Citizens ended 2012 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. 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 2011-2014, 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. o 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 Council 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 Board of Governors Meeting Page 1
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. These investments and many more have improved internal oversight and controls - while substantially impacting the service we provide to our policyholders, improving Citizens reputation in the marketplace and assuring that we are ready for whatever happens tomorrow. Even with these significant investments we continue to outperform the private market by a wide margin from an expense ratio perspective. Investments of this nature will of course continue and even now are underway as evidenced by our Office Consolidation initiative and the Enterprise Resource Planning Initiative (along with about 60 others) which have front end costs but ultimately make us far more efficient. Now of course the marketplace is rapidly changing and so is Citizens. I will share some impressive depopulation numbers that result in a smaller Citizens. We have launched a Strategic Scenario planning initiative, led by Kelly Booten. This planning initiative evaluates today s decisions to ensure their alignment with the size and scale of tomorrow s insurance company of last resort, operating in an environment where, at any time, we may need to respond to a catastrophic event. As a result of the various, but strategic investments, our continued emphasis is a highly efficient, scalable organization that must be continually analyzed. Now let s look at some of the depopulation numbers and the result of a How low can you go? study completed by March Fisher and her analytics team. Then I will close by briefly covering a few of the organizational changes we are implementing that will result in a more streamlined organization that takes advantage of the infrastructure investments we have already made. My purpose today is to provide an indication of How low can we go but let s begin by looking at where we are currently. 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 Board of Governors Meeting Page 2
was frozen in the 460,000 range. As you can see on SLIDE 3, while the Personal Lines Account is still showing the largest drop in count, Coastal and Commercial have dropped in the past two years by 44%: 49%, respectively. Insurance company appetite has broadened not only in the Coastal and Commercial but in the mobile home and dwelling program (DP) market. SLIDE 4 shows the comparison between the Office of Insurance Regulations (OIR) approved numbers with the actual number of policies assumed over the past three years and, of course, you have seen the information on SLIDE 5 that takes you through how we reach these numbers. That is the history, so how does Citizens look going forward? We took a comprehensive approach to forecasting our future. March Fisher, Director of Corporate Analytics, and her team used three independent methodologies to complete the forecast. o 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. o 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. o 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. Methodology Policy Projection Standard Budget Projection 481,000 Gradient Boosted Model 435,000 Venn Diagram 453,000 Indicated Bottom How low can we go 450,000 Board of Governors Meeting Page 3
Given that we are becoming a smaller, more efficient Citizens, we must continue our progress in operational controls and infrastructure improvements while being constantly mindful of operating efficiencies. In prior board meetings I ve outlined many of the Claims and Litigation Management changes. These include the complete reorganization of the Litigation department to improve customer service and eliminate unnecessary protracted litigation. The same philosophy was followed in the Non Litigation claims where this organization was brought under a single leader to provide a consistent message to all Non Litigated claims handling. We are continuing in this vein with our Underwriting Organization. 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: 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. Board of Governors Meeting Page 4
We continue to focus on best practices and evaluate our business functions to assure we are well positioned for whatever direction the wind blows. Citizens Executive Leadership team utilizes this information to predict the revenue and expense implications to assure our daily operational decisions are aligned with our strategic direction. Board of Governors Meeting Page 5