Presentation of the 2003 October Bonding Estimates -- Howard Braun, Raymond James & Associates, Inc. 5. Vote to Approve the 2003 October Bonding Estimates -- Larry Johnson, Chair 6. Department of Community Affairs Report on the Residential Construction Mitigation Program (RCMP) and Budget Items -- Charles McCool, DCA

4 Agenda (continued) 7. Senior FHCF Officer and Staff Reports -- Jack Nicholson 8. FHCF Investment Results -- Richard Smith, SBA Fixed Income 9. Discussion of FHCF Legislation -- Jack Nicholson 10. Schedule & Agenda for Upcoming Meetings -- Anne Bert 11. Concluding Remarks -- Larry Johnson, Chair

4. Presentation of the 2003 October Bonding Capacity Estimates 5 -- --Howard H d Braun, Raymond o James & Associates, A Inc.

5. Vote to Approve the 2003 October Bonding Estimates 6 -- --Larry ry Johnson,, ChairC

FHCF Staff Report -- --Tracy Allen 7 Suggested changes to the FHCF Advisory Council Member Handbook: Discussion Vote to Approve the Changes

6. Department of Community Affairs Report on the Residential Construction Mitigation Program (RCMP) -- Charles McCool,, DCA (RCMP) -- Charles McCool, DCA 8

7. Senior FHCF Officer & Staff Reports -- --Jack Nicholson A. Report on FHCF Staff Activities: 1) May 21-23, 2003, 3 rd Annual Participating Insurer Workshop 2) June 2-3, 2003, World Bank, Washington, D.C., Financing the Risks of Natural Disasters: A New Perspective on Country Risk Management, Jack Nicholson participated in a panel discussion 3) June 12, 2003, Meeting with Legislative staff of the Governor s office to discuss FHCF legislative possibilities for a special session 4) June 12, 2003, Briefed Attorney General Crist re FHCF 5) June 13, 2003, IRS Private Letter Ruling received and good until June 30, 2008 (original 3/27/98, expired 6/30/03) 6) June 23, 2003, Staff attended Citizens Quota Share Primary Committee meeting in Tampa 7) July 24, 2003, Attended the DCA Hurricane Season Briefing 9

Senior FHCF Officer s Report (continued) -- --Jack Nicholson 10 Report on FHCF Staff Activities (continued): 8) August 11, 2003, FHCF Briefing to Taiwanese Delegation 9) August 13, 2003, Meeting with DFS/OIR representatives to discuss FHCF enforcement process and the Insurer Responsibility Rule 10) August 18-19, 2003, Planning Summit with Paragon 11) September 2, 2003, Attended the DCA Residential Construction Mitigation Program (RCMP) Advisory Council meeting 12) September 4, 2003, Auditor Training Conference (2003 audit year) 13) September 8, 2003, E&Y Audit of FHCF Financial Statements begins, results will be published in the FHCF s 2003 Annual Report (early February) 14) September 9, 2003, Meeting with Great American representatives regarding a request for Waiver/Variance from data reporting rule

Senior FHCF Officer s Report (continued) -- --Jack Nicholson Report on FHCF Staff Activities (continued): 11 15) September 10, 2003, Presentation to DFS Division of Consumer Services regarding how the FHCF operates 16) September 15, 2003, FHCF Briefing to Japanese Delegation 17) September 18, 2003, Meeting with Citizens management regarding excess loss recoveries 18) September 30, 2003, Anne Bert attended the Citizens Board meeting in Orlando 19) October 6, 2003, FHCF Audit Program began for Calendar Year 2003 exposure audits B. Upcoming Events: 1) October 22, 2003, Meeting with A.M. Best regarding a financial strength rating 2) October 29-30, 2003, SBA Strategic Planning Retreat 3) November 24, 2003, Southern Risk and Insurance Meeting, Jack Nicholson -- Plenary Session Presentation, Clearwater, FL

