1 CAS Ratemaking Seminar New Orleans, LA State – Specific Issues in Personal Lines March 11, 2005

2 The 2004 Hurricane Season & The Florida Property Residual Market

3 History of Citizens Financial Position of Citizens and the Cat Fund … Post Hurricanes Rates and Depopulation Efforts Closing Remarks Agenda

4 Florida’s Residual Market Prior to Citizens Prior to the formation of Citizens Property Insurance Corporation, there were two (2) property residual market facilities in operation in Florida: oFlorida Windstorm Underwriting Association (“FWUA”) oFlorida Residential Property & Casualty Joint Underwriting Association (“FRPCJUA”)

5 When and why was Citizens created? Initially proposed by Florida Treasurer Tom Gallagher in 2001 to achieve: One property residual market mechanism Federal tax-exempt status IRS issued Private Letter Ruling. Federal tax-exempt status in February Legislation signed into law in May Citizens came into being on August 1, 2002.

6 Citizens Has Three Accounts Three Accounts: Personal Lines Account – former FRPCJUA Commercial Lines Account – former FRPCJUA High-Risk Account – former FWUA With separate calculations of: Surplus Plan Year Deficit Assessment Base

7 Personal Lines & Commercial Lines Account (PLA/CLA) Personal lines: homeowners, mobile homeowners, dwelling fire, tenants, condominium unit owners and similar policies written throughout the state. Commercial lines: condominium association, apartment building and homeowners association policies. Personal lines rates set for each county at the highest rate of the 20 largest insurers in the State legislation required Citizens rates to be actuarially sound and not competitive with the voluntary market.

8 High-Risk Account (HRA) Citizens uses Insurance Service Office (ISO) policy forms and modified ISO policy forms to adjust for the unique coverage that is needed for a residual market such as a wind only policy. The completed forms are filed with the Office of Insurance Regulation for final approval. Personal lines wind-only policies – covering homeowners, mobile homeowners, tenants, condominium unit owners Commercial residential wind-only polices Commercial non-residential wind only policies

9 Historical Policy Counts Comparison

10 Citizens has at its disposal both the typical resources available to all P&C insurers that conduct business in the State, as well as special assessment powers granted to Citizens by the State Legislature. Typical Financial Resources Special Assessment Powers Insurance Premiums Investment Income Operating Surplus from Prior Years Florida Hurricane Catastrophe Fund Reimbursements Private reinsurance (Citizens does not utilize private reinsurance) Insurance Premiums Investment Income Operating Surplus from Prior Years Florida Hurricane Catastrophe Fund Reimbursements Private reinsurance (Citizens does not utilize private reinsurance) Regular Assessments Market Equalization Surcharges on Citizens Policyholders Emergency Assessments Regular Assessments Market Equalization Surcharges on Citizens Policyholders Emergency Assessments Citizens Financial Resources Citizens’ Financial Resources

11 PLA Account – Comparison of Financial Strength to Predecessor FRPCJUA

12 Rate Change History

13 Citizens has depopulated over 124,000 policies in 2004 and it anticipates the removal of an additional 69,500 before year-end. This does not include an additional 75,000 polices approved for takeout at the October 12th meeting. This results in a reduction to our PIF of over 270,000 policies. The 124,512 represents a reduction of our current PIF by 15%. For policies removed in 2004 Citizens has paid out: Unearned Premium: $87 million Escrowed Bonuses: $24 million The number of policies removed and the success of our depopulation efforts have been adversely affected by Consumers Choice. Depopulation in Calendar Year 2004

14 GAAP Surplus by Account (Prior to 2004 Hurricanes) In Millions

15 Plan Year Regular Assessment Base Must be levied to fund a deficit in any plan year Levied up to the greater of: 10% of the regular assessment base or 10% of the Plan Year Deficit Levied on assessable insurers and assessable insureds (surplus lines policyholders) collectively in proportion to their share of statewide direct written premium in prior year “Market Equalization Surcharge” – assessment rate applied to Citizens policyholders. Insurers are obligated to pay within 30 days Insurers may pass regular assessments through to their policyholders through a rate filing process

