State Board of Administration Florida Hurricane Catastrophe Fund

State Board of Administration Florida Hurricane Catastrophe Fund Proposed 2012 Legislation September 2011

Background • The FHCF was expanded in 2007 as a result of HB 1 A in order to greatly increase its capacity by over $12 billion (to over $28 billion) for the purpose of lowering insurance rates. • Problems in the financial markets as a result of the sub-prime crisis adversely impacted the FHCF’s ability to adequately fund the added capacity. • Legislation in 2009 resulted in phasing out the optional coverage which was added in 2007. • Financial markets continue to be highly volatile. • The FHCF needs to be structured such that it is financial reliable and capable of serving its original mission of creating additional capacity and stabilizing the residential property insurance markets. • This will require a restructuring of the FHCF in order to “right size” its coverage. 2

Basic Structure of the FHCF From Emergency Assessments Cash Balance Retention (Insurer Deductible) Bonding Co-Payments FHCF From Reimbursement Premiums 3

Basic Structure of the FHCF with Optional Coverages and Pre-Event Notes Optional Coverage (TICL) Bonding Co-Payments FHCF From Emergency Assessments Pre-Event Notes Cash Balance From Reimbursement Premiums Optional Coverage (Up to $10 M for Certain Companies) Retention (Insurer Deductible) 4

2011/2012 Initial Season Projection Based on Data Available as of 5/9/11 52. 3 Years – 1. 9% Not Drawn to Scale Not Official For Illustrative Purposes Only ESTIMATED TOTAL COVERAGE SELECTED: $18. 551 Billion $31. 7 B $4. 860 B Available TICL Coverage Not Selected 37. 6 Years – 2. 7% $25. 4 B 18. 5 Years – 5. 4% 8. 7 Years – 11. 5% $18. 7 B $15. 0 B $7. 369 B $1. 140 B TICL Coverage Selected $17 B Mandatory Coverage Limit (Includes loss reimbursement and the 5% allowance for loss adjustment expenses) $3. 5 B Pre-Event Bonding (Will Not Be Relevant for 2011/2012) $7. 245 B Projected 2011 Year-End Cash Balance $0. 411 B Selected by Eligible Companies $7. 369 B Industry Retention Mandatory Coverage 24. 6 Years – 4. 1% $1. 815 B Industry Co-Payments Return Times Probabilities, & Ground Up Losses $0. 122 B $6 B $17 B $10 Million “Below Retention” Option

Restructuring the FHCF • Proposed legislative changes would be effective starting in 2013 -2014. • Reducing the size of the mandatory coverage from $17 billion to $12 billion over 3 years. • Increasing the participating insurer’s copayments from 10% to 25% over 3 years. • Increasing insurer retention to $8 billion back to where it would have been had it not been reset in 2004 and 2005. 6

Restructuring the FHCF (con’t) • Increasing the cash build-up by extending the 5% phase-in per year implemented in 2009 for another 5 years to reach 50% by 2018. • Reducing the emergency assessment caps from 6% per year and 10% in all years to 5% per year and 8% in all years. • Terminating the Temporary Increase in Coverage Limit (TICL) coverage in 2013 -2014. • Changing the name of the Florida Hurricane Catastrophe Fund Finance Corporation to the State Board of Administration Finance Corporation. 7

Changes in Bonding Capacity from October 2008 through May 2011 ($ Billions) $15. 9 $11 $16 $12 Maximum Bonding Capacity Needed for 2011 -2012 $8 $3 8

World Wide Catastrophes 1970 -2009 2005 1992 1999 2001 2004 2008 9 Source: Swiss Re, Sigma No 1/2010.

Florida is the Peak Risk Concentration Zone for Insured Hurricane Exposures $54. 6 B* $22. 4 B in excess undiversified exposure remains FHCF coverage provided by the FHCF reduces the peak by $18. 8 B $13. 4 B Average Annual Cost of Hurricanes in Florida $3. 5 B *Based on the RMS Risk. Link hurricane model assuming long term historical event rates.

Private Reinsurance Capacity 1998 to 2010 Capacity Surpluses Capacity Shortages

The Price of Reinsurance Hurricane Andrew 3 199 0 to 199 Incr eas e of 300 % Following 2005 Increase of 100% 2000 to 2006 12

Not Drawn to Scale Not Official For Illustrative Purposes Only Restructuring the FHCF 2012 -13 Lowering Statutory Limits to “Right Size” the FHCF $17 B $15. 5 B 2014 -15 $8 B Assessment Caps 6%/10% $14 B 2015 -16 25% Co-Payments 20% Co-Payments Cash Assessment Caps 6%/10% 2013 -14 15% Co-Payments Bonding 10% Co-Payments $7. 37 Retention* Less Bonding Required $8. 32 B* Assessment Caps 6%/10% *The Retention is projected to grow at 4% in these examples. $12 B Cash Build Up 25% -- continues 5% per year for another 5 years to 50%. $8. 65 B* Assessment Caps 5%/8% More Cash Funding

14 Contact Information • • • Jack Nicholson – Chief Operating Officer, FHCF Telephone: (850) 413 -1340 Fax: (850) 413 -1344 E-Mail: jack. nicholson@sbafla. com Website: www. sbafla. com/fhcf Address: Florida Hurricane Catastrophe Fund State Board of Administration of Florida 1801 Hermitage Boulevard Tallahassee, Florida 32308 14 +