The State of Florida's Property Insurance Market 2nd Annual Report

The State of Florida's Property Insurance Market 2nd Annual Report

The State of Florida's Property Insurance Market 2nd Annual Report

The State of Florida’s Property Insurance Market 2nd Annual Report Released January 2013 for the Florida Legislature by The Florida Catastrophic Storm Risk Management Center

The State of Florida's Property Insurance Market 2nd Annual Report

1 Table of Contents Executive Summary . 3 Introduction . 8 Framework . 8 Stakeholders . 8 Current Marketplace Challenges . 8 Property Insurance Market History . 9 Legislative and Regulatory Activity . 10 State Involvement in Property Insurance . 13 Citizens Property Insurance Corporation . 13 The Florida Hurricane Catastrophe Fund . 14 Florida Insurance Guaranty Association . 15 Primary Market Structure . 15 Benefits of Private Market . 18 Pricing of Risk . 18 Incentives to Mitigate . 18 Diversification beyond Florida . 19 Exposure . 19 Exposure Trends . 20 Pricing . 23 Rate Level Trends . 23 Role of Catastrophe Models . 24 Reinsurance Pricing . 25 Regulatory Environment Factors . 26 Impact of Mandatory Mitigation Credits . 26 Non-windstorm Losses: Sinkholes . 29 Non-windstorm Losses: Lengthening of the Property Claims Tail . 31 Private Market Performance . 32 Competition . 32 Private Insurance Availability . 34 Number of Companies and Their Structure . 35 Premiums and Surplus . 36 Profitability . 38 Market Size and Capitalization . 39 Market Concentration . 41 Leverage . 42 Reinsurance Market Current Structure . 46 Benefits of Reinsurance to the Florida Marketplace . 46 Pricing of Risk . 47 Access to Capital Markets . 47 The Citizens 2012 Catastrophe Bond Issue . 48 Measuring the Net Effects . 48 Insurance Market Impact: Changing Exposure Levels . 48 State Aggregate Exposure . 49

The State of Florida's Property Insurance Market 2nd Annual Report

2 Private Market Exposure . 49 FHCF Exposure . 50 Consumer Impact: True Cost to Florida Consumers . 50 Assessment Structures and Processes . 51 Subsidies in the Assessments . 62 Economic Impact: Where do we go from here . 62 Conclusions . 63 Appendix A – Data Sources & Data Limitations . 64 Quarterly Supplemental Reports . 64 NAIC Database of Insurer Annual Reports . 64 Appendix B – Company Listings . 65 Appendix C -- Citizens Policies and Occupied Housing Units by Legislative District . 78 Appendix D – References . 84

The State of Florida's Property Insurance Market 2nd Annual Report

3 Executive Summary The number and magnitude of catastrophic events in recent years, such as the September 11, 2001 terrorist attacks, Hurricane Katrina, and the March, 2011 Japanese tsunami, have inspired a rise in the attention devoted to catastrophes. The impact of catastrophes on insurance markets, in particular, has been a subject of attention from policymakers, the media, academics and the general public in recent years. Beginning with Hurricane Andrew in 1992, Florida has been at the forefront of discussions related to natural catastrophes and insurance markets. The state, given its loss history and exposure to hurricanes, provides an excellent setting to analyze the effect that catastrophe exposure and catastrophe losses have on property insurance market operations and performance.

This report serves as an update to The State of Florida’s Property Insurance Market 2011 report completed by the Florida Catastrophic Storm Risk Management Center in December, 2011. First, the report provides a brief history of events, legislative and regulatory activity, and the state of Florida’s involvement in residential property insurance. Second, a thorough analysis of the primary property insurance market in Florida is provided, including information on exposure, pricing, and regulatory factors that have significant effects on insurer performance. Third, the report discusses the data regarding competition, insurance availability, supply-side size and market structure, as well as financial performance of Florida insurers, and provides a comparison to other hazard prone states. Fourth, the reinsurance and other capital markets available to Florida are reviewed. Fifth, the report evaluates the impact of all of these factors by examining the state’s exposure levels and the effect on consumers of the potential post-loss assessments. Finally, the report poses some open questions regarding the economic impact of the market structure that is currently in place in the state.

The most prominent challenge facing Florida is the current and future exposure to catastrophic windstorms. The current condition of the Florida property insurance market has developed from a confluence of natural and man-made events that have taken place over the last three decades. Hurricane Andrew in 1992 and the combined effects of the 2004/2005 storm seasons, population growth and changing demographics, the evolution of the catastrophe modeling industry, management of catastrophe exposure by insurers/reinsurers, and legislative/regulatory actions in Florida have all contributed to the current market conditions. The lack of significant incentives to mitigate, the dependence on coastal development as an economic driver and the potential impact of climate change on storm activity and damages are all challenges facing the marketplace. The Historical Context In 1995, as one of several responses to the devastating effect of Andrew on the State of Florida, Florida State Budget Specific Appropriation 1743A created the Academic Task Force on Hurricane Disaster Insurance to review Florida’s market system for storm disaster insurance. The Task Force final report, “Restoring Florida’s Paradise,” (popularly known as the Collins Report)

4 proposed a “Balanced Equation” approach with the goal to “reestablish a healthy, competitive private insurance market within two to five years.” Characteristics of a “healthy, competitive private insurance market” mentioned in the Collins Report: 1. Coverage by financially strong private companies of most of Florida’s homeowners for hurricane risk; 2. Affordable, competitive rates consistent with widespread coverage of homeowners by private companies; 3. Low numbers of the “truly uninsurable” in one remaining public insurance entity; 4. A strong Florida Hurricane Catastrophe Fund; and 5. A limit on market share for any one company in high-risk areas. The proposed plan called on “private homeowners insurance companies to continue to pay for most hurricane catastrophe damages.” It further recommended “cooperation and mutual responsibility among private insurers, individual homeowners, banking industry, private capital markets, and local, State and Federal governments for the health of the private insurance system.” The Collins Report outlined major components of its Balanced Equation in an effort to establish the abovementioned healthy, competitive private market characteristics. (The full report is available at www.stormrisk.org.) Since the time of the Collins Report, Florida has seen major changes in its property insurance market system, most of which have not resulted in a healthier insurance market. The state, however, has made strides during this time toward reducing the underlying risk, both through improvements in knowledge of the risk and through strengthened building codes. Internal risk reduction through improvement in knowledge of the risk. Florida leads the other 49 states in the use of catastrophe models to estimate the risk, and created the Florida Commission on Hurricane Loss Projection Methodology (“Commission”) to evaluate the accuracy and reliability of the modeling process used to set base insurance rates for the homeowners market. Florida requires residential property insurers to use loss costs from a catastrophe model approved by the Commission for residential insurance pricing. The Commission collaborates with modelers to continue improvement of risk knowledge. External risk reduction through strengthened building codes. Early 2012, the Insurance Institute for Business and Home Safety (IBHS) released a report rating building codes in 18 hurricane-prone states located along the Gulf of Mexico and the Atlantic Coast based on an IBHS-directed study. The study measured the building regulatory systems that hurricane-prone states have in place to promote life safety and property protection. Florida rated highest out of the 18 states with an overall score of 95 out of 100.

5 Unfortunately, risk reduction on existing construction has not met with the same success as with new construction due to problems within the My Safe Florida Home (MSFH) and Insurance Mitigation Discounts programs (discussed in detail in The State of Florida’s Property Insurance Market 2011 available at www.stormrisk.org). And also unfortunate, Florida must be given low marks for the achievement of a “healthy, competitive private residential insurance market.” This report focuses primarily on the health status and continuing challenges of the insurance marketplace.

Marketplace Challenges The most prominent challenge to the Florida residential insurance market is the state’s current and future exposure to catastrophic windstorms. Catastrophe exposure has in fact driven the evolution of Florida’s property insurance market. The series of actions and reactions that have followed Hurricane Andrew in 1992 all stem from attempting to address this basic underlying driver. Attempts at effective public policy are made more challenging by: 1) The lack of homeowner-perceived incentives to mitigate; 2) Reliance on coastal development as an economic driver; 3) The potential impact of climate change on storm activity; and 4) Affordability of property insurance premiums. But effective public policy must be accomplished for a return to Florida as a state where citizens and taxpayers have confidence in its disaster insurance market to be possible. Florida’s property insurance market, simply put, does not meet the Collins Report “healthy market” standard on any front.

Lack of coverage by financially strong private companies. A shift in private insurance market domination from large, geographically diverse companies to small domestic insurers has taken place since the time of the Collins Report and private market capacity and performance have declined. High numbers and high market share concentrated in one public insurance entity (Citizens). Rather than having low numbers of the “truly uninsurable” in one remaining public insurance entity, high numbers of both the insurable and uninsurable are today covered by Citizens. Citizens is the primary writer of new insurance policies in Florida, with a total number of new policies written greater than the combined total of the other 9 companies in the Top 10. The growth of the state’s role in providing residential property insurance may be both evidence of a malfunctioning private insurance market and also a cause of that malfunction. The catastrophe fund. The Florida Hurricane Catastrophe Fund tries to provide financial stability to Citizens and the private market. It relies heavily, however, on its ability to borrow and to assess policyholders in order to pay its costs in the event of a disaster.

6 Questionably affordable, competitive rates inconsistent with widespread coverage of homeowners by private companies. The emphasis of public policy related to property insurance seems to have been placed on insurance affordability, so much so that since the time of the Collins Report, overall homeowners insurance premiums declined while insured values did not. Rates in the private market are now effectively set by Citizens, and it is unknown whether the true price of the insurance is competitive, fair or affordable since potential post-loss assessments could be quite high as well as result in subsidies across Florida policyholders. Information in this Report Capital is needed to support the windstorm risk present in the state of Florida. While there appears to be ample capital to support catastrophic exposure at higher levels of the loss distribution (e.g., reinsurance and capital market products), the availability of capital to support catastrophic exposure at the primary insurer level appears to be less healthy. This can be seen via the:  High number of insurance companies exiting the Florida market and a lack of companies entering to replace them;  Growing number of insurance companies no longer writing new policies in Florida;  Lack of new insurance company formation in Florida; and  Slow growth of capital supporting premiums written by primary insurers in Florida. To establish evidence for the concerns mentioned herein, this report analyzes the Florida insurance market in two ways. First, looking at the Florida market individually, the report studies the four major categories of residential property insurers: Citizens, Florida domestic insurers, pup companies, and multiline national insurers. Florida is a market dominated by Citizens and relatively small monoline domestic property insurers. This type of structure raises questions as to the ability of the private market to withstand significant storm activity. The second analysis compares Florida to other hurricane-prone states. This analysis shows that Florida’s structure is unique among similarly exposed states in terms of both the state’s involvement and the number and market share of independent insurers. Further, it reveals that the insurance marketplace is weaker, overall, than that of other hurricane-prone states. Data from The State of Florida’s Property Insurance Market 2011 have been updated to include 2011 and 2012 data (where available). Much of the media coverage of Florida’s property insurance market in 2011 and early 2012 focused on Citizens, so this report includes a significant discussion of the state’s residual property insurer. Indeed, four updates from The State of Florida’s Property Insurance Market 2011 focus specifically on Citizens: 1. The evaluation of Citizens policy counts and assessments now includes a brief analysis of Citizens policy counts by legislative district (See Table 12);

7 2. The discussion of Florida’s post-loss assessment structure reflects the legislative changes to Citizens’ assessments (See Figure 3 and Table 13); 3. A discussion of Citizens’ 2012 catastrophe bond issue has been added (See the end of Section V – Reinsurance Market Structure); and 4. A discussion of Citizens’ depopulation activities has been included, although it is too early to draw any conclusions about their success or failure (See Section II – Property Insurance Market History).

In addition to the added discussion of Citizens, many of the trends noted in The State of Florida’s Property Insurance Market 2011 continue: 1. Citizens continues to dominate new policy writing in Florida (See Table 3); 2. While Citizens and the FHCF’s financial pictures are better than in 2011, the FHCF may still not be able to bond adequately to cover potential liabilities (See Table 14); 3. The percentage of PMLs that would be funded through post-loss assessments by Citizens and the FHCF continues to decline as the number of years without a land-falling storm continues to increase (See Table 14); 4. The role of catastrophe models and model verification continues to remain an issue in pricing in both the primary and reinsurance markets (See Section III – Primary Market Structure); 5. Reinsurance (and the FHCF) is still vital to Florida’s private primary insurers as retention ratios are continuing to hover around 40% (See Chart 7); 6. The concentration and leverage of Florida’s private property insurers is still a significant concern (See Table 5 and Chart 6); 7. Overall exposure levels in Florida have remained relatively level as measured by total insured values (See Chart 1) and PML (See Table 10); and 8. Rates continue to slowly increase but for most market segments remain well below 2005 levels (See Chart 2).

Open questions still remain regarding a variety of issues in the Florida market. Should the state be involved in providing insurance or reinsurance? If so, what is the participation strategy achieves the healthiest private market? How much post-loss financing (if any) should be utilized within the public strategy? What are the economic impacts of the current and future insurance market structures? These questions need to be answered and public policy implemented accordingly if stakeholders are to once again have confidence in the Florida property insurance marketplace.

8 Introduction Framework This report serves as an update to The State of Florida’s Property Insurance Market 2011 report completed by the Florida Catastrophic Storm Risk Management Center in December, 2011, available at www.stormrisk.org. First, the report provides a brief history of events, legislative and regulatory activity, and the state of Florida’s involvement in residential property insurance. Second, a thorough analysis of the primary property insurance market in Florida is provided, including information on exposure, pricing, and regulatory factors that have significant effects on insurer performance. Third, the report discusses the data regarding competition, insurance availability, supply-side size and market structure, as well as financial performance of Florida insurers, and provides a comparison to other hazard prone states. Fourth, the reinsurance and other capital markets available to Florida are reviewed. Fifth, the report evaluates the impact of all of these factors by examining the state’s exposure levels and the effect on consumers of the potential post-loss assessments. Finally, the report poses some open questions regarding the economic impact of the market structure that is currently in place in the state. Stakeholders There are a variety of stakeholders in the Florida property insurance market. Clearly Florida property owners and primary insurers are stakeholders; however, because of the potential post- loss assessments and economic importance of a functioning insurance market, all current and future Floridians are stakeholders in this market. In addition to the primary insurers, reinsurers and investors in capital market products such as catastrophe bonds are also stakeholders in this market. Finally, public policy makers at the local, state and federal level are stakeholders who need to be considered.1 Current Marketplace Challenges There are a variety of challenges facing the Florida property insurance market. The most prominent is the current and future exposure levels to catastrophic windstorms. Catastrophic exposure levels have driven the evolution of Florida’s property insurance market. The series of actions and reactions that have followed Hurricane Andrew in 1992 all stem from attempting to address this basic underlying driver. The lack of significant incentives to mitigate, the reliance on coastal development as an economic driver, and the potential impact of climate change on storm activity are all challenges facing the marketplace. These issues combined with a challenging regulatory environment, insurers and insurer rating agencies focusing on catastrophic exposure, and an unclear cost of capital associated with investing in catastrophic risk make the Florida property insurance market a unique and challenging marketplace. 1 The potential for federal government disaster relief funds makes all Americans potential stakeholders. The analysis presented here does not explicitly account for federal post-loss intervention.

9 Affordability of property insurance premiums is still a significant issue in the state of Florida and it appears that this will continue for some time. Recent efforts to reduce the state’s role in the insurance market by shrinking the size of Citizens Property Insurance Corporation will be discussed later in this report. Property Insurance Market History The current condition of the Florida property insurance market has developed from a confluence of natural and man-made events that have taken place over the last three decades. Hurricane Andrew in 1992 and the combined effects of the 2004/2005 storm seasons, population growth and changing demographics, the evolution of the catastrophe modeling industry, management of catastrophe exposure by insurers/reinsurers, and legislative/regulatory actions in Florida have all contributed to the current market conditions.