Senior FHCF Officer s Report (continued) -- --Jack Nicholson 12 C. Other Items to Report: 1) June 22, 2003, NAIC resolved the SSAP #35 issue regarding the reporting of loss reserves (NAIC working group reached agreement last March and final approval was given at the June meeting) 2) FHCF Investment Guidelines (Status Update) 3) Loss Reimbursement Readiness Program 18 (19) insurers participating thus far representing 40.99% (57.16%) of the FHCF s Premium/Potential Liabilities 4) Preliminary Insurer Compliance Report (as of 9/30/03), all issues related to compliance are being reviewed and/or in the process of being resolved no major issues to report a) Total FHCF Participating Insurers -- 252 b) Quarterly Meeting with the DFS/OIR 5) Closed Hurricane Opal & Erin claims (from 1995)

Senior FHCF Officer s Report (continued) D. Hurricane Season: -- --Jack Nicholson 13 1) 52 days remaining until November 30, 2003 2) Normal: 9 tropical storms, 6 hurricanes, 2 intense hurricanes (Cat 3 or greater) 3) Expected (NOAA): 11-15 tropical storms, 6-9 hurricanes, & 2-4 intense 4) Thus far, 12 tropical storms, 6 hurricanes, & 3 intense hurricanes E. On-Going Work: 1) Upgrading of the FHCF s Credit ratings (delayed by legislation) 2) A.M. Best Financial Strength Rating (cost considerations) 3) FHCF Legislation 4) Citizens Property Insurance Corporation: -Take-outs - Management Structure - Quota Share Primary Insurance - Excess Loss Recoveries

FHCF Staff Report (continued) -- --Donna Sirmons 14 F. Florida Commission on Hurricane Loss Projection Methodology: 1) Reviewed four (4) models and found them to be acceptable: AIR, EQECAT, RMS, and ARA 2) Professional Team & Staff met to propose revisions to the 2002 Report of Activities 3) Adopted New Standards and Revised the Acceptability Process 4) Published the 2003 Report of Activities G. Status of Public Hurricane Model

FHCF Staff Report (continued) -- --Jack Nicholson 15 H. FHCF Premium Formula Considerations: 1) Special Rating Study for Citizens 2) Limit of Coverage with and without changes in the law 3) Investment Income Considerations 4) Risk Load 5) Legislation Limit, Retention, Inclusion of Surplus Lines

FHCF Planning Calendar Jun Jul Aug Sept Oct Nov Audit Notices Hurricane Season PY Audits Ending CY Audits Begin Planning Dec Jan Feb Mar Apr May Budget Due Investment Policy Review Rule Development Jun Risk Management Implementation Legislative Session

17 8. FHCF Investment Results -- --Richard i Smith, m SBA S A Fixed d Income

FHCF Investment Update Historical Yield Curve 4 th Quarter, 2002 1 st Quarter, 2003 2 nd Quarter, 2003 3 rd Quarter, 2003 Investment Statistics Forecast Richard Smith, Portfolio Manager

U.S. Treasury Historical Yield Curves As of Quarter End 5.00% 4.50% 4.00% 3.94% 4.88% 4.67% 3.50% 3.00% 2.83% 3.59% 2.50% 2.00% 1.50% 1.00% 0.50% 1.58% 1.55% 0.79% 0.94% 1.50% 1.00% 1.68% 1.46% 1.96% 1.86% 2.56% 0.00% 1-mth. 3-mth. 6-mth. 2-yr. 3-yr. 5-yr. 10-yr. 30-yr. 09/30/2002 09/30/2003

4 th Quarter, 2002

Market Recap 4 th Quarter, 2002 The Fed Funds target rate was lowered 50 basis points to 1.25% on November 6 th. Total unemployment rose each month from 5.80% - 5.90% - 6.00%. Total consumer credit outstanding continued to reach new highs as the quarter was at $1.728, $1.725 and $1.726 billion (in billions of seasonally adjusted $$ s). The big three auto companies sold an average of 813k vehicles per month an average decrease of 95k vehicles from the prior quarter. The real estate market has remained strong as new housing starts of 1.815 million units in December capped the second highest month in five years (private residential real estate activity / seasonally adjusted annual rate). Existing home sales averaged 5.74 million units - the best quarter of any year since the federal government began keeping statistics in 1968 (accounts for 85% of all houses sold). U.S. manufacturing was mixed for the quarter with December matching June s rate of 55.2. Consumer confidence plummeted to 81.7 for the quarter the lowest level since Q4-93. Initial jobless claims averaged 403,770 for the quarter.

