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

2 Background The FHCF was expanded in 2007 as a result of HB 1A 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 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.

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

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

$7.245B Projected 2011 Year-End Cash Balance $17B Mandatory Coverage Limit (Includes loss reimbursement and the 5% allowance for loss adjustment expenses) $1.815B Industry Co-Payments $10 Million “Below Retention” Option $7.369B Industry Retention $25.4B Mandatory Coverage $15.0B 37.6 Years – 2.7% 8.7 Years – 11.5% 18.5 Years – 5.4% $0.411B Selected by Eligible Companies $0.122B Not Drawn to Scale Not Official For Illustrative Purposes Only ESTIMATED TOTAL COVERAGE SELECTED: $ Billion 52.3 Years – 1.9% $18.7B 24.6 Years – 4.1% $4.860B Available TICL Coverage Not Selected Return Times Probabilities, & Ground Up Losses $1.140B TICL Coverage Selected $3.5B Pre-Event Bonding Projection Based on Data Available as of 5/9/11 $31.7B $7.369B (Will Not Be Relevant for 2011/2012) 2011/2012 Initial Season $17B $6B

6 Restructuring the FHCF Proposed legislative changes would be effective starting in 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.

7 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 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 Changing the name of the Florida Hurricane Catastrophe Fund Finance Corporation to the State Board of Administration Finance Corporation.

Changes in Bonding Capacity from October 2008 through May 2011 ($ Billions) 8 Maximum Bonding Capacity Needed for $3 $11 $8 $15.9$16 $12

World Wide Catastrophes Source: Swiss Re, Sigma No 1/

Florida is the Peak Risk Concentration Zone for Insured Hurricane Exposures FHCF coverage provided by the FHCF reduces the peak by $18.8B $22.4B in excess undiversified exposure remains $13.4B $54.6B* *Based on the RMS RiskLink hurricane model assuming long term historical event rates. Average Annual Cost of Hurricanes in Florida $3.5B

Private Reinsurance Capacity 1998 to 2010 Capacity Surpluses Capacity Shortages

12 The Price of Reinsurance Hurricane Andrew Following 2005 Increase of 300% 1990 to 1993 Increase of 100% 2000 to 2006

10% Co-Payments Not Drawn to Scale Not Official For Illustrative Purposes Only Restructuring the FHCF $17B Lowering Statutory Limits to “Right Size” the FHCF 15% Co-Payments $15.5B 20% Co-Payments $14B 25% Co-Payments $12B $8.65B*$8.32B*$8B $7.37 Retention* *The Retention is projected to grow at 4% in these examples. Less Bonding Required More Cash Funding Bonding Cash Assessment Caps 6%/10% Assessment Caps 5%/8% Cash Build Up 25% -- continues 5% per year for another 5 years to 50%.

14 Jack Nicholson – Chief Operating Officer, FHCF Telephone: (850) Fax: (850) Website: Address: Florida Hurricane Catastrophe Fund State Board of Administration of Florida 1801 Hermitage Boulevard Tallahassee, Florida Contact Information +