Prior to Hurricane Andrew, Florida’s property insurance market was similar to many other states in that the market was dominated by a few large multistate, multiline insurers. Following Andrew, insurers re-evaluated their books of business and reduced their exposure to catastrophes while Florida continued to see substantial population growth and an increase to its exposure to catastrophic damage. These two trends have spurred a series of legislative, regulatory, and insurer actions/reactions that have significantly altered the property insurance landscape in Florida. An analysis of the state of the property insurance market in Florida requires a significant examination of these crucial developments in Florida. The growth of the property insurance residual markets in Florida may be a cause of some private market disruptions, but also may just be a symptom of other underlying issues. The implementation of mitigation credits in Florida in an attempt to reduce property insurance premiums has had a significant impact on insurer strategy and performance, as well as on the size of the residual market. The availability of capital to support catastrophic exposure at the primary insurer level appears to be dwindling. This can be seen via the:  High number of insurance companies exiting the Florida market and a lack of companies entering to replace them;  Growing number of insurance companies no longer writing new policies in Florida;  Lack of new insurance company formation in Florida; and  Slow growth of capital supporting premiums written by primary insurers in Florida. It does appear that, despite a weak primary market, there is capital to support catastrophic exposure at higher levels of the loss distribution as the markets for reinsurance and capital market products appear to be healthy.

10 Legislative and Regulatory Activity Regulation and legislation have both played important roles in premium setting during the last decade. The most influential legislative activities:  House Bill 1A, passed in 2007, rolled back Citizens rates, froze rates going forward, allowed policyholders to purchase Citizens policies without first being rejected by the admitted market, and expanded the capacity of the FHCF; and  The Citizens glidepath legislation, passed in 2009 (effective 2010), limited premium increases on any individual Citizens policy to 10% per year.

Recent legislative activity has not had as large an impact on insurance rates. In 2011, Citizens was required to file with Florida’s Office of Insurance Regulation (OIR) actuarially fair rates for sinkhole coverage and any rate increases due to sinkholes were to be implemented outside the 10% glidepath restriction on rate increases. In 2012, legislation altered the assessment structure of Citizens. Within Florida’s residential property insurance market, the OIR affects premium setting in two primary ways. First, by setting Citizens rates, the OIR implicitly sets market rates, as private insurers are in direct competition with Citizens. Second, and more directly, the OIR is charged with rate approval for private insurers.

Recent regulatory activity that had significant effects on premiums (in addition to Citizens rate setting and approval/disapproval of rate increases) involved mitigation credits. These activities included:  Creation of the mitigation discount tables in 2003 by rescaling the ARA mitigation credit study from the average structure being the base house to the weakest structure being the base house, thus ensuring that most inspected homes can be eligible for a mitigation credit and being a worse than average risk results in no surcharges; and  Full implementation of the mitigation credit structure in 2006-2007 without allowing insurers to adjust their base rates to reflect the fact that the weakest structure is the base house. (Insurers used the average house as their base structure to compute their base rates.) In 2011, Citizens filed for sinkhole rate increases of 447% for HO and 631.5% for Dwelling. The OIR limited Citizens rate increases for sinkhole coverage to 32.8% for HO and 96.5% for Dwelling.

11 Figure 1 shows major legislative and regulatory activities since 1970 affecting Florida’s residential property insurance market. Additional legislative and regulatory activities are discussed in more detail throughout this report.

12

13 State Involvement in Property Insurance Florida has developed several property insurance mechanisms.2 In 1970, the Florida Windstorm Underwriting Association (FWUA) was enacted by the Florida Legislature to offer “wind only” coverage in Monroe County and the Florida Keys. The FWUA was gradually expanded to provide wind coverage in 29 of Florida’s 35 coastal counties. Since this initial attempt to provide a public policy response to catastrophic windstorm risk, three entities have evolved with expressly different purposes: Citizens Property Insurance Corporation, the Florida Hurricane Catastrophe Fund, and the Florida Insurance Guaranty Association. Each is briefly introduced here.3 Citizens Property Insurance Corporation After Hurricane Andrew in 1992, the Florida Legislature met in a special session to address problems in the residential insurance market. Several insurers had become insolvent, and others were concerned about increased insolvency risks. The Legislature addressed the need for homeowners insurance policies that provided “full” (multi-peril) coverage rather than wind-only policies offered by the FWUA. The Florida Residential Property and Casualty Joint Underwriting Association (FRPCJUA) or (JUA) was created in 1992, and later combined with the residual market mechanism that insured commercial residential or condominium and apartment buildings (the Florida Property Casualty Joint Underwriting Association). The Florida Legislature merged the FWUA with the FRPCJUA, creating Citizens Property Insurance Corporation (Citizens) effective August 1, 2002. Citizens has three distinct accounts: the Personal Lines Account, the Commercial Lines Account, and the Coastal (formerly High- Risk) Account. The Coastal Account consists of policies from the FWUA territories. When any of these three accounts has a deficit, Citizens may levy assessments. These assessments are not only against its policyholders but also against the policyholders of private insurers in almost all lines of property casualty insurance. A more detailed discussion of the assessments is found in Section VI (Measuring the Net Effects) of this report. While developed as a residual market entity, Citizens now accepts nearly all insurable applicants. Legislative changes in 2007 (based on House Bill 1A, or HB1A) removed eligibility restrictions on Citizens as a competitor with private insurers. Prior to HB1A a policyholder had to be rejected in the private market or show that admitted insurers were charging 25% more or higher than Citizens to be eligible for Citizens coverage. HB1A removed the requirement that a policyholder must be rejected by the private admitted insurance market to be eligible for Citizens coverage. After the passage of HB1A, the minimum premium difference requirement for 2 For a complete discussion of residual market mechanisms and their development in Florida see Newman (2010) and Newman (2009).

3 See Cole et. al. (2009).

14 Citizens eligibility was reduced from 25% to 15%. It does not appear, however, that there are any enforcement mechanisms in place to verify the premium difference requirement. Table 1 shows the growth in Citizens’ policy count from end-of-year 2003 through 2011. The table also indicates an overall decrease (or at least lack of growth) in Citizens’ policy count from end-of- year 2011 through November, 2012. Table 1: Citizens Property Insurance Corporation Personal Residential Policy Counts PLA (Multi- peril) Coastal (Wind Only) Coastal (Multi- peril) Total Personal Residential Policy Count Nov. 2012 888,423 240,184 165,729 1,294,336 Apr. 2012 984,621 242,689 176,056 1,403,366 Dec. 2011 1,003,856 245,506 173,798 1,423,160 Dec. 2010 829,406 248,328 154,663 1,232,397 Dec. 2009 609,652 251,287 114,561 975,500 Dec. 2008 629,467 328,775 67,672 1,025,914 Dec. 2007 845,857 421,505 24,676 1,292,038 Dec. 2006 743,592 403,509 1,147,101 Dec. 2005 407,387 399,418 806,805 Dec. 2004 416,529 453,765 870,294 Dec. 2003 383,280 433,056 816,336 Source: www.citizensfla.com, various financial statements As of December 2011, Citizens insured in excess of 1.4 million Florida personal residential policies. By the end of January 2012, Citizens’ policy count peaked at nearly 1.5 million policyholders.4 More than 1 million of these policies were in the multi-peril PLA category, meaning they covered non-coastal properties. As seen in Table 1, the number of policies in the Coastal account has been relatively stable, while the number of policyholders in the PLA account more than doubled between end-of-year 2005 and 2011. This upward trend was partially driven by sinkhole issues, as Citizens has added nearly 75,000 policies (a 65% increase) in Hernando, Hillsborough, and Pasco counties between the third quarter 2009 and April 2012. The Citizens market share (based on policy count) in those counties increased from 23% (third quarter 2009) to more than 42% (end-of-year 2012) in two years. Strategies to reduce the policy count in Citizens may be working as Citizens’ policy count reduced by more than 150,000 policies by November, 2012 from its high point in January, 2012.

The Florida Hurricane Catastrophe Fund The Florida Hurricane Catastrophe Fund (FHCF) was created by the Florida Legislature in 1993 to provide additional insurance capacity and help stabilize the property insurance market in Florida (Fla. Stat. s. 215.555(1)). The FHCF provides reimbursement for a portion of a property 4 Citizens had 1,475,000 policyholders as of January 31, 2012.

15 insurer’s hurricane losses above the amount retained by the insurers. Insurers enter into contracts with the FHCF and pay a premium. The FHCF is able to accumulate premium payments on a tax- free basis as it is exempt from federal income taxation. The FHCF’s total potential obligation is set by statute. For the 2012-2013 storm year, the FHCF’s total potential obligation for the mandatory layer is $17 billion. There is also some exposure for the FHCF in the Temporary Increase in Coverage (TICL) layer. The exposure in this layer will depend on insurance companies opting to purchase a contract in that layer (they have until June 1, 2012). As of early May, the FHCF had only $317 million in exposure in the TICL layer.5 In the event that the FHCF’s losses exceed its surplus, the FHCF is authorized to collect assessments on policyholders in almost all lines of property casualty insurance. The amount of coverage available from the FHCF, the cost of the coverage, and the potential assessments are significant factors in the state of the insurance market. A more detailed description is found in Section VI (Measuring the Net Effects) of this report.

Florida Insurance Guaranty Association Although not a residual market, a discussion of The Florida Insurance Guaranty Association (FIGA) seems appropriate at this point. FIGA was created by the Florida Legislature in 1970 to address concerns about the adverse effects of insolvent insurers. Its specific purpose is to “provide a mechanism for the payment of covered claims under certain insurance policies to avoid excessive delay in payment and to avoid financial loss to claimants or policyholders because of the insolvency of an insurer.” (Section 631.51(1), F.S.) FIGA does not accumulate funds in advance of an insurer’s insolvency but, similar to Citizens and the FHCF, obtains funds through pro-rata assessments levied by the Office of Insurance Regulation on companies subject to assessment. A more complete discussion of FIGA is found in Section VI (Measuring the Net Effects).

Primary Market Structure The market for residential property insurance in Florida has been scrutinized extensively since 1993, in the wake of Hurricane Andrew. Market health is determined largely by the interplay between prices and availability. If insurers determine they have underestimated the costs of providing coverage, it is imperative they are able to adjust estimates (and prices) upward to avoid potential insolvency (i.e., the inability to keep the insuring promise made to policyholders). If they cannot raise prices adequately to pay expected losses, they might leave the market. Conversely, if insurers determine they have overestimated the costs of providing coverage, it is imperative they are able to adjust estimates (and prices) downward before they begin to lose 5 See the May 10, 2012 Claims Paying Estimates report for the FHCF done by Raymond James.

16 market share to the competition, which is likely growing given the short-term possibility of excess profits. The state of Florida has more than $1.8 trillion in insured residential property exposure (see Chart 1). The state has more than $4 billion in expected average annual losses (AAL) due to windstorms ($4.17 billion according to RMS v11.0, $4.35 billion according to AIR 12.0.1) and nearly $60 billion in 1-in-100 probable maximum losses (PML) due to windstorms ($52.6 billion RMS v11.0, $61 billion AIR 12.0.1).6 To support this type of catastrophic exposure, Florida needs a large diverse capital base available to pay for losses if and when they occur. Table 2 shows the probable maximum losses (PML) per occurrence faced by residential policyholders in Florida.

Table 2: Probable Maximum Windstorm Loss Amounts for Florida by Return Period Return Time (Years) Gross PML 50 $38 B 100 $57 B 250 $87 B Source: 2012 Annual report of aggregate net probable maximum losses, financing options, and potential assessments Per-occurrence PML amounts represent large loss amounts that are estimated to be exceeded only once during a return period. For instance, a PML of $38 billion with a 50-year return period can be interpreted to mean that loss costs from a single storm are estimated to exceed $38 billion only once every 50 years, over the long run on average. Another way to interpret the value is to restate the return period as a probability: There is a 2% (1/50) probability that the loss costs from a single storm will exceed $38 billion.

When large losses occur, capital is needed to pay for the losses. Potential capital sources include residential property owners, the private insurance market, the State and its affiliated entities, the Federal Government, and tax payers (within Florida and nationally). Property owners in Florida are the first tier source of capital, as they will need to be able to pay for any uninsured damage as well as any deductibles on insured losses to their property as well as any losses over policy limits. The second tier of capital is Florida’s primary insurance market; the current structure of which includes both the private insurance market and the State’s residual market. The private market for primary insurance includes insurers admitted by the OIR to compete in Florida for standard business as well as non-admitted insurers selling only in the surplus lines. We do not have 6 The AALs and PMLs are for residential and commercial residential properties only. Commercial residential includes condominiums, apartment complexes, etc., including the common elements in those complexes.

17 significant data on the premiums collected or the amount of exposure currently being insured in the surplus lines market.7 This report focuses on the admitted insurers and Citizens and partitions the Florida property insurance market into four segments of primary insurers: 1. Citizens. Florida’s state-sponsored property insurer. 2. Florida domestic insurers (“domestics”). Florida-domiciled insurers who write primarily Florida property insurance. Many of these domestics began operating after Hurricane Andrew. The Insurance Capital Build-Up Incentive Program provided start-up surplus loans to 13 new property insurers in 2006-2007.

3. National company subsidiaries (“pups”). Florida-domiciled subsidiaries of national insurers. These pups are focused solely on property insurance in Florida while still members of the parent’s insurance group. The subsidiary structure allows national insurers to isolate the parent’s assets from Florida’s catastrophic property exposure. 4. National insurers and others. These insurers are not Florida-based and do not fall in any of the above categories. Most are traditional national insurers with a multi-line focus. A list of company names and National Association of Insurance Commissioners (NAIC) codes used in this report, along with assignments to these Florida segments, is included as Appendix B. Excluding Citizens and non-admitted (surplus lines) insurers, Florida’s primary insurance market collected approximately $6.45 billion in residential property insurance premiums that include wind coverage in 2011. Citizens collected nearly $2.5 billion in residential property premiums in 2011 that include wind coverage. Residential property insurance includes homeowners, dwelling, condominium owners, and allied lines that included wind coverage.8 The total homeowners’ insurance premiums collected in 2011 were approximately $7.7 billion ($6.0B in private market and $1.7B for Citizens).9 While this is enough to cover the AAL ($4- 7 While most surplus lines business has traditionally been commercial lines coverages, the role of the non-admitted market has expanded greatly in providing personal lines property insurance coverage in hazard prone areas. The non-admitted market adds significant capacity in high risk areas, but their policies are generally not protected by the state’s guaranty funds. The Florida Surplus Lines Insurance Office’s 2010 Annual Report shows that surplus lines premiums in the state of Florida were more than $3.8 billion in 2010. Of that, more than $1.3 billion (both commercial and personal lines, property and liability) in premiums were written in Miami-Dade, Broward, and Palm Beach counties (southeastern Florida).

8 Two main datasets were used in the analysis for this paper, see Appendix A. The first dataset is the QUASR dataset maintained by the Florida Office of Insurance Regulation. When data from that dataset is referenced the terminology will reference residential property insurance premiums. The second dataset utilized is the NAIC annual statement data. That dataset organizes data by line of business which is slightly different than the categories used by the QUASR data. The homeowners’ insurance line of business in the NAIC dataset does not include non-owner occupied dwelling policies, which are included in the QUASR residential property insurance premiums. In the NAIC data, non-owner occupied dwelling policies are included in Allied lines. This difference in categorization makes apples to apples comparisons between datasets difficult, but both datasets were used because the NAIC dataset allows for cross state comparisons that the QUASR data does not allow. 9 Source: NAIC annual statement database.

18 $4.5 billion) from windstorms, it does not approach the amount needed to cover the PMLs.10 Recall that total losses from the 2004-2005 storms were more than $35 billion and the 1-in-100- year PML is nearly $60 billion. Capital is needed to support the deviation from expected loss amounts that can occur. Through reinsurance transactions, the FHCF and the global reinsurance market are also suppliers of capital to support Florida’s catastrophic risk.11 Citizens, the FHCF, and FIGA all utilize post- loss assessments to supply capital, which means that almost all property casualty policyholders in Florida ultimately supply a portion of their capital. The final supplier of capital may be the Federal Government and ultimately all taxpayers if federal aid is necessary (and available) to pay for losses.