Investment Rates & Returns 4th Quarter, 2002 4.00% 3.75% 3.50% 3.25% 3.00% 2.75% 2.50% 2.25% 2.00% 1.75% 1.50% 1.25% 1.00% 0.75% 0.50% 0.25% 0.00% 2.11% 2.11% 1.46% 1.45% 2.04% 2.01% 9/30 10/14 10/28 11/11 11/25 12/9 12/23 09/30/02 Fed Funds Target 1.7 5 % Weakness Bias 11/ 0 6 / 0 2 Fed Funds Target 1.2 5 % Balanced Bias 1.23% Fed Funds 30-Day CP 3m Libor 2 Yr Note 5 Yr Note CATFUN Benchmark 1.12%

INVESTMENT SUMMARY DECEMBER 2002 Security Type Par Invested % of Total Avg. Days to Maturity Avg. Days to Reset Callable Agencies $239,120,000 4.90% 1,392 1,392 CD - Interest Bearing $35,000,000 0.72% 2 2 Commercial Paper $2,881,035,000 59.04% 37 37 Corporates (Fixed Rate) $281,301,000 5.76% 359 359 Corporates (Variable Rate) $1,043,040,000 21.38% 36 36 U.S. Agency Discount Notes $50,000,000 1.02% 8 8 U.S. Treasury Notes $350,000,000 7.17% 602 36 TOTAL $4,879,496,000 100.00% 244 142

1 st Quarter, 2003

Market Recap 1 st Quarter, 2003 The FOMC met in January and March and kept the target at 1.25%. Total unemployment decreased slightly to 5.80% by the end of the quarter. Total consumer credit outstanding rose each month reaching an all-time high of $1.747 billion in March (in billions of seasonally adjusted $$ s). The big three auto companies sold an average of 754k vehicles per month an average decrease of 28k vehicles from the prior quarter. New housing starts averaged 1.736 million units for the quarter with January reaching an all-time high of 1.828 million units. (private residential real estate activity / seasonally adjusted annual rate). Existing home sales averaged 5.86 million units - the best quarter since the federal government began keeping statistics in 1968 (accounts for 85% of all houses sold). U.S. manufacturing decreased each month ending the quarter at 46.2 the lowest level since November-01. Consumer confidence took a drastic turn for the worse averaging 68.3 for the quarter the lowest level since Q3-93. Initial jobless claims ended the quarter at 443,000 the highest level since April 12th.

Investment Rates & Returns 1st Quarter, 2003 4.00% 3.75% 3.50% 3.25% 3.00% 2.75% 2.50% 2.25% 2.00% 2.01% 1.93% 1.90% 1.85% 1.75% 1.50% 1.25% 1.00% 0.75% 1.12% 1.04% 0.99% 0.96% 0.50% 0.25% 0.00% 12/31 1/14 1/28 2/11 2/25 3/11 3/25 12 / 3 1/ 0 2 Fed Funds Target 1.25% Balanced Bias Fed Funds 30-Day CP 3m Libor 2 Yr Note 5 Yr Note CATFUN Benchmark

INVESTMENT SUMMARY MARCH 2003 Security Type Par Invested % of Total Avg. Days to Maturity Avg. Days to Reset Callable Agencies $542,870,000 11.08% 981 981 Commercial Paper $2,233,205,000 45.59% 14 14 Corporates (Fixed Rate) $271,301,000 5.54% 281 281 Corporates (Variable Rate) $1,168,040,000 23.85% 642 68 Repurchase Agreements $157,985,000 3.23% 1 1 U.S. Treasury Notes $525,000,000 10.72% 565 565 TOTAL $4,898,401,000 100.00% 344 208

