1. Affordable Homeowners Insurance Commission November 21, 2011 Building Blocks of a Successful Property Insurance Market In States Prone to Catastrophic Risk Prepared for

2. 1 INTRODUCTION John Forney, CFA Managing Director, Public Finance Raymond James & Associates, Inc. 880 Carillon Parkway St. Petersburg, FL 33716 Ph: 727-567-7825 Email: John.Forney@RaymondJames.com Financial Advisor, Florida Hurricane Catastrophe Fund Financial Advisor, Citizens Property Insurance Corporation Financial Advisor, Florida Insurance Guaranty Association Financial Advisor, California Earthquake Authority Financial Advisor, ProtectingAmerica.org Member of Investment Banking Team: Louisiana Citizens Property Insurance Corporation; Texas Windstorm Insurance Association; North Carolina Insurance Underwriting Association

3. 2 RAYMOND JAMES’ GOVERNMENTAL CATASTROPHE INSURANCE FINANCE EXPERIENCE Raymond James has been involved in a lead capacity in over 90% of catastrophe-related municipal financings since 2005 We understand the market both from an insurance and a public policy perspective Citizens (FL) Property Insurance Corporation Since 2005, financial advisor on 7 debt transactions for $11.76B, 5 bank issues for $4.37B Florida Hurricane Catastrophe Fund Since 1999, financial advisor on 6 debt transactions for $12.95B, and for an innovative post-event financing put option strategy for $4 billion Louisiana Citizens Property Insurance Corporation Senior manager on $300MM tax-exempt bond financing in 2009 Texas Windstorm Insurance Association Named to senior manager underwriting team in 2009; helped develop legal mechanism and bond documents California Earthquake Authority Since 2008, served as financial advisor; advisor on $150 million capital markets risk transfer financing Florida Insurance Guaranty Association Since 2006, served as financial advisor; helped develop legal mechanism, prepare bond documents, and obtain credit ratings for future issuances North Carolina Insurance Underwriting Association Named to underwriting team in 2010 as a co- manager ProtectingAmerica.orgFinancial advisor to industry consortium led by Allstate and State Farm trying to enact responsible national catastrophe insurance legislation

4. Section I Section II Key Facts Building Blocks of a Successful Market PRESENTATION STRUCTURE

5. Section I: Key Facts

6. 5 KEY FACT #1  Catastrophic hurricane risk of the size that exists on the Gulf Coast is difficult to insure in the private markets, especially at affordable rates, because it violates key principles of insurability $2-3B $3-4B $4-5B $5-10B $10-20B $20B+ 100 Year Residential PML By State <$100MM $100-250MM $250-500MM $500MM-1B $1B+ Hurricane Related Residential Lines Average Annual Losses (AAL) Based on the RMS RiskLink hurricane model assuming long term historical event rates. Source: RMS. Gulf Coast states have an $85 billion 100 year residential PML

7. 6  Insurance exists to solve timing risk; but some academics and industry leaders believe:  Catastrophic risks “are uninsurable through conventional markets….”  “Because they defy the conditions private markets require for operation.”  What conditions?  Individual exposures NOT independent  Losses are NOT predictable  Events are NOT relatively small & relatively frequent and the actions of insurance firms indicate there may be some truth to this “ not all risks are amenable to private insurance……. some risks which initially appear to be uninsurable by the private sector can be fully or partially insured through public private partnerships 1 ” 1 SIGMA, No3/2011, “State Involvement in Insurance Markets,” published by Swiss Reinsurance Company, Ltd. THE PROBLEM IN WORDS Insuring the Uninsurable: Private Insurance Markets and Government Intervention in Cases of Extreme Risk,” Sophie M. Korczyk, Ph.D., A Public Policy Paper of the National Association of Mutual Insurance Companies, June 2005 “Should the Government Provide Insurance for Catastrophes?,” J. David Cummins, Federal Reserve Bank of St. Louis Review, July/August 2006

8. THE CATASTROPHE CONTINUUM 1992Andrew ($15.5 B) 2001WTC ($18.8 B) 2004 Four Storms (Charley, Ivan, Frances, Jeanne ($18 B) 1994Northridge ($12.5 B) 2005 Four Storms (Dennis, Katrina, Rita, Wilma ($58 B) 2008 Gustav, Ike, Global Financial Meltdown ($??? T) 8 of the 12 most expensive natural disasters in U.S. history have occurred since 2004; with each occurrence, private insurers withdraw further from this market State Farm losses in FL exceed its total capital base nationally; industry losses greater than 50 years of premium collections Industry losses greater than all premiums ever collected in California 7

9. 8 Natural Disasters in U.S. Are Trending Upwards 2011 saw the deadliest tornado year since 1953, and the most EF5 tornados ever recorded There were five separate insured billion-dollar outbreaks in the U.S.