Benefits of Private Market Many reports have discussed the value of having a properly functioning and solvent private market for property insurance. There are three main benefits to having the private market: accurate pricing of risk, incentives to mitigate, and diversification of risk beyond Florida. Pricing of Risk One of the major advantages of having a private market for insurance coverage is the market forces that will work to accurately price risk. Competition will ensure that insurers cannot overcharge for coverage. If an insurer is charging too much, other insurers in the marketplace will be able to gain market share. In addition, insurers will not be able to undercharge for insurance and remain solvent. The accurate pricing of the risk will include the appropriate market determined risk load or return on capital. To entice investors to be willing to put their capital at risk in Florida’s property insurance market, they must be adequately compensated. The rate of compensation is market determined and varies with market conditions, including (but not limited to) other investment options, supply and demand for capital, volatility of losses, and interest rates.

Incentives to Mitigate Accurate pricing of risk will also lead to proper incentives to mitigate. Although the insurance mechanism is not the only mechanism that could or should be used to incentivize mitigation, it is one of them. Accurate risk pricing provides policyholders with optimal location and mitigation incentives by internalizing the cost of catastrophic risk to those who are exposed to the risk. Mitigation will reduce the cost of risk and the expected cost of losses. Therefore, policyholders forced to bear the accurate cost of their risk can make rational mitigation decisions and invest in 10 These premiums must also cover losses from all other causes of loss covered by a homeowners’ policy. 11 Both insurers and reinsurers have a variety of capital market products that may be used to draw investors and capital to support catastrophic risk. These products can include: catastrophe bonds, catastrophe swaps, industry loss warranties (ILWs) and other insurance-linked securities. These markets, while growing, do not supply a significant portion of the capital in Florida or anywhere.

19 cost effective mitigation strategies. It is important to remember that avoidance is also a mitigation strategy. For Florida, this strategy could be seen as individuals chosing not to relocate to Florida or a reduction in new building in hazardous areas. Diversification beyond Florida Private market insurers can benefit from the law of large numbers and diversification benefits of having a book of business that contains some property exposure in Florida along with exposures in other parts of the country (or world). This type of diversification ensures that the cost of risk can be minimized and the insurer has funds that can flow in and out of the State to pay for losses when they occur. State run insurers do not have the same ability to diversify across state lines. Exposure The sources and cost of the capital available to support Florida’s catastrophic exposure have evolved over the last 25 years. Figure 2 shows the major changes that have occurred in Florida’s private residential insurance market since Hurricane Andrew in 1992. Formation of the pups and domestics occurred almost entirely during this period. Since 2006, several of the domestics have become insolvent. While some of these insolvencies can be traced directly to the 2004-05 storm seasons, the most recent insolvencies (in 2010-11) are not necessarily traceable to specific catastrophic losses.

Citizens, the FHCF and FIGA are all relying on debt as a significant source of capital in the event of a major loss. As will be discussed in more detail in Section VI (Measuring the Net Effects), approximately 30% of 50- or 100-year return time losses in 2012 will be financed through assessments from Citizens and the FHCF. This does not include any assessments that may be necessary from FIGA for insolvent insurers. In Section IV (Private Market Performance), we discuss how the amount of capital available from the private, admitted insurers market has been decreasing while exposure has increased. Reinsurers provide a significant source of capital and diversification to the Florida insurance marketplace. As the private primary market has become one of smaller and less diversified companies, more reinsurance is necessarily being used.

Citizens’ market share continued to grow. As of year-end 2011, the residual entity wrote 53% of the Dwelling/Fire, 40% of the Allied Lines, and 22% of the Regular Homeowners markets (multi-peril and wind only policies), respectively. Citizens now underwrites a combined total of 27% of the personal residential insurance premiums in Florida, excluding mobile homes.12 12 Source: OIR QUASR market share reports.

20 Exposure Trends Property insurers measure exposure to risk by units of insured value, which ultimately represents the size of the promises they have made in contracts. Insured values are based on principle of indemnity in the insurance contract, and should reflect replacement costs of construction, not market real estate values. Real estate values and construction costs, however, often increase in tandem when labor and materials are scarce. The housing depression in Florida has resulted in slack markets and only very slow inflation in replacement costs since 2007Q2, but not deflation of such costs. The path of statewide insured values is shown in Chart 1. As the personal lines policy count has remained roughly flat during the analysis window, at 5.7 million (plus or minus 100,000), the increase in exposures up through 2007 is almost entirely based on increases in the insured value of properties rather than growth in policy count.

The total insured value has been near $1.8 trillion since early 2008. Insured exposure values decreased slightly over the last two years and population growth has slowed significantly over the last few years coinciding with the drastic changes in the Florida housing markets.13 It is important to reiterate that insurance provides replacement cost coverage on structures, so market value of property is not a good measure of exposure. While construction costs (and therefore replacement costs) vary, they do not necessarily move with housing market prices; construction costs have increased only slightly. This, combined with slow construction, implies that exposure, as measured by replacement costs, has remained relatively stagnant during this time period. 13 See University of Florida Study on Florida Population (2011).

21 Chart 1: Trend in Florida Personal Residential Property Insured Values (2005-201214 ) 14 The insurance industry has generally become more sophisticated about monitoring insured values in accordance with the insure-to-value requirement of most homeowners insurance policies. The net rise since 2007Q2 to just under $1.9 trillion in insured value, despite the slack economy, likely reflects insurance-to-value efforts.

22 Figure 2: Timeline of Major Changes in Florida’s Private Market for Residential Property Insurance 1992 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Weather Events Hurricane Andrew Hurricanes Charley, Frances, Ivan, Jeanne Hurricanes Dennis, Katrina, Rita, Wilma Pup Formation Travelers of Florida established (First Floridian Auto & Home) Allstate Floridian established (Castle Key Insurance) State Farm Florida established Nationwide Insurance Company of Florida established Encompass Floridian established (Allstate) Capital Incentive Programs Insurance Capital Build‐Up Incentive Program Domestic Insurer Entries 3 3 8 5 2 1 1 4 8 6 9 4 1 Domestic Insurer Insolvencies Atlantic Preferred Ins. Co. (Poe Group) Florida Preferred Property Ins. Co. Southern Family Ins. Co. Vanguard Fire & Casualty Coral Ins. Co.

Magnolia Ins. Co. Northern Capital Ins. Co. Homewise Preferred Ins. Co. (receivership)

23 Pricing There are a number of factors that affect pricing of residential property insurance in Florida. The legislative and regulatory factors previously discussed had a significant impact on rates and therefore premiums over the last six years. In addition, the growing role of catastrophe models and reinsurance pricing are all highly influential factors in pricing. This section will discuss each of these factors. Rate Level Trends Rate levels actually earned by insurers are best measured by the ratio of premium to insured value – premiums per unit of risk. Rate is the amount charged per $1,000 of insured value. Similar to exposure, changes in rates inherently have significant impact on insurance premiums. Florida has seen notable volatility in insurance rates over the last decade, including a relatively high 15% increase occurring between year-end 2005 and 2007.15 House Bill 1A, which took effect in early 2007, included the expansion of the FHCF along with increases to the minimum mitigation credit requirements and changes to Citizens rate structure and thereby reduced insurance rates. Rates declined through the end of 2009 to below year-end 2005 levels and still remain below that baseline on a statewide average basis. Rate levels for domestic companies and Citizens generally declined the most.

This rate erosion appears to have bottomed out in late 2009 or early 2010. Rates in each of the four company categories have been climbing since 2010, but still need significant growth to reach 2005 levels across the board. By late 2012, it appears only rates for the pup and “other” (mostly national group) companies are close to regaining their end of 2005 levels. Rate decreases combined with stagnant insured values imply significant erosion in the statewide premium base. Chart 2 shows the rate trends over the last seven years in Florida. 15 Rates rose about 15% statewide during the run-up of 2006, but insured values rose by about twice as much (in percentage terms). Said differently, about two of every three dollars of premium increases seen by consumers in 2006-2007 were due to recognition of increased exposure, not increased rates.

24 Chart 2: Trend in Florida Personal Residential Property Insurance Rate Levels (2005-2012) Source: QUASR Role of Catastrophe Models The traditional rating methodology of using historical loss costs aggregated to territorial levels has proven unreliable with regard to catastrophic perils such as hurricanes or earthquakes (Nyce and Maroney, 2010). Because of the nature of these perils (i.e., the frequency, severity and correlation of exposures), traditional rating methods have been replaced by catastrophe models. These models are forward-looking computer simulations incorporating a variety of sciences (including, but not limited to engineering, meteorology, geology, geography, and oceanography) to develop average annual loss costs, not at a class or territory level but at the individual property level. These models do not rely on homogeneity of exposures to develop historic loss costs, but on scientific estimates of storm frequency and severity and engineering estimates of structural damage to determine a loss estimate at the property level. The catastrophe models are reviewed and approved for use for setting rates in Florida by the Florida Commission on Hurricane Loss Projection Methodology (Commission).

The shift to catastrophe models would likely lead to a fundamental shift in the rate-making methodology for the windstorm portion of property insurance premiums. Insurers would not determine the rate they need for their book of business but the rate they need for each individual

25 property insured. Although catastrophe models generate average annual losses (AALs) at the property level, rating plans filed by insurers (in Florida and other states) still rely on territorial rating for homeowners and wind-only property coverage. A switch to this bottom-up rate making depends on the accuracy of the catastrophe models, the validation of the relevant construction features, and the verification of their existence on the property for windstorm risk rating. This type of approach raises a number of questions as to the role of the catastrophe models in setting wind rates. Are they a replacement for historical data? How accurate are they? Can the loss costs they generate be used as the sole determinant of wind rates? If so, then the roles of model verification (such as the Florida Commission on Hurricane Loss Projection Methodology) and data accuracy become increasingly important. The variation across models (Cole and McCullough, 2010) and the volatility found from one version to the next is problematic. For example, a recent study indicates significant differences in predicted average loss costs per $1,000 value depending on whether using: 1) AIR 12.0.1 or AIR 11.0; 2) RMS 11.0a or RMS 8.0a; and 3) AIR 12.0.1 and RMS 11.0a.16 These models represent the current best practices in prediction of windstorm losses and are vital to appropriate pricing of property insurance in Florida and other windstorm prone states. Catastrophe models are updated as technological advances and new information become available. These updates can have a significant impact on predicted loss costs and, therefore, on indicated rates and premiums. This is a relatively new and developing field. As with any new field there will be mistakes and significant changes or developments that have substantial impact. These changes can take place in any of the fields of science (meteorology, oceanography, etc.), engineering, technology, information or market evolution and will be continuing for the foreseeable future.

Reinsurance Pricing The evolution of the Florida property insurance market, from being a market dominated by large, diverse national insurers with significant surplus to becoming a market dominated by smaller, monoline (or virtually monoline) and geographically focused insurers has made the market increasingly reliant on the global reinsurance market as its primary source of diversification and risk capital. Reinsurers are the primary link between Florida property insurance companies and the broader capital markets that may be interested in making capital investments in the catastrophe risk market. In 2012, Citizens issued their first catastrophe bond without going 16 Rollins Analytics, Inc., in March, 2011, completed a comparative analysis of loss costs generated by recent models from AIR and RMS. The analysis compared predicted average loss costs for each wood frame, masonry and mobile home structure on a county-by-county basis.

26 through a reinsurer. Details on that catastrophe bond offering are discussed later in this report. The reliance on reinsurance affects rates and premiums in Florida in two ways. First, reinsurers can set risk-based rates using their choice of catastrophe models that may or may not have been approved by the Commission. The models used by reinsurers may result in significantly different rate indications than those used by Florida property insurers. Second, as the link between Florida windstorm risk and the capital markets, reinsurers are the best indicator of the cost of capital needed to entice investors to Florida’s catastrophe risk market. Because this cost of capital is dependent on market conditions and other investment opportunities to which investors have access, it can fluctuate widely and have significant impact on reinsurance rates, premiums, and private market insurance stability in Florida.

Regulatory Environment Factors As noted in the Property Insurance Market History section, regulation and legislation have both played important roles in premium setting during the last decade. The most influential legislative activities were:  House Bill 1A, passed in 2007 , rolled back Citizens rates, froze rates going forward, allowed policyholders to purchase Citizens policies without first being rejected by the admitted market, and expanded the capacity of the FHCF; and  The Citizens glidepath legislation, passed in 2009 (effective 2010), limited premium increases on any individual Citizens policy to 10% per year.

In addition to the role that regulation plays in premium setting (setting Citizens’ rates and rate approval for private insurers), recent regulatory activity that has had a significant impact on premiums involved mitigation credits. These activities included:  Creation of the mitigation discount tables in 2003 by rescaling the ARA mitigation credit study from the average structure being the base house to the weakest structure being the base house, thus ensuring that most inspected homes can be eligible for a mitigation credit and being a worse than average risk results in no surcharges; and  Full implementation of the mitigation credit structure in 2006-2007 without allowing insurers to adjust their base rates to reflect the fact that the weakest structure is the base house. (Insurers used the average house as their base structure to compute their base rates.) Impact of Mandatory Mitigation Credits One of the methods of reducing Florida’s current exposure to windstorm damage is to mitigate the existing building stock. The reduction in average annual losses and probable maximum losses due to windstorms can be reflected in insurance premiums through mitigation credits applied to the property insurance premiums on deserving properties. The use of mitigation credits can serve as an incentive to property owners to undertake cost effective mitigation

27 activities such as installing storm shutters or other types of opening protection. However, an improperly structured mitigation credit program can reduce a property owner’s mitigation incentives or have other perverse effects on the insurance market. In 1993, the Florida Legislature enacted section 627.0629 of the Florida Statutes. This statute required rate filings for residential property insurance to include appropriate discounts, credits, or other rate differentials (or appropriate reductions in deductibles) for properties on which fixtures have been installed that are actuarially demonstrated to reduce the amount of loss in a windstorm (s.13, ch.93-410, Laws of Florida). In 1997, the Department of Insurance issued rule 69O- 170.017 F.A.C., which required shutter discounts to be at least equal to the Insurance Services Office (ISO) discounts.17 In 2000, section 627.0629 of the Florida Statutes was amended to provide that rate filings for residential property insurance must include “actuarially reasonable” discounts, credits, or other rate differentials, or appropriate reductions in deductibles for properties on which fixtures “or construction techniques” demonstrated to reduce the amount of loss in a windstorm have been installed or “implemented.” New language added to the statute stated that: “The fixtures or construction techniques shall include, but not be limited to, fixtures or construction techniques which enhance roof strength, roof covering performance, roof-to- wall strength, wall-to-floor-to-foundation strength, opening protection, and window, door, and skylight strength. Credits, discounts, or other rate differentials for fixtures and construction techniques which meet the minimum requirements of the Florida Building Code must be included in the rate filing. All insurance companies must make a rate filing which includes the credits, discounts, or other rate differentials by June 1, 2002” (s.99, ch.2000-141, Laws of Florida).

The Legislature subsequently amended the law and changed the filing date to December 31, 2002, and then to February 28, 2003. In 2002, Applied Research Associates (ARA) conducted two studies to quantify wind loss reduction for wind mitigation construction features. “Development of Loss Relativities for Wind Resistive Features of Residential Structures” focused on single-family homes. “Development of Loss Relativities for Wind Resistive Features for Residential Buildings with Five or More Units” addressed condominium and renter occupancies in buildings with five or more units. The Florida Office of Insurance Regulation (OIR) issued Informational Memorandum OIR-03- 001M on January 23, 2003. In essence, the Memorandum states that only premium credits should be offered. Thus, the results of implementation would be premium neutral or result in premium decreases, not premium increases. The Memorandum goes on to state, “Credits were then 17 See Mitigation Credit Study (2010).

28 determined and tempered by 50%. This tempering was applied in view of the large rate changes which might otherwise be induced, the approximations needed to produce practical results (such as the specifications of the houses used for modeling and the number of rating factors used), and the potential for differences in results using different hurricane models.” Rule 69O-170.017 F.A.C. was amended effective December 16, 2006, to require insurers to make new rate filings by March 1, 2007, to double the credits to 100% of the study’s indicated value or provide actuarial justification for an alternative system. Informational Memorandum OIR-07-03M issued February 27, 2007, stated that the “windstorm mitigation discount filing shall not include any modification of the rating factors or base rates for any purpose, including the offset of revenue impact on current business.” To date, we are not aware of any insurer providing actuarial justification for an alternative mitigation credit system to the OIR. ARA updated the study of mitigation credits in 2008, but the recommendations and relativities of that study have not been implemented. The Uniform Home Grading System was to be implemented in 2011 to replace the current mitigation discount system. It would have required discounts to be based on a numerical score of the Uniform Home Grading System. The system has not been implemented.