2 nd Quarter, 2003

Market Recap 2 nd Quarter, 2003 The FOMC lowered the target rate to 1.00% in June. Total unemployment ended the quarter at 6.40% - the highest level since April 1994. Total consumer credit outstanding continues to rise increasing an average of 21.6 million this quarter (in billions of seasonally adjusted $$ s). The big three auto companies sold an average of 906k vehicles per month an average increase of 152k vehicles from the prior quarter. New housing starts were 1.844 million units in June the highest month ever (private residential real estate activity / seasonally adjusted annual rate). Existing home sales averaged 5.83 million units which almost reached the 1 st Quarter 2003 s all time high (accounts for 85% of all houses sold). U.S. manufacturing remained below 50 in each month. Consumer confidence was 81.0, 83.6, and 83.5 a higher level but still considerably lower than a year ago. Initial jobless claims were over 400k all thirteen reporting weeks this quarter.

Investment Rates & Returns 2nd Quarter, 2003 4.00% 3.75% 3.50% 3.25% 3.00% 2.75% 2.50% 2.25% 2.00% 1.75% 1.50% 1.25% 1.00% 0.75% 0.50% 0.25% 0.00% 1.85% 0.96% 1.81% 0.92% 1.75% 1.79% 0.91% 0.86% 06/25/03 Fed Funds Target 1.0 0 % Balanced Bias w/risk of Deflation 3/31 4/14 4/28 5/12 5/26 6/9 6/23 03/31/03 Fed Funds Target 1.2 5 % No Bias Fed Funds 30-Day CP 3m Libor 2 Yr Note 5 Yr Note CATFUN Benchmark

INVESTMENT SUMMARY JUNE 2003 Security Type Par Invested % of Total Avg. Days to Maturity Avg. Days to Reset Callable Agencies $907,730,000 18.46% 841 841 Commercial Paper $1,619,607,000 32.94% 13 13 Corporates (Fixed Rate) $246,324,000 5.01% 216 216 Corporates (Variable Rate) $1,318,040,000 26.81% 576 62 U.S. Treasury Notes $825,000,000 16.78% 562 562 TOTAL $4,916,701,000 100.00% 419 280

3 rd Quarter, 2003

Market Recap 3 rd Quarter, 2003 The Fed target remained at 1.00%, however, the FOMC changed their economic assessment to balanced with risk of disinflation. Total unemployment was slightly lower for the quarter averaging 6.13% as compared to last quarter s 6.17%. The big three auto companies sold an average of 876k vehicles per month an average decrease of 30k vehicles from the prior quarter. New housing starts were 1.892 million units in July surpassing June s all-time high. (private residential real estate activity / seasonally adjusted annual rate). Existing home sales reached an all-time high of 6.47 million units in August. (accounts for 85% of all houses sold). U.S. manufacturing has begun to accelerate averaging 53.4 its highest level since Q2-02 and the second best quarter since Q1-00. Consumer confidence continues to wane dropping below 80 for July & September. Initial jobless claims were mixed as six of the thirteen weeks in the quarter were over 400k.

Investment Rates & Returns 3rd Quarter, 2003 4.00% 3.75% 3.50% 3.25% 3.00% 2.75% 2.50% 2.25% 2.00% 1.75% 1.79% 1.75% 1.64% 1.50% 1.25% 1.00% 0.75% 0.86% 0.50% 0.73% 0.71% 0.25% 0.00% 6/30 7/14 7/28 8/11 8/25 9/8 9/22 1.55% 0.71% 06/30/03 Fed Funds Target 1.00% Balanced Bias w/risk of Deflation Fed Funds 30-Day CP 3m Libor 2 Yr Note 5 Yr Note CATFUN Benchmark