10. 9 KEY FACT #2  Alabama is comparable to other Southern states (ex-Florida) with regard to State Farm and Allstate’s combined market share Source: Highline Data and Fitch Ratings. Based on direct written premium for personal lines only as of May 2010. State Farm and Allstate make up 37% of Alabama’s personal lines, while the other insurers not in the top 10 represent only 13.5% of Alabama’s personal lines market

11. 10 KEY FACT #3 Alabama’s average annual policyholder premiums is $905 for residential insurance and $817 for auto insurance, for a total of $1,722, which ranks as the 18 th highest in total premiums Alabama currently ranks 9 th in current premium as a percentage of household income TOP TEN STATES RANKED BY POLICYHOLDER PREMIUMS AS A % OF HOUSEHOLD INCOME Source: Most recently reported premium data from the National Association of Insurance Commissioners (NAIC) as of 2007. Florida premiums exclude Citizens' policyholders. Income data from U.S. Census Bureau, Current Population Survey, based on the 2-year median average from 2007 to 2008. Alabama already has a high premium burden relative to other states

12. 11 KEY FACT #4  Other states struggle with the same issue Five states have catastrophe insurance entities with bonding capacity Other states struggle with affordability/availability issues as well

13. Section II: Building Blocks to a Successful Market

14. 13  Rates shouldn’t encourage residual market growth  Cost drivers should be under control  Private companies should be adequately capitalized  Building codes should be in place and enforced to reduce claims and costs  Financially strong, right-sized residual market mechanisms  Alabama Insurance Underwriting Association  Consider a new Alabama Cat Fund  Support for a responsibly funded national backstop THE BASICS All of these are potentially beneficial, but need not be enacted simultaneously to produce meaningful progress

15. 14 THE OPTIMUM: AN INTEGRATED PUBLIC-PRIVATE PARTNERSHIP WITH NO SUBSIDIES Private Insurers State or Regional Reinsurance Funds Federal Layer Private Reinsurers Liquidity Loans or debt guarantees; reinsurance; cat bonds State Residual Funds A properly designed and funded public private partnership is an antidote to the current system of unaffordable insurance and unfunded, subsidized post-event bailouts that exists nationally

16. 15 WHY CONSIDER A HURRICANE CATASTROPHE FUND?  Insurers rely heavily on reinsurance coverage to cover losses  40-50% of premiums ceded to reinsurers  Therefore, reinsurance costs are a big driver of insurance costs to consumers  Reinsurance capacity and pricing is cyclical  Currently capacity is good but pricing is below levels acceptable to reinsurance company shareholders  Pricing and capacity vary not only with events but also due to model changes  A state or regional cat fund can complement private sector reinsurance and provide market stability and enhanced affordability The key to a successful cat fund is balance between private reinsurers and public involvement With the right balance, insurance will be more affordable, markets will be more stable, and private companies will be more comfortable doing business in Alabama

17. 16 FINANCIAL MARKET UPDATETHE FLORIDA HURRICANE CATASTROPHE FUND The FHCF is not primarily intended to be a rate-reducing entity, but its structure (even with actuarially sound rates) saves Florida policyholders several billion dollars annually, and has a high ROI  The FHCF provides significant economic benefits to Florida, and has been exceptionally reliable  The FHCF has a projected 2011 year-end fund balance of over $7 billion

18. 17 HOW A CAT FUND MIGHT BE STRUCTURED IN ALABAMA  State or several counties with perceived property insurance problems related to affordability and availability can join together to form a hurricane catastrophe fund  The hurricane catastrophe fund provides low-cost reinsurance to insurers writing coverage in affected areas  The cost savings to these insurers enables them to pass savings on to consumers  The fund pays losses after a specified industry retention (i.e., deductible) up to a pre-determined maximum amounts  The obligations of the hurricane catastrophe fund are backed by: (1) the premiums collected from the participating insurance companies; and (2) a promise of the counties or state to issue bonds if needed to pay claims; security sources and maximum amounts would be spelled out in advance  The size of the program would be structured within the ability of the state or counties to pay claims in a worst-case scenario  If no storms occur in a year, premiums are retained in the hurricane catastrophe fund and future contingent bonding amounts decrease Is self-insuring a portion of Alabama’s catastrophic risk a rational economic response given the extremely high cost – financially and economically – of paying all up front for remote events?