Following the implementation of the mitigation credits in 2007, the claims-paying ability (policyholders’ surplus) of Florida’s homeowners insurers declined. The implementation also reduced the incentives of many policyholders to undertake mitigation activities. This may best be illustrated through an example. Suppose Bob owns a home that has a hip roof and hurricane straps (both of which qualify for mitigation credits). Bob’s insurance company is not aware of these mitigation features and charges him the premium for an average property. (This was the common practice in the industry as the base rates charged by insurers were based on the average property they insured.) As the property owner, Bob chooses to get a mitigation inspection, which reveals these features to his insurer. According to the loss relativities from the 2002 ARA mitigation study, these features should result in a premium credit as follows: The ARA loss relativity for the average house is 1.0 (the average loss amount), but the loss relativity for a house with a hip roof and hurricane straps is 0.91 (i.e., losses are expected to be 9% lower than the average home because of these features). Therefore, Bob should receive a 9% premium credit for mitigation features. Informational Memorandum OIR-03-001M issued by the OIR in 2003 created a mitigation discount table based on ARA’s loss relativities table, but made the weakest structure rather than the average structure the base. In the ARA table the weakest structure represents a relativity of 2.37, meaning losses at the structure are expected to

29 be 2.37 times as bad as losses to the average structure (with its loss relativity equal to 1.0). The OIR’s mitigation discount table divides every relativity by 2.37, such that the weakest structure’s loss relativity becomes 1.0, and Bob’s house with the hip roof and hurricane straps warrants a relativity of 0.384 rather than 0.91. This indicates the losses at Bob’s house are expected to be 62% (1-.384) lower than they would be at the weakest house. The OIR’s mitigation table shows this 62% credit. Therefore, by having a mitigation inspection, Bob now receive a 62% discount on his wind premium. This would not be a problem if the base rates charged by the insurer were based on the weakest structure. Informational Memorandum OIR-07-03M issued by the OIR in 2007, however, has prevented insurers from adjusting their base rates (set at the average structure) to the weakest structure. In practice, the following occurs. Suppose that the base wind premium being charged by the insurer is $1,000. The hip roof and straps should reduce that premium to $910, a 9% premium credit. By resetting the mitigation credit table to the weakest structure and not allowing a change in the base rate, OIR-07- 03M effectively changes the premium credit to 62% and the wind premium for the house to $380, well below what is actuarially indicated by the ARA loss relativities. These types of legislative and regulatory interventions into the marketplace create significant uncertainty to private insurers and add to the cost of doing business in Florida. While there have been no studies that examine how significant these events have been in the decision-making process of insurers deciding to sell homeowners insurance in the state of Florida, there is substantial anecdotal evidence that it is important. Even within Florida’s existing market of private insurers, those interested in “taking out” policies from Citizens (and thus contributing to depopulation of the residual insurer) may prefer uninspected policies-properties over inspected policies-properties if they determine that pricing within the category of inspected and credit eligible homes is inadequate due to the abovementioned distortions in the current mitigation credit program.

Non-windstorm Losses: Sinkholes In 2010, Citizens earned approximately $32 million in sinkhole premium and is expecting to pay out approximately $245 million in losses and loss related expenses ($19.6 million and $84 million respectively in 2009). Citizen’s 2012 rate filing had a nearly 450% sinkhole rate change indication. In December 2010, The Florida Senate Interim Report, Committee on Banking and Insurance, provided a discussion on the sinkhole issue. This followed the November 2010 Florida Office of Insurance Regulation Report on Review of the 2010 Sinkhole Data Call. The Florida Senate Interim Report does an excellent job of addressing the issues surrounding sinkholes. The relevant points discussed in the Senate Interim Report include:

30  Citizens’ rate change indication is driven by sinkhole claims in Hernando, Pasco, and Hillsborough counties, where claims have increased by 375%, 187% and 384% respectively between 2006 and 2009;  Private insurers have also seen their sinkhole claims and costs rise by double and triple- digit percentages over the past several years. According to the OIR Data Call report, the total reported sinkhole claims increased from 2,360 in 2006 to 6,694 in 2010. Over that time period, there were 24,671 total sinkhole claims for approximately $1.4 billion. Of those claims, 66% were in Hernando, Pasco, and Hillsborough counties;  Based upon the opinions of licensed geologists in Florida, there is no geological explanation for such a significant increase in the number of claims; and  Representatives from OIR, as well as insurers, believe that a major driving force for the significant increase in sinkhole claims is the fact that many policyholders are incentivized to file such claims because they can keep the cash proceeds from the claim instead of effectuating repairs to their home or remediating the land.

The failure of sinkhole claimants to make repairs or stabilize land has concerned property appraisers in several counties, particularly in Hernando and Pasco counties. They believe that this dilemma has had a damaging effect on the market values of affected homes, which could lead to financial instability of local governments. The Hernando County property appraiser has estimated that since 2005, the county has lost $173 million in total market value as a result of value adjustments to sinkhole homes. During the 2011 Florida Legislative Session, legislation specifically designed to address sinkhole insurance issues passed. While it is likely safe to assume that the changes effected by SB408 will reduce sinkhole claims, the magnitude of the reduction is difficult to quantify this soon. This issue was at the forefront of Citizens’ 2012 rate hearing and subsequent rate setting by OIR. In the press release outlining the Citizens 2012 rates, the OIR states: “In Senate Bill 408, the Legislature eliminated the 10% statutory cap on sinkhole rates, but at the same time it enacted fundamental changes to reduce sinkhole losses. The rates established by this order contemplate cost-savings of Senate Bill 408, but do not fully quantify the cost-saving effects due to the lack of data at this time.” There were a number of components to SB408 that were designed to address these trends. These components include (but are not limited to):  Limits on public adjuster solicitations and compensation;  Limiting sinkhole coverage to the principal residence;  Stricter definitions on what constitutes sinkhole damage;  A two-year limit on claims notification; and  Requiring repairs to sinkhole damaged property.

31 SB408 may actually increase sinkhole claims in the short run as policyholders may file claims under existing insurance contracts before the more restrictive policies issued following SB408 are implemented. This may take a few years since current policies are occurrence policies. This means that sinkhole damage that occurs this year, regardless of when the claim is reported, is covered by this year’s policy. Therefore, policyholders may still file claims in future years that will be covered under policies issued prior to SB408 (often referred to as the “tail problem”). In addition, there is a time lag from the time that SB408 was passed until its components are incorporated into every policy issued. For example, it will be nearly a year before a policy that was issued just prior to SB408 is renewed with the new SB408 rules included. It will take a minimum of three to four years for credible data to emerge regarding the impact of SB408 on sinkhole claims and the growth of Citizens market share in this area. Non-windstorm Losses: Lengthening of the Property Claims Tail18 Property insurance claims have traditionally been considered short-tailed. In other words, property claims have generally been opened and closed within relatively short time periods. Property claims associated with catastrophes have generally had longer tails than have ordinary property claims. It takes more time to settle catastrophe claims because of the overwhelming nature of the catastrophe and the strain it puts on the claims process. Even with catastrophes, the amount of time it takes to settle property claims has been relatively short. In Florida, the tail on property claims, especially catastrophe claims, has significantly increased in the last 5 years. Following the 2004-2005 storm seasons, most claims were closed by the middle of 2007. Citizens experienced 303,000 total claims stemming from those two storm seasons, only 3,500 (approximately 1.1%) of which were still open in June 2007. Similarly, State Farm had 320,000 total claims with only 1,820 (approximately .6%) still open in June 2007.19 In other words, even with two storm seasons that placed substantial strain on the claims paying process, more than 99% of claims were closed by the middle of 2007.

These numbers changed substantially in 2008 and 2009. Between March 2008 and June 2009, Citizens opened or re-opened 14,997 catastrophe claims (7,299 new claims and 7,698 re-opened claims) related to the 2004-2005 storms.20 This represents approximately 5% of all Citizens claims related to those storms. This type of claims activity significantly lengthens the tail of the claims distribution and substantially impacts the loss costs associated with property insurance. The trend of new and reopened insurance claims related to the 2004-2005 storms was not isolated to Citizens policyholders. The FHCF was required to issue bonds in the amount of 18 SB 408 addressed issues that may result in a shortening of the property insurance claims tail. The results of the Legislation will be evident over time.

19 See Diamond (2007). 20 See OPPAGA (2010).

32 $675.92 million, in 2010, to cover the additional reinsurance claims private insurers faced due to new and reopened 2004-2005 storm claims.21 Of the reopened Citizens catastrophe claims, 57% of the claimants were represented by public adjusters; this means 43% of the reopened claims were filed by claimants not utilizing public adjusters. Furthermore, only 19% of the newly opened Citizens catastrophe claims were represented by public adjusters.22 The role of public adjusters is not limited to catastrophe claims. Of the 61,324 non-catastrophe claims, 26% of the new claimants were represented by public adjusters and 40% of the claimants with reopened claims utilized public adjusters. In all cases, the use of a public adjuster lengthened the claims process. For example, the median time to close non-catastrophe claims was 41 days without a public adjuster compared with 115 days with a public adjuster.

The lengthening of the claims tail for property claims greatly affects the loss costs of insurers. The additional time adds uncertainty to the settlement dates, reserve amounts, and ultimate paid amounts driving up insurers’ loss costs and ultimately premiums, as discussed below. Private Market Performance Competition Competition plays an important role in pricing in any market, including insurance markets. Florida property insurance markets have three types of competitors: licensed primary insurers, surplus lines insurers and Citizens. For competition to affect premiums, an insured must have the ability to shop for products from competitors to determine who is offering the best product/service for the best price. To shop for property insurance in Florida, an insured must find insurers who are selling new policies.

Table 3, taken from the OIR’s QUASR reports, shows that Citizens is the primary writer of new insurance policies in Florida. The nearly 1 million new policies issued in 2012 (as of the end of November) represent approximately a significant portion of the 5.7 million residential properties in Florida. Citizens’ total number of new policies is nearly equal to the combined total of the other 9 companies in the Top 10. Given Citizens dominance in issuing new policies, Citizens may be setting the premiums charged in Florida’s private residential property insurance market. In other words, it may be Citizens’ premiums, rather than competitive practices within the private industry, that are impacting statewide property insurance premiums in Florida. 21 See http://www.sbafla.com/fhcf/Home/FHCFEmergencyAssessment/tabid/333/Default.a spx, accessed 8/25/11. 22 See OPPAGA (2010).

33 Table 3: Top 25 - New Policies Written 2012 (As of 11/30/2012) Personal Residential Property Insurer Name # of New Policies Type of Insurer 1 CITIZENS PROPERTY INSURANCE CORPORATION 310,998 State Run Residual Market 2 UNIVERSAL PROPERTY & CASUALTY INSURANCE COMPANY 93,713 Florida Domestic 3 SECURITY FIRST INSURANCE COMPANY 56,051 Florida Domestic 4 AMERICAN BANKERS INSURANCE COMPANY OF FLORIDA 50,569 Other 5 AMERICAN MODERN INSURANCE COMPANY OF FLORIDA, INC. 32,509 Florida Domestic 6 AMERICAN INTEGRITY INSURANCE COMPANY OF FLORIDA 30,695 Florida Domestic 7 UNITED PROPERTY & CASUALTY INSURANCE COMPANY 30,364 Florida Domestic 8 CASTLE KEY INDEMNITY COMPANY 29,565 Pup 9 FEDERATED NATIONAL INSURANCE COMPANY 27,310 Florida Domestic 10 ST. JOHNS INSURANCE COMPANY, INC. 26,951 Florida Domestic 11 SOUTHERN FIDELITY INSURANCE COMPANY 23,673 Florida Domestic 12 ASI PREFERRED INSURANCE CORP. 22,456 Florida Domestic 13 TOWER HILL PRIME INSURANCE COMPANY 22,301 Florida Domestic 14 FLORIDA PENINSULA INSURANCE COMPANY 22,035 Florida Domestic 15 ARK ROYAL INSURANCE COMPANY 21,392 Florida Domestic 16 TOWER HILL SIGNATURE INSURANCE COMPANY 17,229 Florida Domestic 17 CYPRESS PROPERTY & CASUALTY INSURANCE COMPANY 15,826 Florida Domestic 18 FLORIDA FAMILY INSURANCE COMPANY 15,603 Florida Domestic 19 GULFSTREAM PROPERTY AND CASUALTY INSURANCE COMPANY 14,964 Florida Domestic 20 AUTO CLUB INSURANCE COMPANY OF FLORIDA 13,616 Other 21 PEOPLE'S TRUST INSURANCE COMPANY 12,837 Florida Domestic 22 CAPITOL PREFERRED INSURANCE COMPANY, INC.

11,074 Florida Domestic 23 OLYMPUS INSURANCE COMPANY 9,758 Florida Domestic 24 TOWER HILL PREFERRED INSURANCE COMPANY 9,626 Florida Domestic 25 SAFE HARBOR INSURANCE COMPANY 8,564 Florida Domestic Top 25 Total (thru 3Q 2012) 929,679 Source: QUASR market share reports quarters 1 through 3 of 2012.

34 Private Insurance Availability The availability of insurance is typically measured in multiple ways that, together, outline the sources and supply of capital that can be used to support risk. The number of carriers that choose to do business in the state, the structure of these participants, their premium sales volume and their surplus in the market are all important elements of availability. This section explores the availability of private homeowners insurance in Florida according to these four aspects of the market and benchmarks Florida against the availability of homeowners insurance nationally as well as in other Atlantic and Gulf Coastal states. Specifically, states selected for comparison include Alabama, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Texas and Virginia. Keep in mind information regarding the activity and performance of surplus lines insurers is not available so the discussion focuses on admitted insurers in these states. For purposes of benchmarking, Florida’s private homeowners insurance supply is segmented by company structure type in two distinct ways: 1) whether an insurance “decision center” behaves in the market as an independent company or as a group interest; and 2) whether an insurer is a national carrier, a pup company (established by a national carrier separate from its other non-Florida or non-Florida-property business), or a domestic Florida company.

First, a common distinction in insurance is between independent or stand-alone companies and those insurance companies that are members of a group of insurers. In the analysis presented in this report, all insurance companies that are members of a group (for example, State Farm, Allstate, Progressive, etc.) are considered to be a single entity or “decision center.” This is an attempt to recognize that these companies may work in conjunction with one another to achieve the group’s goal, rather than competing as individual entities. Each independent company is considered its own decision center. This allows for an apples-to-apples comparison across states since the definition of independent and group companies will remain consistent across all states. The second distinction between national carriers, pup companies and domestics is unique to Florida. Most states have not had the same type of domestic insurer development as Florida nor have they seen the same type of pup formation. These are important distinctions to Florida but do not translate well for interstate comparisons. Appendix B contains a list of all insurance companies used in the analysis in Florida along with their segments. The importance of these categorizations is related to the ability of a company to 1) raise capital and 2) diversify its business, and thus also its risks. These categorizations are similar although not identical ways of segmenting company structure type. Most group companies are considered national in scope, so the parallel between these two categories is close. Most domestics are set up

35 as independent companies although, again, the parallel is imperfect. For purposes of comparison to other states, the statistics and analysis here focus on statewide figures and conclusions. Number of Companies and Their Structure As of year-end 2011, there were 74 total private (i.e., other than Citizens) “decision centers” writing homeowners insurance in Florida, more than in any of the other coastal states used for comparison. As indicated by Table 4, Texas is the next closest state with 70 decision centers. Compared to the national total of 397, the amount of competitive interest in the Florida market appears relatively high.