INVESTMENT SUMMARY SEPTEMBER 2003 Security Type Par Invested % of Total Avg. Days to Maturity Avg. Days to Reset Callable Agencies $1,069,325,000 21.05% 802 802 Commercial Paper $2,416,235,000 47.57% 6 6 Corporates (Fixed Rate) $185,301,000 3.65% 332 332 Corporates (Variable Rate) $1,408,040,000 27.72% 515 45 TOTAL $5,078,901,000 100.00% 322 189

Investment Statistics

MATURITY SPECTRUM (in US Dollars) Maturity Range Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 1-3 Months $3,299,628,000 $3,076,035,000 $2,452,190,000 $1,800,630,000 $2,553,235,000 4-6 Months $210,000,000 $170,000,000 $85,000,000 $137,000,000 $200,000,000 7-9 Months $130,000,000 $45,000,000 $137,000,000 $250,000,000 $219,080,000 10-12 Months $65,000,000 $247,000,000 $250,000,000 $124,080,000 $214,500,000 1-2 Years $616,080,000 $895,551,000 $1,171,341,000 $1,639,211,000 $1,041,306,000 2-3 Years $240,000,000 $360,490,000 $727,450,000 $900,780,000 $825,780,000 3-5 Years $0 $85,420,000 $75,420,000 $65,000,000 $65,000,000 TOTAL $4,560,708,000 $4,879,496,000 $4,898,401,000 $4,916,701,000 $5,118,901,000

INVESTMENT TARGET STATISTICS Sept-02 Dec-02 Mar-03 June-03 Sept-03 CATFUN 2.11% 2.01% 1.85% 1.79% 1.55% IBC First Tier Benchmark 1.46% 1.12% 0.96% 0.86% 0.71% Fed Funds Target 1.75% 1.25% 1.25% 1.00% 1.00% Discount Rate 1.25% 0.75% 2.25% 2.00% 2.00% The primary credit rate replaced the discount rate in Jan-03. 1-Month Libor 1.82% 1.42% 1.30% 1.16% 1.12% 3-Month Libor 1.80% 1.41% 1.29% 1.12% 1.14% 2-Year T-Note 1.98% 1.81% 1.55% 1.20% 1.69% 5-Year T-Note 2.92% 2.99% 2.75% 2.23% 3.18% 10-Year T-Note 3.87% 4.02% 3.79% 3.32% 4.26% 30-Year Bond 4.77% 4.92% 4.80% 4.37% 5.14% The Libor rates and Treasury rates are the average for the specified month.

Average Yield & Spread Calendar Years 1996-2003 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 1996 1997 1998 1999 2000 2001 2002 2003 CATFUN BM FF 3mL 2 Yr 5 Yr CATFUN Yield Spread over BM CATFUN Yield Spread over BM 1996* 5.39% 0.32 2000 6.36% 0.37 1997 5.66% 0.40 2001 4.37% 0.55 1998 5.72% 0.52 2002 2.29% 0.82 1999 5.51% 0.67 2003** 1.77% 0.90 BM - The benchmark was introduced in July, 199** - January - September, 2003 * - July - December, 1996

CATFUN AND LOCAL GOV'T INVESTMENT POOL MONTHLY YIELD COMPARISON SEPTEMBER 2002 - SEPTEMBER 2003 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 CATFUN LGIP Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 FHCF 2.11% 2.11% 2.04% 2.01% 1.93% 1.90% 1.85% 1.81% 1.75% 1.79% 1.75% 1.64% 1.55% LGIP 1.89% 1.89% 1.79% 1.62% 1.51% 1.56% 1.45% 1.48% 1.39% 1.44% 1.33% 1.29% 1.25% Spread 0.22% 0.22% 0.25% 0.39% 0.42% 0.34% 0.40% 0.33% 0.36% 0.35% 0.42% 0.35% 0.30%