16 Plan Year Regular Assessment Base In Millions

17 Plan Year Emergency Assessment Base Must be imposed upon determination that Regular Assessments are insufficient to fund a Plan Year Deficit Levied up to the greater of: 10% of the Emergency Assessment base or 10% of the Plan Year Deficit plus interest, reserves, and other financing costs Levied as a uniform percentage on all policies in the subject lines of business (including surplus lines and Citizens policyholders) Collected by insurers upon new business issuance or renewal of policies

18 Plan Year Emergency Assessment Base In Millions

19 Assessment Mechanics “Plan Year Deficit” not defined in enabling statute Timing of assessments allows for flexibility in timing and amount of assessment Rate filing process statutorily defined for insurers’ recoupment of paid Regular Assessments

20 Claims Paying Resources - PLA

21 Claims Paying Resources - HRA

Hurricane Season

Hurricane Season This has been an unprecedented hurricane season with 4 storms Industry loss estimate between $15 - $20 billion Shortage of adjusters and industry response The stability of the insurance market after the storms The cost of insurance and potential rate increases as a result of Hurricane losses or assessments All insurers in the State of Florida have responded effectively and efficiently to a monumental task The Department of Financial Services will continue to take steps necessary to improve the insurance market and the availability of insurance for Florida Citizens. The success of the Cat Fund and Citizens Ample resources on hand to pay claims Cat Fund continues to build cash Citizens able to rebuild surplus at amazing rate due to tax exempt status and rate increases Potential income tax refund of $200 million for the High-Risk Account (HRA)

24 Things Don’t Always Go as Planned… Staff and members of the Board put together a plan to respond to one category 5 storm: Designed to respond to large storm in small geographical area 6 “dedicated” claim adjusting firms Emergency Response Vehicle (EOC) System capacity testing System designed dispatch system The 2004 Storm season resulted in four major storms with different challenges 110,000 claims geographically spread over 67 counties Adjuster shortages Lost adjusting days OIR order and reporting Tallahassee Cat Center to manage independent adjusters System issues What we planned for…What happened…

25 Storm Losses The estimated losses based upon Risk Management Solutions (RMS) footprint of each storm is shown below. These numbers are unverified and preliminary and are based on computer analyses, not actual reported and paid claims. In addition, please note that the quarterly and annual financial statements prepared in accordance with accounting guidelines would not record losses based upon the models. Ultimate losses from each storm are based upon actuarially determined amounts which use factors other than models and therefore may differ from RMS’s modeled loss projections. ESTIMATED STORM LOSSES PROVIDED BY RMS StormHRAPLACLATotal Charley$850 million$60 million$15 million$925 million Frances$225 million$50 million$15 million$290 million Ivan$220 million$6 million $232 million Jeanne$250 million$50 million$27 million$327 million Total$1.55 billion$166 million$63 million$1.8 billion

26 Cat Models: Indemnity and Loss Dollar Comparisons

27 Hurricanes:CharleyFrancesIvanJeanne Approximately 111,000 reported claims Citizens Reported Claims By Storm

28 Industry Response: The Financial Impact of 4 Storms

29 To What Extent Was Company’s Reinsurance Triggered (A Look at the Cat Fund:) Retention applies separately to each storm No recoveries are anticipated for either account for any storm. HRAPLA/CLA

30 Closing Remarks Citizens and the Cat Fund have been a great success and exceed expectations in responding to an unprecedented four storm season. Citizens will continue to work with DFS to seek legislative changes to add to its claim paying abilities and to manage its risk profile. The growth in Citizens exposure has been offset by: Tax exempt status Rate increases Takeouts If Citizens has a Deficit actions will be taken to levy assessments. The Cat Fund has significant cash balances remaining after Charley, Frances, Ivan and Jeanne. Both entities will continue to re-build cash balances.

31 APPENDIX

32

33 Citizens Exposure: Overview HRA Total Insured Value (TIV) by County Top 5 Counties in Total Exposure CountyExposure as of 7/31/04 Dade28,275,980,554 Palm Beach20,756,842,790 Broward18,438,396,281 Monroe8,257,954,297 Sarasota8,228,585,732

34 Citizens Exposure: Overview PLA Total Insured Value (TIV) by County Top 5 Counties in Total Exposure CountyExposure as of 7/31/04 Dade $ 19,776,649,208 Pinellas $ 7,704,634,849 Broward $ 6,079,884,094 Pasco $ 4,799,524,844 Palm Beach $ 4,411,984,106