Segmenting the private marketplace into independent companies and group interests, Table 4 reveals that the comparatively large supply of homeowners insurers doing business in Florida is largely due to the contribution of independent companies to the overall Florida total. Relative to the states compared, supply in Florida is significantly more dependent on independent insurers. The 23 independent insurers writing homeowners insurance business in Florida represent not only a higher absolute number than in any of the other states but also a higher portion of the total number of decision centers in the state.23 Table 4: Number of Homeowners Insurance Decision Centers by State in 2011 Type | State Nat’l AL FL GA LA MS NC SC TX VA Group 197 50 51 59 36 42 47 57 55 56 Independent 200 3 23 8 10 4 14 9 15 8 Total 397 53 74 67 46 46 61 66 70 64 Source: NAIC Annual Statements, Authors’ calculations The high number of independent companies is an important statistic regarding the nature of available homeowners insurance in Florida relative to other states and the nation. Generally, group companies are larger and have a larger geographic reach than independents and, therefore, tend not only to produce higher premium sales volume than their independent counterparts but also achieve greater geographic diversity of their business risks.24 The importance of these advantages cannot be underestimated, particularly if doing business in a state subject to catastrophic risk, such as Florida.

Table 5 shows the number of insurers in each state whose total business, as measured by direct premiums written (DPW), is 90% or more concentrated within that state. DPW represent insurance sales volume. Forty-four companies doing business in Florida had concentrated at least 90% of that business in Florida as of year-end 2011. It is notable that all 23 of the independent 23 As additional information, Florida’s 23 independent companies represent more than 11% of the entire nation’s 200 independents.

24 This generalization is not always true as there are groups that only sell Florida homeowners.

36 companies operating in the Florida homeowners insurance market concentrated at least 90% of their business in the homeowners insurance line and in Florida. Table 5: Number of Companies with 90% or More of Total DPW in the State in 2011 State AL FL GA LA MS NC SC TX VA # of companies 2 44 8 8 2 10 1 23 3 Source: NAIC Annual Statements, Authors’ calculations This concentration of business effectively requires an insurer to heavily reinsure the risk taken to ensure solvency in the event of catastrophic losses. It is fair to say that each of the 23 insurers conducting homeowners business independently in Florida is either highly sensitive to reinsurance rate volatility, highly sensitive to one large loss event (or several smaller loss events occurring within the same year), or both. This raises the additional concern of a domino effect of primary insurers being unable to meet their obligations if the FHCF is unable to meet its obligations to them.

Following the insolvencies of the Poe Companies and other domestics after the 2004-2005 storm seasons, regulators have taken steps to require insurers to have in place more robust catastrophe risk plans. Primarily, the state appropriates funds to be exchanged for surplus notes issued by residential property insurers, under conditions requiring the insurer to contribute additional private sector capital and to write a minimum level of premiums for residential hurricane coverage. This Insurance Capital Build-Up Incentive Program is intended to incentivize investors to commit additional capital to Florida’s residential insurance market. Since the state has suffered no major storms to stress test these new requirements, however, the question surrounding the adequacy of minimum capital and surplus requirements remains an open one. Furthermore, since the new requirements are coupled with the provision of state funds to the insurers in exchange for surplus notes from the insurers, the private cost to an insurer of meeting the new requirements is questionable.

Premiums and Surplus Two additional and interrelated indicators of insurance supply are premiums and surplus. DPW is one way to measure company size. Policyholders’ surplus (PHS) represents the amount of “leftover” capital a company has (i.e., assets minus liabilities), after paying expected losses and expenses, to retain in the business for contingencies, such as an unexpected disaster. Comparing these values in Florida’s homeowners insurance market with those of other states, the Florida market again appears to operate differently from its neighbors.

Table 6 displays the year-end 2011 DPW by company type for each state. Florida comprises nearly 10% of the nation’s total DPW in homeowners insurance. Clearly, the Florida market is large. Just as when looking at the number and type of companies, the table also indicates that Florida premiums are more heavily dependent on independent insurer business than are the other

37 states examined. Selling nearly 29% of the State’s DPW in homeowners insurance, Florida’s independent insurers are responsible for a substantial portion of homeowners risk in the State. In addition, more than 45% of the total homeowners’ premium written by independent companies nationally is written in the state of Florida. The state with the second largest number of independent decision centers is Texas, where the 15 independent decision centers represent 20% of the total decision centers selling homeowners insurance but sell less than 5% of Texas’ DPW. Table 6: Direct Premiums Written (DPW) in $ Millions for Homeowners Insurance by Structure Type and State in 2011 Type Nat'l AL FL GA LA MS NC SC TX VA Group 59,761 1,215 4,303 1,817 1,131 650 1,760 1,023 3,992 1,463 Independent 3,848 4 1,745 19 182 1 33 47 171 20 Total 63,608 1,218 6,048 1,836 1,313 650 1,793 1,069 4,163 1,482 Source: NAIC Annual Statements, Authors’ calculations. Although it is necessary to categorize by whether a company is independently operated or part of a group in order to make state-by-state comparisons, this categorization can be misleading when looking at Florida. It is more reflective of the true Florida homeowners insurance market to evaluate segment size by sorting according to the national, domestic and pup categories. Other states simply do not have a sufficient number and size of domestic and pup companies to make such categorization possible. It is notable that approximately 59% of Florida’s $6 billion in 2011 DPW for private market homeowners insurance is attributable to Florida domestic companies ($3.56 billion in DPW), with pups and national companies representing approximately 19% and 22% of the market (at $1.16 billion and $1.33 billion in DPW, respectively).25 The surplus picture in Table 7 reflects the most disconcerting difference between Florida and other states. Despite its relatively large market size, Florida’s year-end 2011 PHS, at just under $93 billion, was lower than any of the other hurricane-exposed states. And despite their 29% market share of premiums, independent companies in Florida contributed only slightly more than 1% of the State’s total PHS, at slightly over $1 billion.26 Table 7: Policyholders’ Surplus (PHS) in $ Billions by Structure Type and State in 2011 Type Nat'l AL FL GA LA MS NC SC TX VA Group 290.28 142.10 91.55 163.94 93.52 113.76 176.90 129.61 118.63 164.21 Independent 7.68 0.53 1.07 0.99 0.74 0.91 0.98 1.09 0.98 1.14 Total 297.96 142.63 92.62 164.92 94.26 114.66 177.88 130.70 119.61 165.35 Source: NAIC Annual Statements, Authors’ calculations. If a more Florida-centric picture of PHS is drawn, segmenting companies by national, domestic and pup types, the reason for concern regarding the capacity of the Florida market to pay claims is more easily evident. Florida’s PHS of $92.6 billion in 2011 is largely attributable to large, 25 Source: NAIC Annual Statements, Authors’ calculations 26 Policyholder surplus is used to support all operations, not just homeowners insurance in the state of Florida.

38 national insurers, representing more than $89.3 billion of the total PHS available. Unfortunately, these national insurers are not heavily exposed in Florida relative to their domestic and pup peers, who account for less than $1.33 billion and $2.02 billion in PHS, respectively. The current picture of private homeowners insurance availability in Florida describes a market with heavy dependence on small companies with limited capitalization and risk diversification capabilities. Although Florida attracts a high number of insurers relative to other coastal states, many of these insurers (more than in any other state) are independent, mostly small domestic Florida companies. These independents make up one-fourth of Florida’s private homeowners premium volume, and domestics (based on OIR’s QUASR data that includes both the independent and group-based domestics) represent more than half the private insurance premium at 59%.

Despite the high number of insurers and the relatively high total premium amounts sold in Florida, the State’s private homeowners insurance market has the worst level of capitalization (as measured by PHS) of any catastrophe-prone state. Given the large number of homeowners insurance companies concentrating most of their business in Florida and the large Florida homeowners insurance premium base attributable to domestics having relatively small stores of PHS, the existing level of capitalization may be insufficient should a major storm hit Florida. Profitability Table 8 below displays the average loss ratio and the variability of these ratios for the private insurance industry in each of the nine states across 1985-2011. Both the average loss ratio for Florida, as well as its standard deviation, is the highest of the nine states. Table 8: Average Loss Ratio, Standard Deviation and Coefficient of Variation by State (1985-2011) AL FL GA LA MS NC SC TX VA Average Loss Ratio 0.784 0.948 0.717 0.906 0.899 0.716 0.758 0.718 0.653 Standard Deviation 20.17 193.37 19.41 160.36 119.77 37.00 100.04 27.75 24.36 Coefficient of Variation 0.282 1.901 0.192 1.575 1.175 0.374 0.981 0.272 0.239 Source: NAIC Annual Statements, Authors’ calculations. The average loss ratio is the average of the annual loss ratio.

The 94.8% loss ratio indicates that on average, Florida insurers needed 94.8% of the premiums earned simply to pay losses and loss adjustment expenses, leaving less than 6% of premiums available to cover all other business expenses.27 The 193.37% standard deviation indicates an 27 The 94.8% loss ratio is the average of the annual loss ratios from 1985 through 2011. In non-storm years in Florida, loss ratios vary significantly from this average. For example, the loss ratio in 2011 was approximately 30%, and was similar in 2009 and 2010. It would be improper however, to “ignore” the storm years in the analysis.

39 extremely high level of volatility within Florida’s loss ratio over the time period examined. Effectively, the higher the standard deviation, the less confidence with which the industry can view the average loss ratio as a “typical” value. In other words, the loss ratio has proved less stable. Therefore, within Florida, insurers not only experienced the worst performance of any of these states but they have a measurable reason to have less confidence in the Florida market to perform in a stable manner than any of the other states.

Market Size and Capitalization In the previous evaluation of private insurance availability, we looked at the 2011 marketplace only. Three vital elements of the market’s health we reviewed were the number of companies active in the marketplace, their DPW and PHS. Chart 3 and Table 9 below show how these statistics have changed from 1985 to 2011, as compared with other select coastal states. Chart 3: 1985-2011 Trend in Number of Insurers Writing Homeowners Insurance, by State Source: NAIC Annual Statements, Authors’ calculations.

40 Table 9: Percentage Changes in Number of Companies, PHS and DPW by State and Company Structure in the Florida Homeowners Insurance Market (1985-2011) 1985 thru 2011 Total Decision Centers Groups Ind. Cos. Total PHS Group PHS Ind. Cos. PHS Total DPW Group DPW Ind. Cos. DPW Nat’l -20.60% -28.36% -11.11% 416.19% 413.49% 544.07% 378.23% 365.97% 708.67% AL -32.91% -31.51% -50.00% 312.88% 312.01% 857.74% 433.78% 434.32% 299.53% FL -41.73% -50.96% 0.00% 139.84% 138.44% 378.09% 854.23% 604.51% 7495.22% GA -35.58% -36.56% -27.27% 341.77% 340.15% 1047.15% 501.31% 515.29% 90.83% LA -44.58% -52.00% 25.00% 190.28% 188.47% 1314.97% 378.49% 330.69% 1431.79% MS -35.21% -36.36% -20.00% 253.51% 251.17% 2061.63% 404.81% 429.77% -88.13% NC -32.97% -41.98% 40.00% 406.94% 406.29% 559.27% 517.02% 521.02% 358.69% SC -26.67% -30.49% 12.50% 276.67% 274.55% 1068.83% 511.40% 498.56% 1055.72% TX -39.13% -43.88% -11.76% 241.02% 238.82% 1495.60% 397.47% 385.08% 1127.99% VA -36.63% -39.13% -11.11% 354.06% 352.36% 888.18% 523.35% 516.25% 4464.97% Source: NAIC Annual Statements, Authors’ calculations. All catastrophe prone states have seen insurers leaving the homeowners market at a rate greater than the national average during the period 1985-2011. Overall, the reduction in the number of decision centers may be due to mergers and acquisitions rather than pure exodus from the marketplace. This would not explain why catastrophe prone states have a higher rate of exodus. The presence of fewer companies does not necessarily indicate a problem so long as the capacity has increased or is at appropriate levels. What is notable is that Florida holds the highest insured value exposure and still has the most companies of the nine states being compared, yet it has the lowest PHS (see Table 7). Table 9 describes how this is occurring. While Florida has seen a 41.7% decrease in the number of insurers writing homeowners business in the state, it has experienced a 50.96% loss of group (mostly large, national) insurers while, on net, experiencing no loss of independent (mostly domestic) insurers. During the same 1985-2011 period, independent companies writing homeowners insurance in Florida have increased their DPW by 7495.22% – the greatest increase seen by any of these states by either structure type – yet the PHS of these independent companies writing in Florida only increased 378.09%. Looking at Florida alone, we can segment DPW by national, pup, domestic and Citizens categories to more accurately reflect Florida’s homeowners insurance marketplace. Chart 4 displays the DPW in FL for homeowners insurance policies, categorized by insurer type, for the years 1985-2011.

41 Chart 4: Florida Homeowners Insurance Direct Premiums Written by Insurer Type, 1985-2011 Source: NAIC Annual Statements, Authors’ calculations. Note: Citizens was formed in 2002, the DPW of its predecessors are not included in this chart. Chart 4 illustrates the substantial growth in Citizens and the domestics in recent years as the relative premiums of the nationals and pups in the Florida homeowners insurance market have diminished. This change in the composition of the marketplace is a matter of concern since national companies typically have more capacity available to pay claims and write additional business than do the other types. Despite their large capacity, the national insurers have chosen to limit their exposure to the Florida homeowners insurance market.

Market Concentration Chart 4 in the last section revealed the changing composition of the Florida homeowners insurance marketplace during the past 26 years. The graph indicates changing market share but does not specifically provide information about market concentration. This section looks specifically at the Herfindahl index. The Herfindahl index is a measure of how concentrated an industry is. Any marketplace where a few competitors hold most of the market share will have a high Herfindahl index (high level of concentration), while a market with many competitors, or relatively equal market share among competitors, will have a low Herfindahl index (low concentration).28 28 The Herfindahl index measures concentration as the sum of the squared market share of each firm in the industry. For example, consider an industry with six competitors, with respective market share of 30%, 20%, 20%, 10%, 10% and 10% the Herfindahl index will be (0.3*0.3) + (0.2*0.2) + (0.2*0.2) + (0.1*0.1) + (0.1*0.1) + (0.1*0.1) = 0.09 + 0.04 + 0.04 + 0.01+0.01 + 0.01 = 0.2.

42 Chart 5 shows the Herfindahl indices plotted over time for each state in the sample. As a general rule, a Herfindahl index below 0.1 signals low concentration, while a Herfindahl index above 0.18 signals high concentration. Between 0.1 and 0.18 the industry is moderately concentrated. Chart 5: Homeowners Insurance Market Concentration Levels by State, 1985-2011 Source: NAIC Annual Statements, Authors’ calculations At first glance, the Florida market appears to have a low market concentration relative to other coastal states. Bear in mind that the data being measured include only the private market. Since Citizens insures nearly 25% of the 5.7 million residential insurance policies in Florida, the true market has been more highly concentrated since at least 2007 when Citizens was encouraged to compete with the private marketplace for standard risk policies.

Leverage One of the more notable changes in the Florida property insurance marketplace is the increase in leverage for insurers selling homeowners insurance. As noted earlier, Florida has seen a substantial shift from large national insurers to smaller less diversified domestic insurers. This change can also be seen by looking at a common measure of leverage in the insurance industry, the premiums to surplus ratio. Using the Insurance Regulatory Information System (IRIS ratios) as a guide, insurers who had a premiums-to-surplus ratio below 3 were seen as adequate. While that has been a historic measure, most insurers today look for ratios below 2 and on average the property casualty insurance industry is writing premium at a ratio below 1. The changing nature

43 of the leverage of insurers writing homeowners insurance in Florida is more clearly evidenced in Charts 6 a-d below. Chart 6: Frequency Histogram for Florida Private Homeowners Insurers’ 20 40 60 80 100 120 140 0‐1 1‐2 2‐3 3‐4 4‐5 5‐6 6‐7 7‐8 Premium to Surplus Distrubution ‐ 1985 Number of Insurers Premium‐Surplus Ratio

44 10 20 30 40 50 60 70 80 90 100 0‐1 1‐2 2‐3 3‐4 4‐5 5‐6 6‐7 7‐8 Premium to Surplus Distrubution ‐ 1994 Number of Insurers Premium‐Surplus Ratio 10 20 30 40 50 60 70 80 0‐1 1‐2 2‐3 3‐4 4‐5 5‐6 6‐7 7‐8 Premium to Surplus Distrubution ‐ 2003 Number of Insurers Premium‐Surplus Ratio

45 Looking at Chart 6(a), one sees nearly all Florida homeowners insurers enjoyed a premium-surplus ratio of ≤ 1.0 in 1985 (well before Andrew hit) indicating a claims-paying ability of at least $1 PHS to every $1 DPW. As of 1994 (two years post-Andrew), Chart 6(b) shows the vast majority of insurers still held their premium-surplus ratios at or below 1.0, with just a handful of companies potentially over-extending their capitalization. Chart 6(c) suggests a turning point from 1994-2003 in the capitalization of Florida homeowners insurers as 22 insurers saw their premium-surplus ratios above 1.0, and three companies suffered ratios in the 6.0 – 7.0 range. Such an abrupt change within a 10-year period may be attributable to two drivers: the formation of Florida pups by national insurers and the entrance of domestic insurers to the Florida homeowners market. Between 1996 and 2000, Travelers, Allstate, State Farm and Nationwide all formed pup companies, limiting the capital they placed at risk to underwrite Florida homeowners. Plus, 23 domestic insurers started-up during the 1996-2003 timeframe; several of which were arguably undercapitalized. Capitalization among Florida homeowners insurers was even worse by 2011 after the 2004-2005 storm seasons depleted substantial PHS of many insurers and regulatory-legislative interventions increased pricing pressures on all insurers. By this time, thirty-two companies had ratios in excess of 1.0, with 17 of them above 3.0.