CATFUN AND FIRST TIER INSTITUTIONAL MMF MONTHLY YIELD COMPARISON SEPTEMBER 2002 - SEPTEMBER 2003 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 CATFUN BENCHMARK Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 FHCF 2.11% 2.11% 2.04% 2.01% 1.93% 1.90% 1.85% 1.81% 1.75% 1.79% 1.75% 1.64% 1.55% BM 1.46% 1.45% 1.23% 1.12% 1.04% 0.99% 0.96% 0.92% 0.91% 0.86% 0.73% 0.71% 0.71% Spread 0.65% 0.66% 0.81% 0.89% 0.89% 0.91% 0.89% 0.89% 0.84% 0.93% 1.02% 0.93% 0.84%

Historical Top-20 Spreads CATFUN vs. Benchmark BM Month CATFUN BM Spread 1* Jan-02 2.85% 1.67% 1.18% 2* Feb-02 2.71% 1.60% 1.11% 3* Jul-03 1.75% 0.73% 1.02% 4* Aug-03 1.64% 0.71% 0.93% 4* Jun-03 1.79% 0.86% 0.93% 6 Feb-99 5.58% 4.66% 0.92% 7* Feb-03 1.90% 0.99% 0.91% 8* Apr-03 1.81% 0.92% 0.89% 8* Mar-03 1.85% 0.96% 0.89% 8* Jan-03 1.93% 1.04% 0.89% 8* Dec-02 2.01% 1.12% 0.89% 12 * May-03 1.75% 0.91% 0.84% 12 * Sep-03 1.55% 0.71% 0.84% 14 * Nov-02 2.04% 1.23% 0.81% 15 * Apr-02 2.37% 1.57% 0.80% 15 * Mar-02 2.37% 1.57% 0.80% 17 * May-02 2.31% 1.53% 0.78% 18 Apr-99 5.33% 4.59% 0.74% 19 * Jun-02 2.25% 1.52% 0.73% 20 * Aug-02 2.20% 1.48% 0.72% The benchmark was introduced in July, 1996 (87 reporting periods) * - denotes under my management (36 reporting periods)

Forecast

Forecast 24.0% 22.0% 20.0% 18.0% 16.0% 14.0% The FOMC has never began a tightening cycle w hen the capacity utilization rate w as below 79%. 100.0 90.0 80.0 70.0 60.0 12.0% 50.0 10.0% 8.0% 6.0% 4.0% 2.0% 40.0 30.0 20.0 10.0 0.0% Sep-67 Sep-70 Sep-73 Sep-76 Sep-79 Sep-82 Sep-85 Sep-88 Sep-91 Sep-94 Sep-97 Sep-00 0.0 Fed Funds Target Total Unemployment Capacity Utilization

Forecast (Part 2) 24.00% 22.00% 20.00% Beginning in August, 2003 industrial prodution w ould have to grow 8.6% over the next tw elve months for capacity utilization to reach 80%, thereby allow ing the FOMC to raise rates. 2.00% 1.50% 18.00% 16.00% 14.00% Aug-2003 +0.10% 1.00% 12.00% 0.50% 10.00% 8.00% 0.00% 6.00% 4.00% -0.50% 2.00% 0.00% Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03-1.00% Fed Funds Industrial Production MoM % Change

46 9. Discussion of FHCF Legislation -- -- - Jack J NicholsonN 2003 Regular Session HB 1353 and SB 2556 -- FHCF Legislation, died last day HB 659 and SB 720 -- FHCF Constitutional Amendment, died last day 2003 Special Sessions Special Session A HB 99A, FHCF Legislation, filed by Rep. Waters, one of 30 bills outside the original call Special Session B -- HB 21B Special Session C Special Session D -- HB 17D

2004 FHCF Legislative Ideas 47 A. Expanding the Capacity of the FHCF 1) Increase the $11 billion limit to grow with exposure growth for both the initial and subsequent season. 2) Funding the extra capacity by increasing the amount of the emergency assessment authority from 4% a year and 6% aggregate to 5%/8%. B. Clarifying prior fiscal year Relating to Investment Income for Mitigation Funding C. De Minimis Exposure Reporting D. Approved Reinsurer E. Interest on Delinquent Remittances F. Rating Issues exclude excess and deductible buyback policies G. Clarifying excess recoveries to Citizens accounts H. Clarifying coverage provided for additional living expenses

2004 Legislative -- Other Ideas for Discussion 48 Other Ideas: Including Surplus Lines in the FHCF s assessment base. Freezing the insurance industry retention level at $4 billion or resetting it to $4 billion. Increasing initial season capacity greater than subsequent season capacity.