19. 18 HYPOTHETICAL ALABAMA HURRICANE CATASTROPHE FUND SCHEMATIC Industry Retention (i.e., deductible) Projected Year-End Cash Balance (from premiums) Additional Claims-Paying Capacity (this portion of capacity comes from post-event bonding by sponsoring entities) Industry Co-Payments Total Capacity of the Fund

20. 19 ISSUES TO CONSIDER  Size of the program  The program must be big enough to make an impact on premiums to consumers but small enough to ensure that the claims can be paid without impairing the financial soundness of the state or sponsoring counties  Commercial vs. residential  Residential is much easier to model for this type of program, but commercial could be included if needed  Seed money  Limited or no seed money is required, as long as the contingent source of revenue (bonding) is structured to give comfort to potential fund participants  Much care must be made in structuring any contingent bond component  Legal issues  These will obviously be considerable, from gaining the authority to do the hurricane catastrophe fund to structuring the interlocal agreement to structuring the contracts with participants, and more (tax status of fund and bonds, etc.) Balance, balance, balance!

21. 20 OTHER THOUGHTS  Incentive programs for private insurers to write in catastrophe –exposed areas  Do not directly address affordability  Raising rates will never solve availability completely and will aggravate affordability concerns  Direct means-tested aid to policyholders  Does not provide economic benefit of cat fund, since rates do not come down and most catastrophe premium dollars leave the state  Regional programs  Discussing a Southern regional fund or other inter-state pooling mechanism could provide additional benefit  Work hard for a national cat plan  Budget Control Act of 2011 limits federal catastrophe expenditures  Upfront, actuarially sound, unsubsidized Federal involvement can further enhance affordability and availability of catastrophe insurance

22. THE CATASTROPHE CONTINUUM QUESTIONS? 21

23. Affordable Homeowners Insurance Commission November 21, 2011 Building Blocks of a Successful Property Insurance Market In States Prone to Catastrophic Risk Prepared for

24. 23 DISCLAIMER The information contained herein is solely intended to suggest/discuss potentially applicable financing applications and is not intended to be a specific buy/sell recommendation, nor is it an official confirmation of terms. Any terms discussed herein are preliminary until confirmed in a definitive written agreement. The analysis or information presented herein is based upon hypothetical projections and/or past performance that have certain limitations. No representation is made that it is accurate or complete or that any results indicated will be achieved. In no way is past performance indicative of future results. Changes to any prices, levels, or assumptions contained herein may have a material impact on results. Any estimates or assumptions contained herein represent our best judgment as of the date indicated and are subject to change without notice. Examples are merely representative and are not meant to be all-inclusive. Investors, borrowers, or other market participants should not rely upon this information in making their investment/financing decisions. The information set forth herein was gathered from sources which we believe, but do not guarantee, to be accurate. The fact that a specific swap, security, or trade idea referred to herein does not mean RJ Capital Services, Inc. or Raymond James & Associates, Inc. has, or will, be able to execute all or a portion of this trade. Neither the information, nor any options expressed, constitute a solicitation by us for purposes of sale or purchase of any securities or commodities. RJ Capital Services, Inc. or Raymond James & Associates, Inc. or its affiliates may have either a long or short position in, and may buy or sell for its own account or the accounts of others, these securities and derivative instruments. You should consider certain economic risks (and other legal, tax, and accounting consequences) prior to entering into any type of transaction with RJ Capital Services, Inc. or Raymond James & Associates, Inc. It is imperative that any prospective client perform its own research and due diligence, independent of us or our affiliates, to determine suitability of the proposed transaction with respect to the aforementioned potential economic risks and legal, tax, and accounting consequences. Acceptance of this presentation and/or analyses constitutes your acknowledgement that the potential exists for there to be certain legal, tax, and accounting risks associated with any transaction involving RJ Capital Services, Inc. or Raymond James & Associates, Inc., that RJ Capital Services, Inc. or Raymond James & Associates, Inc. cannot be relied upon to provide legal, tax, or accounting advice, and that you should, in your best interests, seek out independent and qualified legal, tax, and accounting advice from outside sources.