46 Reinsurance Market Current Structure Benefits of Reinsurance to the Florida Marketplace Reinsurance serves at least eight principal functions:  Increase large line capacity;  Spread risks globally;  Provide catastrophe protection;  Stabilize loss experience;  Provide surplus relief;  Facilitate withdrawal from a market segment;  Provide access to capital markets; and  Provide underwriting guidance.29 In Florida, reinsurance has functioned most importantly as a provider of catastrophe protection but also has facilitated withdrawal for many insurers and provided underwriting and pricing guidance for many others. Reinsurers have significant relationships with investors and understand the required rates of return that are necessary to entice investors to Florida’s catastrophic risk. Because of this, reinsurers also have traditionally served an important function as the major link between primary insurers and investors interested in the risks and rewards available.

Reinsurers also create a global spread of Florida risk, at least in concept. They do so in two different, but equally important ways. First, reinsurers make it possible for primary insurers in Florida to diversify risk indirectly across the global marketplace. As previously mentioned, the ability of many of the monoline Florida domestic insurers to diversify their risks individually is severely limited. Reinsurers provide this diversification function for them. Second, reinsurers directly diversify the loss exposure of peak risk zones, such as Japan and California earthquake risk, European flood and winter storm, and various tropical cyclone zones, such as Florida. Conceptually, this direct diversification works smoothly, but in reality the global spread of risk is limited by insurance demand and penetration levels. Because the Florida market consists of high insured values and high insurance penetration relative to many other peak risk zones (such as economically less-developed parts of Asia), Florida hurricane risk is difficult for the reinsurance market to spread elsewhere. This situation has begun to change, but arguably still causes reinsurers to price Florida risk higher and to respond more sharply to Florida losses than would otherwise be necessary.

29 See Reinsurance Principles and Practices, Harrison, 2004.

47 Pricing of Risk Overall, rates on line in reinsurance are increasingly volatile year over year and market behavior is increasingly fragmented. The pricing behavior of reinsurers reflects knowledge of exposures, capital levels and financial uncertainty regarding both. Worldwide, large losses have increased consistently during the past half century and, in particular, the last 20 years and catastrophe models predict further increases in losses in upcoming years for most zones. While predictive analytics may reflect changes in exposure and vulnerability more quickly than did traditional loss models, they also require more expert input and produce more sensitive results than did traditional methods. So not only do the models predict larger losses, they also produce uncertainty among reinsurers (and primary insurers) about their results. Florida has direct experience with eight of the top 12 natural disasters on record, in terms of insured losses. Thus, reinsurers pay special attention to the Florida property market when pricing. In the last year, substantial changes in hurricane risk models in particular as well as new requirements from rating agencies create uncertainty around the cost of capital, thus making high-risk market regions such as Florida more difficult to price on a consensus basis. Increasingly, Florida and other catastrophe-exposed markets can be expected to observe reinsurance market fragmentation.

Access to Capital Markets Reinsurance provides primary insurers with indirect access to capital markets, both through the international nature of most reinsurers’ investments and their capital markets activities on the underwriting side of the business. Reinsurers enjoy flexibility with regard to sources of capital. They can raise capital and return capital through stock issues and buy backs. Furthermore, reinsurers are still the most active participants in the market for insurance-linked securities, such as industry loss warranties and catastrophe bonds, and as such serve an unofficial intermediary role between primary insurers and capital market investors. However, this role shows signs of change, at least in the U.S., as primary insurers begin to access capital markets directly more frequently than in the past. For example, in 2012 alone, a handful of primary insurers have gone directly to capital market investors in the form of catastrophe bonds to cover U.S. hurricane risk:30  USAA (May 2012);  Citizens Property Insurance Corporation (April 2012);  Louisiana Citizens (April 2012);  Chubb Group (March 2012); and  Liberty Mutual (March 2012).31 30 We use the term direct to imply that they are not purchasing reinsurance and then the reinsurer issues catastrophe bonds. In each of these issues a special purpose vehicle was established to conduct the transactions. 31 Source: Artemis Deal Directory, www.artemis.bm.

48 The Citizens 2012 Catastrophe Bond Issue In April 2012, Citizens Property Insurance Corporation issued their first catastrophe bond through Everglades Re, Ltd., a special purpose vehicle formed for this issue. The catastrophe bond was established as a shelf offering so that Citizens will have the option of issuing additional catastrophe bonds in the future. The $750 million issue is the single largest catastrophe bond issue and provides coverage for Citizens Coastal account. The catastrophe bond has an indemnity trigger on Citizens’ actual losses for both personal and commercial residential properties due to windstorms on a per occurrence basis for two years (covering the 2012 & 2013 storm seasons), with an attachment point of $6.35 billion. The risk modeling was conducted by AIR Worldwide, and the initial probability of attachment (exhaustion) was 2.71% (2.40%) with an expected loss of 2.53%. The bonds were rated by S&P as a B+ (middle of the high yield ratings) and have a coupon of 17.75%. There were 32 initial investors in the catastrophe bond transaction, and since issuance the bonds have been listed on the Bermuda Stock Exchange. Measuring the Net Effects With so many factors impacting the insurance market in Florida, it is difficult to isolate the effects of any single law, regulation, event or insurer action. However, there have been some clear impacts on insurers, their customers (Floridians) and the overall economy. Insurance Market Impact: Changing Exposure Levels Chart 7 indicates the percentage of risk retained by Florida homeowners insurers over the time period 1985-2011.

Chart 7: Percentage of Direct Premiums Written Retained by Florida Homeowners Insurers (1985-2011) Source: NAIC Annual Statements, Authors’ calculations

49 Chart 7 indicates that immediately post-Andrew Florida homeowners insurers decreased their usage of reinsurance, commensurate with sharp increases in reinsurance rates-on-line (prices) during that time. Since 2007, however, insurers in Florida have held their risk retentions at around 40%, reinsuring the remainder. The retention levels during the last four years are the lowest they have been since 1985. Their ability to do so may, in large part, be aided by a lack of catastrophic storms during 2007-2011, accompanied by softening reinsurance prices and the availability of FCHF reinsurance. It will never be known whether catastrophic storms, and typically resultant higher reinsurance prices, might have resulted in company decisions to increase their retentions once again. It is also unclear based on the lack of PHS in many domestic insurers if they have the ability to increase their retentions. State Aggregate Exposure With the growth of Citizens and the role of the FHCF, the amount of exposure being underwritten by state sponsored entities is significant. Table 10 shows the breakdown between the State of Florida and private insurance market of statewide gross PMLs for various return times. For shorter return times (50 or 100 years), the majority of the State’s exposure is from the FHCF, which hits its maximum liability below the 50-year return time. As the return time gets longer, Citizens’ exposure continues to increase while the FHCF’s has reached its limit. Even though it appears that Florida’s percentage of the PML is decreasing as the return time is extended, it is important to remember that FIGA is not included in this table. As the return time increases, more insolvencies in the private market are likely, and those liabilities will show up in FIGA’s assessment pool. Predicting the frequency and severity of those insolvencies is difficult and, therefore, not included in this table.

Table 10: Probable Maximum Windstorm Loss Amounts for Florida by Return Period Return Time (Years) Statewide Gross PML Citizen Net PML Net Losses to FHCF Total State Sponsored Exposure Private Insurer/Reinsurer Exposure State % of Gross PML 50 $38 B $5.7 B $17.3 B $23 B $15 B 60.53% 100 $57 B $13.6 B $17.3 B $30.9 B $26.1 B 54.21% 250 $87 B $28.1 B $17.3 B $45.4 B $41.6 B 47.82% Source: 2012 Annual report of aggregate net probable maximum losses, financing options, and potential assessments, Florida Hurricane Catastrophe Fund Claims Paying Estimates May 2012, and Authors’ estimates. Private Market Exposure Private market exposure at the primary insurer level will depend on how the primary insurers share the risk with reinsurers. Since the OIR is only requiring primary insurers to purchase reinsurance up to less than the 1 in 100 year event, it seems safe to assume that the difference between the 100-year return time and the 250-year return time (approximately $15 B) is being completely borne by the primary insurers, and ultimately Floridians, through FIGA.

50 FHCF Exposure The FHCF’s annual exposure is set by statute. In 2004, the FHCF’s mandatory layer was set at $15 billion. By the start of the 2007 Special Session, it had been increased to $16 billion. During that Special Session, HB 1A increased the FHCF’s Temporary Increase in Coverage Limit (TICL) layer to $12 billion, increasing the FHCF’s total exposure to $28 billion. During the 2009 Legislative Session, HB 1495 created a glide path to reduce the FHCF’s total exposure by $2 billion per year in the TICL layer ($10 billion in 2009-2010, $8 billion in 2010-2011, etc.). Much of this glidepath has been rendered moot by the FHCF’s inability to bond for enough capacity to cover the TICL layer. The result is that very few insurers are buying optional coverage from the FHCF. This has reduced the FHCF’s total exposure to just over the current $17 billion mandatory layer.

Consumer Impact: True Cost to Florida Consumers32 As discussed in the last section, due to the magnitude and variability of catastrophic windstorm losses, it is virtually impossible to finance all of the potential losses in any single time period. This leaves two choices – prefund all potential losses or use some form of post-loss funding – when windstorm losses are significant. Florida, like other catastrophe-prone states, has chosen to finance a significant portion of its catastrophic risk exposure through post-loss assessments. In Florida, these assessments are levied on most property-casualty insurance policyholders by state sponsored insurance entities such as Citizens, the FHCF and the FIGA. Citizens is the state’s residual market property insurer. Homeowners have the choice of purchasing homeowners insurance coverage from a private insurer or from Citizens, which in effect now competes with private insurers on price. Citizens, on its current glidepath to actuarially sound rates, cannot increase rates by more than 10% for any policyholder in a given year.33 Given the current rate restrictions and deficiencies, it will be many years before all Citizens policyholders are priced at actuarially fair rates (see Maroney, Nyce, and Newman, 2009). According to Maroney, Nyce, and Newman, policyholders in Miami-Dade County will still be underpriced in 2020, given the present glidepath.

The FHCF is the state run entity created to provide stability to insurers participating in Florida’s residential property insurance market. Both Citizens and private insurers may purchase reimbursement coverage from the FHCF.34 The FHCF is mandated by statute to charge “actuarially indicated” rates. The FHCF rates are substantially lower today than private market reinsurance rates. 32 Some of this section was taken from Cole et al (2011). 33 Sinkhole premiums are not part of Citizens’ glidepath. 34 The FHCF sells mandatory and optional reimbursement coverage. All insurers selling homeowners insurance in Florida are required to purchase the mandatory reimbursement coverage.

51 FIGA is the state entity that pays the claims of insolvent insurers and has the ability to assess in the event of insolvencies related to catastrophic storms. Its use is limited primarily to protecting the State’s policyholders against potential insolvencies of private insurers since the public insurers – Citizens and FHCF – have their own respective assessment capabilities in the event of large losses. The assessment structure for each of the three entities is discussed in detail in the next section. Currently, both Citizens and the FHCF have assessments (emergency assessments) in place (ending 2017 and 2016 respectively) to pay for post-event debt service stemming from the 2004-2005 hurricane seasons. The current assessments are shown in Table 11. Table 11: Current Assessments Annual Assessment Thru FHCF 1.30% 2016 Citizens 1.4% (reduced to 1.0%) 2017 FIGA* 0% *FIGA’s last assessment in the “all other” account was in 2009 for .8% Source: Citizens, FHCF, FIGA annual reports and websites.

Assessment Structures and Processes This section contains a review of the three primary insurance entities in Florida with the power to levy post-loss assessments: Citizens, the FHCF, and FIGA. The primary focus relates to the overall organization, assessment base, and assessment structure of each entity. Citizens Citizens has three distinct accounts: the Personal Lines Account (PLA), Commercial Lines Account (CLA), and the Coastal Account (formerly the High-Risk Account or HRA).35 Each account has a separate financial identity, and the calculation of deficits and resulting assessments are determined separately for each of the accounts. The current assessment base definition for Citizens includes all property and casualty lines of insurance except medical malpractice, accident and health, and workers’ compensation. When Citizens has a financial deficit in any of its three accounts, it has statutory authority (Section 627.351(6)(b)2.a, Florida Statutes) to levy up to three different types of assessments.

Citizens Policyholder Surcharge. The first assessment is the Citizens Policyholders Surcharge, levied on Citizens’ policyholders for each of Citizens’ three accounts. The amount of this surcharge reduces the amount of the deficit before Citizens Regular Assessments and Emergency Assessments are considered. Citizens Regular Assessment. The second Citizens assessment is Citizens Regular Assessment. The principal purposes of Regular Assessments are to cover smaller deficits quickly and to generate an early flow of funds to Citizens when larger deficits occur. Regular Assessments are 35 The accounts are defined in Section 627.351(6)(b)2, Florida Statutes.

52 imposed on private insurance companies and collected from policyholders who purchase relevant types of insurance policies from surplus lines insurers.36 The admitted insurers have the authority to recoup the amount of the Regular Assessments they paid to Citizens by adding a surcharge to the premiums they charge their policyholders (Section 627.3512, Florida Statutes). The payment of these assessments could be detrimental to thinly capitalized insurers that more than likely have significant losses in their own books of business. In 2012, Florida legislators passed legislation (HB 1127) that eliminated regular assessments in the PLA and CLA accounts and reduces the regular assessment in the Coastal Account from 6% to 2%. This change was designed to protect private property casualty insurance companies from having to pay the regular assessment upfront and then collect those funds from policyholders at policy renewal. The negative cash flows for the regular assessments could have been difficult for private insurers who would have been paying their own claims during the same time period.

Citizens Emergency Assessment. The third Citizens assessment is Citizens Emergency Assessment. The principal purpose of Emergency Assessments is to allow Citizens to make principal and interest payments on debt it issues to pay the claims associated with large hurricane losses when needed. Citizens levies Emergency Assessments on the policyholders of private and surplus lines insurance companies, subject to assessment, as well as on its own policyholders. Citizens cannot levy Emergency Assessments unless the maximum Policyholders Surcharge and Regular Assessments are not enough to cover the deficit. The Emergency Assessments are collected when the policies subject to assessment are renewed or when new policies are issued. One of the effects of HB 1127 was to shift the funds that would have been collected in regular assessments to emergency assessments.

36 For a definition of surplus lines see Part VIII of Ch. 626, Florida Statutes.

53 Figure 3: Citizens Assessment Structure Source: Updated from Citizens website. The HRA account has been renamed the Coastal Account. The Regular Assessment has been eliminated for the PLA and CLA accounts and reduced to 2% for the Coastal Account. Figure 3 illustrates the assessment structure within Citizens. Citizens’ maximum attainable assessments in one year, based on the new assessment structure and the 2011 insurance premiums assessment base,37 are approximately $11.29 billion.  The Citizens Policyholders Surcharge ($1.395 billion): Citizens can assess its policyholders up to 15 percent of their premium for each of Citizens’ three accounts that face a deficit. Citizens policyholders face a maximum of 45 percent Policyholder Surcharge (15% for each account). The $1.395 billion that can be collected through the Citizens Policyholder Surcharge is 45% of the $3.1B Citizens premium collected from its three accounts (Coastal Account, PLA, and CLA)).