49 Why do we need FHCF Legislation? The Short Answer Current law creates the potential for marketplace problems after an event as the FHCF coverage gets out-of-balance (initial and subsequent season). Now is the time to fix this problem before it gets out-of-hand. The gap will continue to widen into the future. The proposed legislation allows the FHCF's coverage to grow in a balanced fashion with the growth of insured values (exposure) in the state.

Issues & Concerns 1. The FHCF s capacity should grow with exposure growth in the state. 2. Growth in the FHCF s capacity should be properly funded to maintain a balance between initial season and subsequent season capacity. 3. There should not be a gap between initial season and subsequent season capacity replacing FHCF capacity with private reinsurance at three to four times the cost of FHCF coverage could result in market problems (higher cost to consumers or tight markets with a rapid growth in the residual market -- Citizens). 4. The FHCF needs to be available to mitigate problems following a major hurricane loss there will be market problems. The FHCF should stabilize the market rather than be a cause of price volatility and/or the reason for a lack of residential insurance availability. 5. As the cash balance of the FHCF grows, bonding needs should diminish and, therefore, potential assessments should decline over time (given no losses triggering the FHCF). 50

Issues & Concerns (continued) 51 6. There is a need for a FHCF structure that contemplates a long term replenishment of capacity as losses occur and which considers the probability of loss and the time frame for rebuilding capacity. 7. Ideally, the cost of bonding should be spread across as broad an assessment base as is feasible. The FHCF benefits the entire state and serves to support the economic base of Florida we all benefit. 8. Insurers should have confidence in the FHCF, they should know what the benefits are going to be, and they should be able to rely on its benefits year after year. There should be no need to go back to the Legislature year after year to change the structure of the FHCF. 9. FHCF legislation should be widely supported and be as noncontroversial as possible.

Millions FHCF Retention & Payout (Historical r Changes) C a $12,000 25 $10,000 20 $8,000 $6,000 15 $4,000 10 $2,000 5 $0 0 19951996 19971998 199920002001 20022003 Retention Capacity 90% Retention Multiple Payout Multiple The Payout Multiple has eroded by 2.64 since 1999. The Retention Multiple has increased by 2.32 since 1999. The result is that insurers exposures have increased, but their FHCF coverage has not kept pace. Unless legislation is passed this will continue.

FHCF Retention & Payout (Historical Changes) Year Capacity Payout Retention Retention Multiple 1995 $4,900 11.14 $3,082 6.22 1996 $6,400 15.21 $2,893 6.20 1997 $8,000 17.12 $3,105 6.20 1998 $11,000 24.72 $2,885 6.20 1999 $11,000 25.31 $3,061 6.63 2000 $11,000 25.07 $3,263 7.15 2001 $11,000 23.02 $3,391 6.95 2002 $11,000 22.02 $4,058 8.03 2003 $11,000 22.667 $4,397 8.95

Growth In FHCF Residential Exposure Contract Year 1995/96 1996/97 Exposure in Billions* $ 747.3 $ 754.4 1997/98 1998/99 1999/2000 2000/2001 2001/2002 2002/2003 $ 760.4 $ 770.5 $ 798.8 $ 881.3 $ 921.7 $ 1,098.3 47% *Excludes Section II (Excess Insurance)

2003 FHCF Coverage* Payout Multiple 22.667 Retention Multiples 8.94665 (90%), 10.73597 (75%), 17.89329 (45%) Expected Payout 22.667 x FHCF Premium FHCF Insurers have three coverage options 45%, 75%, or 90% 10% 90% coverage Retention 8.94665 X FHCF Premium *Not drawn to scale