 The Citizens Regular Assessments ($560 million): Citizens can assess admitted insurers and surplus lines policyholders up to the greater of 2% of premium or 2% of the deficit for the Coastal Account. Therefore the maximum Regular Assessment is 37 The Citizens premiums written in 2011 (Citizens Policyholder Surcharge Base) were $3.1B. All P&C lines except medical malpractice, workers’ compensation, and accident & health (Regular & Emergency Assessment Bases) premiums written were approximately $28B.

54 2% of the $28B in 2011 premiums in the assessment base lines of insurance which equals roughly $560 million.  The Citizens Emergency Assessments ($9.33 billion): Citizens can assess their policyholders, admitted insurers’ policyholders, and surplus lines policyholders up to the greater of 10% of premium or 10% of the deficit for each Citizens account plus an additional amount to cover interest, fees, and other charges related to debt issued to cover hurricane losses. Citizens’ ability to borrow is a function of its assessment rates, the size of the Assessment Base, and conditions in national and international credit markets. The maximum Emergency Assessment is 30% (10% for each account) of the $31.1B in 2011 premiums in the assessment base lines of insurance or $9.33 billion.38 Citizens Policy Counts by Legislative District. By Florida Statute, Citizens assessments are charged against Citizens and non-Citizens residential policies to pay for Citizens claims on a post-loss basis. It is important to recognize the size of the policy count impact the assessment structure has. To the extent that residential policies are insured through the private insurance market, the assessments create a cross subsidy from private policyholders to Citizens policyholders. Table 12 summarizes an estimation of the number of Legislative Districts in Florida having various fractions of their total count of Occupied Housing Units (OHUs) insured by Citizens. Appendix C provides detailed data from which the estimates in Table 12 were derived. The data were provided by the US Census Bureau and Citizens. Looking at Table 12, of the 40 Senate Districts and the 120 House Districts, the total Citizens policy count (including multi-peril and wind only policies) comprises 30% or less of the District’s total Occupied Housing Units for 27 out of 40 Senate Districts and 86 out of 120 House Districts. Tables 3 and 4 indicate the counts and frequencies for the individual Districts. A homeowner may choose to retain property risk if not required to insure property for purposes of securing and keeping a mortgage loan, so it cannot be assumed that all policies not written by Citizens are written by private insurers. But since most properties in Florida are mortgaged, these data provide a proxy for Citizens versus non-Citizens policy counts. As public policy debates regarding hurricanes and related insurance issues take place during the 2013 Florida Legislative Session, hopefully these data are useful for legislators who wish to know how their constituencies might be impacted by insurance legislation.

38 It is highly unlikely that Citizens would assess the full 30% in Emergency Assessments in the first year; rather they would likely spread the assessments out over a long period, such as 30 years to match the duration of the debt issued. Also, there is no set dollar limit to the total amount Citizens may assess since Citizens must estimate its losses to determine the proper assessment amount (e.g. a $100 billion event based on models and initial survey), then charge 10% of that amount to all policies affected by the assessment.

55 Table 12: Citizens Policies as % of Total Policies For Florida Occupied Housing Units by Legislative District Number of Districts Having: Senate House 30% or Fewer 27 86 31-44% 8 21 45-55% 5 5 56-69% 0 5 70% or Greater 0 3 Total 40 120 Sources: Citizens Property Insurance Corporation United States Census, American Community Survey Data FHCF 39 While the FHCF charges premiums for the coverage it provides, much of its capacity to meet its obligations to insurance companies is based on the post-loss assessments it is authorized to levy on insurance companies. To date, the FHCF has charged actuarially indicated rates for its coverage that are substantially below the rates charged by private reinsurance companies.40 The FHCF’s assessment base is very similar to Citizens’ current assessment base. Specifically, included are all lines of property and casualty insurance written by authorized insurance companies in Florida, except for workers compensation insurance, medical malpractice insurance, and accident and health insurance.

39 FHCF was created by the Florida Legislature in 1993 as a mandatory reimbursement mechanism for property insurance companies in Florida (Chapter 93-409, Laws of Florida). It provides reimbursement for a portion of an insurance company’s hurricane losses above the company’s required FHCF retention. Insurance companies that write covered policies must enter into a contract with the FHCF and pay an annual premium for the coverage. Since 1995, covered policies have been limited to those providing coverage for personal and commercial residential properties (Chapter 95-276, Laws of Florida). The FHCF is exempt from federal income taxation. Therefore, the FHCF can accumulate premium payments from year to year on a tax-free basis to pay catastrophe losses when they occur. By charging actuarially indicated rates (below those in the private reinsurance market), the FHCF has helped hold Florida residential property insurance rates lower than they would have been otherwise. While the Florida Legislature’s principal purposes in establishing the FHCF were to provide additional insurance capacity and help stabilize Florida’s property insurance market (Section 215.555(1), Florida Statutes), the beneficial effect of the FHCF charging below private reinsurer rates became apparent over time (Committee on Banking and Insurance, 2007).

40 The FHCF is required by statute to charge an “actuarially indicated” premium to insurance companies purchasing FHCF coverage. The FHCF’s traditional approach to developing actuarially indicated rates was to add an administrative cost factor to the average annual hurricane loss estimates developed from a weighted average of several hurricane models. The reasons why the FHCF can comply with the statutory standard and still have rates as much as one third to one fourth of the rates charged by private reinsurance companies are as follows: (1) the FHCF is exempt from federal income taxation; (2) the FHCF has very low administrative expenses; (3) the FHCF has no underwriting or marketing expenses because it is a mandatory insurance program; and (4) the FHCF does not include a profit load or contingency factor in its rates (a cash buildup factor is included). Finally, the FHCF’s emergency assessments are a broad based tax on most property casualty policyholders and therefore are not part of the FHCF’s rating structure.

56 The FHCF’s ability to borrow is a function of its assessment rates, the size of the FHCF Assessment Base, and conditions in national and international credit markets. The assessments levied by the FHCF are called Emergency Assessments (FHCF Emergency Assessments), but they are not the same as the Citizens’ Emergency Assessments. The Florida Legislature increased the FHCF’s assessment authority during the 2004 Regular Session by allowing assessments of up to 6% for hurricane losses in one season and up to an aggregate of 10% for hurricane losses in multiple years (Chapter 2004-27, Laws of Florida). Historically, FHCF debt has been considered high quality by markets because of the FHCF’s assessment powers. During three of the last four years (2009-2012), however, it does not appear that the FHCF would have been able to bond enough to pay for its full potential liabilities if it had become necessary. While this has been a function of conditions in the credit markets, the quantity of debt needed may be a more of an issue than the quality. The May 2012 Claims- Paying Capacity Estimate Report prepared by Raymond James for the FHCF indicates that they believe the FHCF would have a claims paying ability of $15.6 billion of the $17.3 billion in liabilities. This structure may be even more concerning in light of the current Florida economy and the likely adverse public reaction to potential large assessments (e.g., movement out of state or other evasion of assessments).

FIGA41 FIGA does not accumulate funds in advance of an insurance company’s insolvency. Therefore, when a company insolvency occurs, FIGA must obtain the funds it needs through pro-rata assessments levied by the Office of Insurance Regulation on insurance companies subject to assessment.42 These insurers must then recoup the cost through their policyholders. Depending on the number and size of property insurance companies that become insolvent following future hurricane strikes in Florida, FIGA may need to levy its own FIGA Regular Assessments and FIGA Emergency Assessments to meet its hurricane claims payment obligations under Florida law.43 41 The Florida Legislature joined many other states in 1970 to address concerns about the adverse effects of insolvent insurance companies by creating the Florida Insurance Guaranty Association (Chapter 70-20, Laws of Florida). The purpose of FIGA was to “provide a mechanism for the payment of covered claims under certain insurance policies to avoid excessive delay in payment and to avoid financial loss to claimants or policyholders because of the insolvency of an insurer” (Section 631.51(1), Florida Statutes). 42 Insurance companies may be required to pay these assessments in as little as 30 days. 43 FIGA has the ability to levy two assessments. The first two percent assessment is now called Regular Assessments (FIGA Regular Assessments), while the second two percent assessment is called Emergency Assessments (FIGA Emergency Assessments). The FIGA Regular Assessments “levied against any one insurer shall not exceed in any one year more than 2 percent of that insurer’s net direct written premiums in this state for the kinds of insurance included within such account during the calendar year next preceding the date of such assessments” (Section 631.57(3)(a), Florida Statutes). The FIGA Emergency Assessments can be used to pay hurricane claims directly or be assigned to the governmental unit issuing bonds to assist FIGA so that the governmental unit can “provide for the payment of the principal of, redemption premium, if any, and interest on such bonds, the cost of issuance of such bonds, and the funding of any reserves and other payments required under

57 FIGA has three separate accounts (Section 631.55(2), Florida Statutes): (1) the automobile liability account; (2) the automobile physical damage account; and (3) the account for all other insurance required to be part of FIGA.44 Only insurers writing business in the lines of insurance included in the account in which the insolvent company was writing business can be assessed. For the purposes of this study, only the all other account is relevant since it includes the property insurance lines of business.

Table 13 summarizes the maximum assessments to which two sample households are subject. Due to the fact that an insured in Citizens is assessed differently than an insured in the private market, the table shows the potential assessment levels for a Florida household with homeowners insurance coverage through Citizens and one that is insured by a private insurer. Typical households in Florida have both homeowners insurance policies and auto insurance policies. They may also have a personal umbrella liability policy. Each of these policies are included in the assessment base for Citizens and the FHCF. Since FIGA has a separate account for auto, it is not assessable in the event of a property insurer insolvency, but the homeowners policy and personal umbrella policy are. If a significant windstorm (or series of storms) hits Florida resulting in losses to Citizens and the FHCF that exceeds surplus and some insurer insolvencies, Table 13 shows the maximum assessment to which a typical Florida household is exposed. As shown in the table, a Citizens policyholder could be required to pay 85 percent of their homeowners insurance premium and 38 percent of their auto premium in the form of assessments in the year following a major hurricane striking Florida. Those assessments are in addition to the ordinary premiums paid. The 2012 reduction in the regular assessment results in Citizens policyholders actually bearing more of the cost of assessments. The funds that would have been collected in regular assessments will now have to be collected through emergency assessments. Citizens policyholders are not subject to the regular assessment on their Citizens property policy, but that policy is not exempt from emergency assessments. Therefore, Citizens policyholders will end up bearing a larger portion of any assessments. the bond resolution or trust indenture pursuant to which the bonds have been issued ( Section 631.57(3)(e)1.b, Florida Statutes).

44 The “all other” account does not include workers’ compensation.

58 Table 13: Summary of Maximum Assessments Panel A: Household #1 – Citizens Policies Held: Citizens' Homeowners Policy Personal Auto Policies Personal Umbrella Liability Policy Potential Assessments Citizens Policyholder Surcharge Citizens Regular Assessment Citizens Regular Assessment Citizens Emergency Assessment Citizens Emergency Assessment Citizens Emergency Assessment FHCF Emergency Assessment FHCF Emergency Assessment FHCF Emergency Assessment FIGA Regular Assessment FIGA Regular Assessment FIGA Emergency Assessment FIGA Emergency Assessment Likely Maximum Assessment (as a percentage of premium on the policy) Year 1 85% (Citizens - 75%, FHCF- 6%, FIGA - 4%) 38% (Citizens - 32%, FHCF - 6%) 42% (Citizens - 32%, FHCF - 6%, FIGA - 4%) Year 2+ 40% (Citizens - 30%, FHCF - 6%, FIGA - 4%) 36% (Citizens - 30%, FHCF - 6%) 40% (Citizens - 30%, FHCF - 6%, FIGA - 4%) Panel B: Household #2 - Private Homeowners Policy Policies Held: Private Insurer's Homeowners Policy Personal Auto Policies Personal Umbrella Liability Policy Potential Assessments Citizens Regular Assessment Citizens Regular Assessment Citizens Regular Assessment Citizens Emergency Assessment Citizens Emergency Assessment Citizens Emergency Assessment FHCF Emergency Assessment FHCF Emergency Assessment FHCF Emergency Assessment FIGA Regular Assessment FIGA Regular Assessment FIGA Emergency Assessment FIGA Emergency Assessment Likely Maximum Assessment (as a percentage of premium on the policy) Year 1 42% (Citizens - 32%, FHCF- 6%, FIGA - 4%) 38% (Citizens - 32%, FHCF - 6%) 42% (Citizens - 32%, FHCF - 6%, FIGA - 4%) Year 2+ 40% (Citizens - 30%, FHCF - 6%, FIGA - 4%) 36% (Citizens - 30%, FHCF - 6%) 40% (Citizens - 30%, FHCF - 6%, FIGA - 4%) Source: Authors’ calculations.

59 To get a better idea of how much windstorm risk is being financed through post-loss assessments, an analysis of potential losses is necessary. Each year the Financial Services Commission generates the “Annual report of aggregate net probable maximum losses, financing options, and potential assessments.” This report provides estimates of both Citizens’ and the FHCF’s probable maximum losses (PMLs) for three alternative return periods (50, 100, and 250 years) and capital amounts they have available on a pre-loss basis to pay those claims. The deficits would need to be funded by post-loss assessments. Table 14 contains this information for the 50 and 100 year return times. Additionally, the table shows the percentage of losses that will be funded by post-loss assessments. These amounts would increase in the event FIGA would need to issue assessments to fund any private insurers unable to meet their financial obligations.45 Table 14 shows that in 2012 approximately 30% of the probable maximum losses (PML) will be financed with post-loss assessments (50 or 100 year return time). This number has been falling recently for two reasons. The main driver of the reduction in the percentage of PML financed with post-loss assessments is the reduction in the FHCF’s exposure within its Temporary Increase in Coverage Layer (TICL). The FHCF’s maximum net loss number has dropped from over $27 billion in 2009 to under $19 billion in 2011 (it appears to be around $17 billion in 2012). In addition to the reduction in the FHCF’s TICL exposure, both the FHCF and Citizens have benefitted from the fact that Florida has not suffered windstorms making landfall since 2005, making it possible to increase their surplus and reduce the need for assessments. 45 Citizen numbers in 2010 reflected the assumption that Citizens would purchase optional coverage from the FHCF, which did not actually occur. The result would be that Citizens' assessments would have been higher and FHCF's lower.

60 Table 14 Panel A: 1-in-50 Year PML Year Return Time Gross PML Net Loss to Org. Assessable Shortfall % of PML financed through assessments FHCF 2012 50 $38,217,000,000 $18,388,000,000 $11,219,000,000 29.39% Citizens (combined accounts) 2012 50 $12,639,000,000 $12,000,000 Total 2012 50 $11,231,000,000 FHCF 2011 50 $39,406,852,548 $18,775,874,488 $12,862,353,937 41.60% Citizens (combined accounts) 2011 50 $13,353,124,757 $3,530,050,756 Total 2011 50 $16,392,404,693 FHCF 2010 50 $38,388,320,250 $23,173,000,000 $18,675,000,000 48.65% Citizens (combined accounts) 2010 50 $10,934,073,000 $0 Total 2010 50 $18,675,000,000 FHCF 2009 50 $34,408,230,204 $24,407,038,551 $21,620,766,551 68.20% Citizens (combined accounts) 2009 50 $15,632,000,000 $1,847,000,000 Total 2009 50 $23,467,766,551 FHCF 2008 50 $32,158,701,033 $23,452,830,930 $21,375,230,930 80.67% Citizens (combined accounts) 2008 50 $16,998,636,176 $4,567,054,607 Total 2008 50 $25,942,285,537

61 Table 14 Panel B: 1-in-100 Year PML Year Return Time Gross PML Net Loss to Org. Assessable Shortfall % of PML financed through assessments FHCF 2012 100 $57,459,000,000 $18,388,000,000 $11,219,000,000 30.67% Citizens (combined accounts) 2012 100 $20,743,000,000 $6,402,000,000 Total 2012 100 $17,621,000,000 FHCF 2011 100 $59,333,954,511 $18,775,874,488 $12,862,353,937 40.60% Citizens (combined accounts) 2011 100 $21,391,124,224 $11,228,533,224 Total 2011 100 $24,090,887,161 FHCF 2010 100 $58,099,025,250 $23,173,000,000 $18,675,000,000 39.62% Citizens (combined accounts) 2010 100 $17,302,316,000 $4,344,316,000 Total 2010 100 $23,019,316,000 FHCF 2009 100 $52,946,547,707 $27,670,000,000 $24,883,728,000 67.03% Citizens (combined accounts) 2009 100 $24,393,000,000 $10,608,000,000 Total 2009 100 $35,491,728,000 FHCF 2008 100 $49,846,761,596 $27,830,000,000 $25,752,400,000 73.29% Citizens (combined accounts) 2008 100 $26,649,951,778 $10,777,951,778 Total 2008 100 $36,530,351,778 Source: Financial Services Commission “Annual report of aggregate net probable maximum losses, financing options, and potential assessments”, various years.