FHCF Coverage Example* $22,667,000 Payout FHCF Coverage option 90% 10% 90% coverage $1,000,000 FHCF Premium *Not drawn to scale. Retention $8,946,650

*Return time not adjusted for premium/exposure growth. Not Drawn to scale. 45 year return time* $16.784 B Overall Industry Loss Initial Season Capacity for the 2003 Hurricane Season Co-Payments $1.387 B Industry $11 Billion Capacity $5.5378 B Bonding Capacity (Includes Loss Adjustment Expense) $5.4622 B Projected 2003 Year-end Cash Balance Maximum Emergency Assessment -- $886.0 million (only $367.8 million needed) 1.66% $4.397 B Industry Aggregate Retention

2004 Subsequent Season Capacity (based on $11 billion of capacity being used for the 2003 hurricane season) 45 year return time* $16.960 B Overall Industry Loss Co-Payments $1.387 B Industry $11 Billion Capacity $10.520 B Bonding Capacity (Includes Loss Adjustment Expense) $480 M Projected Year-end Cash Balance $4.573 B Aggregate Industry Retention Maximum Emergency Assessment $886.0 million (only $771.8 million needed) 3.48% *Return time not adjusted for premium/exposure growth. Not Drawn to scale.

14,000 12,000 10,000 8,000 6,000 4,000 2,000 - Historical Capacity of the Fund Initial Season Subsequent Season May 1995 October 1995 May 1996 October 1996 May 1997 October 1997 May 1998 October 1998 May 1999 October 1999 May 2000 October 2000 May 2001 October 2001 May 2002 October 2002 May 2003 Millions of $

FHCF Structure Historical & Projected Growth of FHCF Capacity & Assessments* (Current FHCF Statute with $11 billion limit, 4% one year, 6% Aggregate) Based on October 2002 yield curve Millions $16,000 $14,000 $4,396 $11,000 6.0% Today $14,915 8% 7% $12,000 $10,000 4.0% 6% 5% $8,317 $8,000 4% $6,000 $4,000 3% 2% 3.53% 2.55% $2,000 $0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1% 0%.98% Initial Capacity Subsequent Capacity Future Capacity Initial Assessment Subsequent Assessment Both *Based on various actuarial assumptions. Subject to interest rate volatility. Assumes no loss scenario. These numbers are for illustration purposes and should not be relied on since the underlying assumptions are subject to change.

Proposed Structure FHCF Legislation Projected Growth FHCF Capacity & Assessments* (Proposed FHCF Legislation 5% one year, 8% Aggregate, $11 billion limit adjusted for exposure growth since 2002 4% assumption) Millions $16,000 $14,000 $4,396 Based on October 2002 yield curve $11,000 6.0% Today Capacity Grows with Exposure Growth $14,475 8% 7% $12,000 $10,000 4.0% 6% 5% 4.67%% $9,373 $8,000 $6,000 4% 3% 3.72% $4,000 2% $2,000 1% $0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 0% Initial Capacity Subsequent Capacity Future Capacity Initial Assessment Subsequent Assessment Current Assessment Both.95% *Based on various actuarial assumptions. Subject to interest rate volatility. Assumes no loss scenario. These numbers are for illustration purposes and should not be relied on since the underlying assumptions are subject to change.

62 10. Schedule & Agenda for Upcoming Meetings -- Anne Bert Meetings -- Anne Bert Next Meeting: January 8, 2004 (1:00-4:00) Agenda Items: Filing of FHCF Rules for Notice Discussion of the 2004 FHCF s Premium Formula FHCF Legislative Update Citizens Property Insurance Corporation Update Review of the 2003 Hurricane Season Other FHCF Business

11. Concluding Remarks -- --Larry ry Johnson,, ChairC 63 -- Closing Comments n:\council\10-09-2003meeting\fhcfac10-09-03