62 Subsidies in the Assessments Post-loss financing can create inherent subsidies due to the assessment structures present in states. For example, if assessments are not purely risk based, it is possible that lower-risk insureds pay larger post-loss assessments compared to their exposure than do higher-risk insureds, thus creating a subsidy. Subsidies may not be restricted to differences in hurricane risk. They also may result from a timing issue. For example, if those paying the subsidies are new insureds in the state, it is possible that they did not receive the benefit of below-market rates prior to the catastrophe. Finally, subsidies may exist between the private and state-run markets since the residual market mechanisms may be able to assess both their policyholders as well as policyholders in the private market. “The Use of Postloss Financing of Catastrophic Risk,” Cole et al. (2011), provides a more detailed discussion of the subsidies that may be created by using these assessment structures.

Economic Impact: Where do we go from here? Private reinsurers should be concerned about the solvency of private primary insurers. Given the current market structure, Florida could be one major storm away from the state having to take all the wind risk. This may occur if there is a storm that causes a significant number of domestic insurer insolvencies. Floridians may lose confidence in the private market’s ability to underwrite risk going forward and move to Citizens. If this occurs, Citizens has more flexibility in its financing options. It can access capital markets directly (catastrophe bond issues, post-loss financing bonds) and can avoid reinsurance markets when rates are high. In addition, it may have more market power in negotiations with reinsurers than current private insurers. This type of event would have a drastic impact on the market structure moving forward. What the impacts of assessments would be on the Florida economy is an unanswered question. There is no question that over the last decade, Florida has chosen to utilize post-loss financing options to keep the current cost of risk financing lower. In some cases (2004-2005) assessments were necessary in others (2006+) they were not. The question becomes what are the costs and benefits of potentially pushing current liabilities on future generations of Floridians? How much more economic growth have we seen in Florida over the last decade that we would not have seen if current potential liabilities were being financed in the current periods? How much is the threat of potential future assessments stemming future economic growth? These questions need to be answered to determine the optimal mix between pre-loss and post-loss funding mechanisms.

63 Conclusions Florida is a market dominated by Citizens and relatively small monoline domestic property insurers. This type of structure raises questions as to the ability of the private market to withstand significant storm activity. Florida’s structure is unique among similarly exposed states in terms of both the state’s involvement and the number and market share of independent insurers. The result is private insurers currently selling residential property insurance in Florida are significantly more levered than in the past, with 17 of the 74 insurers selling homeowners insurance having a premium to surplus ratio above 3-to-1 in 2011. In addition, insurers retain approximately 40% of the direct premiums written and reinsure the remainder, making Florida highly dependent on reinsurance pricing.

Open questions still remain regarding a variety of issues in the Florida market. Should the state be involved in providing insurance or reinsurance? If so, what is the participation strategy achieves the healthiest private market? How much post-loss financing (if any) should be utilized within the public strategy? What are the economic impacts of the current and future insurance market structures? These questions need to be answered and public policy implemented accordingly if stakeholders are to once again have confidence in the Florida property insurance marketplace.

64 Appendix A – Data Sources & Data Limitations Quarterly Supplemental Reports The OIR’s own Quarterly Supplemental Reporting System (QUASR) is the best single time series of data since 2005 on the size and composition of the Florida property insurance market. Data elements relevant to this report are:  Insurance company (each insurer is separately identified by 5-digit NAIC company code);  Line of business (defined by OIR, the system separates homeowners, renters, condo unit- owners, dwelling fire, and commercial-residential sub-lines);  Wind coverage (each sub-line is further split into multi-peril, wind-only, or ex-wind);  County;  Direct written premium during quarter;  Policies in force at end of quarter;  Total insured value at end of quarter. Individual reports are requested 45 days after the end of each calendar quarter from each insurer. Though the data is unaudited, it is collected in accordance with a detailed administrative Rule46 .

It is made available in aggregate form by OIR approximately 3 to 4 months after each valuation date; this report uses data valued at quarter-ends valued from year-end 2005 through year-end 2011. NAIC Database of Insurer Annual Reports The College of Business at The Florida State University has access to a database of the National Association of Insurance Commissioners Insurer Annual Reports. These annual reports are available from 1985 through 2011. This database is not as detailed as the QUASR data. It reports premiums (earned and written) and losses by line of business and state. It does not have the number of policies or total insured value reported nor does it report wind coverage separately. The number of insurers selling by line and by state can be calculated and some reinsurance information is available. The reported values may differ from what is reported by the OIR in the QUASR reports. The data elements relevant to this report are:  Insurance company (by NAIC company code and group codes) o Surplus o Reinsurance usage o Corporate Structure  Homeowners line of business (by company by state): o Premiums (written and earned) o Losses & LAE o Market size and concentration 46 Rule 69O-137.009

65 Appendix B – Company Listings (NAIC Code & years in dataset) NAIC Company Code Company Name Group Code Group or Individual Company Florida Company Segment Number of Years in Data 39381 Adriatic Ins Co 0 Individual National/Other 4 33057 American Excel Ins Co 0 Individual National/Other 3 12841 American Integrity Ins Co of FL 0 Individual Domestic 5 12894 American Keystone Ins Co 0 Individual Domestic 1 15121 American Property & Cas Inc 0 Individual National/Other 8 34185 American Risk Assur Co 0 Individual National/Other 4 10707 American Star Ins Co 0 Individual National/Other 1 10876 American Superior Ins Co 0 Individual Domestic 7 13038 Ark Royal Insurance Co. 0 Individual Domestic 4 41459 Armed Forces Ins Exchange 0 Individual National/Other 27 41041 Auto Club South Ins Co 0 Individual National/Other 12 13139 Avatar P&C Insurance Co. 0 Individual Domestic 4 13528 Brotherhood Mut Ins Co 0 Individual National/Other 17 10908 Capitol Preferred Insurance Co 0 Individual Domestic 14 41017 Cascade Ins Co 0 Individual National/Other 2 26905 Century-Natl Ins Co 0 Individual National/Other 3 18767 Church Mut Ins Co 0 Individual National/Other 23 11956 Coral Ins Co 0 Individual Domestic 4 21016 Covenant Mut Ins Co 0 Individual National/Other 8 10890 Desoto Ins Co 0 Individual Domestic 4 12482 Edison Insurance Co. 0 Individual Domestic 4 21261 Electric Insurance Co. 0 Individual National/Other 23 10790 Federated National Ins Co. 0 Individual National/Other 1 10186 Fidelity Fire & Casualty Co. 0 Individual Domestic 5 10897 First Protective Insurance Co. 0 Individual Domestic 12 11975 First Southern Ins Co 0 Individual National/Other 1 10688 Florida Family Mut Ins Co 0 Individual Domestic 16 13951 Florida Farm Bu Mut Ins Co 0 Individual National/Other 8 29882 Florida Fire & Cas Ins Co 0 Individual National/Other 5 10132 Florida Peninsula Insurance Co 0 Individual Domestic 7 14044 Goodville Mut Cas Co 0 Individual National/Other 6 16870 Granada Ins Co 0 Individual National/Other 7 18660 Great Republic Ins Co 0 Individual National/Other 7 27286 Guardian Prop & Cas Ins Co 0 Individual National/Other 5 12237 Gulfstream Prop & Cas Ins Co 0 Individual Domestic 7 12306 Hillcrest Insurance Co. 0 Individual Domestic 4 12944 Homeowners Choice Prop & Cas 0 Individual Domestic 5

66 Ins Co 11460 Homestead Ins Co 0 Individual National/Other 4 20257 Insurance Co Of FL 0 Individual National/Other 4 42692 International Bankers Ins Co 0 Individual National/Other 1 15636 Lutheran Benevolent Ins Exchange Inc 0 Individual National/Other 7 13141 Magnolia Insurance Co. 0 Individual Domestic 1 14508 Michigan Millers Mut Ins Co 0 Individual National/Other 9 14575 Millers Capital Ins Co 0 Individual National/Other 6 27014 Mutual Fire & Storm Ins Co 0 Individual National/Other 12 23663 National American Ins Co 0 Individual National/Other 2 10962 New America Ins Co Inc 0 Individual Domestic 5 27537 Nova Southern Ins Co 0 Individual National/Other 5 26336 Ocean Cas Ins Co 0 Individual National/Other 4 12954 Olympus Insurance Co. 0 Individual Domestic 5 14974 Pennsylvania Lumbermens Mut Ins 0 Individual National/Other 5 13125 People's Trust Insurance Co. 0 Individual Domestic 4 15024 Preferred Mut Ins Co 0 Individual National/Other 11 13687 Prepared Insurance Co. 0 Individual Domestic 2 12588 Prime Insurance Co. 0 Individual National/Other 2 11023 Qualsure Ins Corp 0 Individual Domestic 4 15300 Regency Ins Co 0 Individual National/Other 5 13619 Sawgrass Mutual Insurance Co. 0 Individual Domestic 2 10117 Security First Insurance Co. 0 Individual Domestic 7 10136 Southern Fidelity Insurance Co 0 Individual Domestic 7 41700 Southern Group Ind Inc 0 Individual National/Other 7 12247 Southern Oak Insurance Co. 0 Individual Domestic 6 11844 St. Johns Insurance Co. 0 Individual Domestic 8 13621 Star & Shield Ins Exchange 0 Individual Domestic 3 15237 Sussex Mut Ins Co 0 Individual National/Other 3 24619 Transportation Cas Ins Co 0 Individual National/Other 1 10969 United Prop & Cas Ins Co 0 Individual Domestic 13 23256 United Southern Assur Co 0 Individual National/Other 1 10861 Universal Prop & Cas Ins 0 Individual Domestic 14 25410 Universal Security Ins Co 0 Individual National/Other 1 15326 Utica First Ins Co 0 Individual National/Other 4 10954 Vanguard Fire & Cas Co 0 Individual Domestic 7 11126 Yasuda Fire & Marine Ins Co Of Amer 0 Individual National/Other 20 34983 Amwest Surety Ins Co 2 Group National/Other 1 42633 Far West Ins Co 2 Group National/Other 2 27928 Amex Assur Co 4 Group National/Other 15 29068 IDS Property Casualty Ins Co. 4 Group National/Other 6

67 13935 Federated Mut Ins Co 7 Group National/Other 17 10835 Allstate Floridian Ind Corp 8 Group Pup 7 19232 Allstate Ins Co 8 Group National/Other 18 30511 Castle Key Insurance Co. 8 Group Pup 16 19399 AIU Ins Co 12 Group National/Other 10 22616 American General Prop Ins Co Of FL 12 Group National/Other 10 19380 American Home Assurance Co. 12 Group National/Other 19 32220 American Intl Ins Co 12 Group National/Other 15 19933 Audubon Ins Co 12 Group National/Other 13 19402 Chartis Property Casualty Co. 12 Group National/Other 2 26883 Chartis Specialty Insurance Co 12 Group National/Other 10 19410 Commerce & Industry Ins Co 12 Group National/Other 6 19429 Insurance Co Of The State Of PA 12 Group National/Other 6 35637 Landmark Ins Co 12 Group National/Other 1 19437 Lexington Insurance Co. 12 Group National/Other 19 19445 National Union Fire Ins Co Of Pitts 12 Group National/Other 9 23841 New Hampshire Insurance Co. 12 Group National/Other 19 19550 American Mut Ins Co Of Boston 15 Group National/Other 3 10111 American Bankers Ins Co. of FL 19 Group National/Other 27 19615 American Reliable Insurance Co 19 Group National/Other 10 42978 American Security Insurance Co 19 Group National/Other 16 42986 Standard Guaranty Ins Co 19 Group National/Other 7 40428 Voyager Indemnity Insurance Co 19 Group National/Other 13 19747 American Universal Ins Co 21 Group National/Other 4 19763 Bay State Ins Co 22 Group National/Other 16 19771 Cambridge Mut Fire Ins Co 22 Group National/Other 16 19798 Merrimack Mut Fire Ins Co 22 Group National/Other 16 19895 Atlantic Mutual Insurance Co. 24 Group National/Other 25 19909 Centennial Insurance Co. 24 Group National/Other 25 23639 MCA Ins Co 26 Group National/Other 4 19976 Amica Mutual Insurance Co. 28 Group National/Other 27 37362 General Star Ind Co 31 Group National/Other 11 38962 Genesis Ins Co 31 Group National/Other 2 22063 Government Employees Ins Co 31 Group National/Other 20 38318 Republic Ins Co 31 Group National/Other 14 20222 All Amer Ins Co 36 Group National/Other 12 20230 Central Mut Ins Co 36 Group National/Other 12 38989 Chubb Custom Insurance Co. 38 Group National/Other 27 12777 Chubb Ind Ins Co 38 Group National/Other 3 20281 Federal Insurance Co. 38 Group National/Other 27 20303 Great Northern Insurance Co. 38 Group National/Other 27 20346 Pacific Indemnity Co. 38 Group National/Other 27

68 20397 Vigilant Insurance Co. 38 Group National/Other 27 21296 Associates Ins Co 41 Group National/Other 4 19062 Automobile Ins Co Of Hartford CT 41 Group National/Other 12 22217 Gulf Ins Co 41 Group National/Other 10 42811 Gulf Underwriters Ins Co 41 Group National/Other 3 25623 Phoenix Ins Co 41 Group National/Other 16 22233 Select Ins Co 41 Group National/Other 2 19070 Standard Fire Ins Co 41 Group National/Other 16 19038 Travelers Cas & Surety Co 41 Group National/Other 6 25658 Travelers Ind Co 41 Group National/Other 16 20966 Cotton States Mutual Ins Co. 50 Group National/Other 27 14206 Holyoke Mut Ins Co In Salem 50 Group National/Other 11 21091 International Surplus Lines Ins Co 52 Group National/Other 1 25186 Emc Prop & Cas Ins Co 62 Group National/Other 15 21415 Employers Mut Cas Co 62 Group National/Other 21 10014 Affiliated Fm Ins Co 65 Group National/Other 27 37710 First American Prop & Cas Ins Co 70 Group National/Other 11 11986 Universal Ins Co of NA 71 Group Domestic 8 22772 Integon Ind Corp 79 Group National/Other 5 29742 Integon Natl Ins Co 79 Group National/Other 8 31488 Integon Preferred Ins Co 79 Group National/Other 1 38660 MIC General Ins Corp 79 Group National/Other 14 23728 National General Ins Co 79 Group National/Other 19 35351 American Empire Surplus Lns Ins Co 84 Group National/Other 8 31925 Atlanta Specialty Ins Co 84 Group National/Other 7 26344 Great American Assur Co 84 Group National/Other 14 16691 Great American Ins Co 84 Group National/Other 11 22136 Great American Ins Co of NY 84 Group National/Other 15 31135 Great American Security Ins Co 84 Group National/Other 7 33723 Great American Spirit Ins Co 84 Group National/Other 4 20133 Worldwide Direct Auto Ins Co 84 Group National/Other 14 26050 Worldwide Ins Co 84 Group National/Other 11 22292 Hanover Ins Co 88 Group National/Other 23 22357 Hartford Accident & Indem Co. 91 Group National/Other 9 22365 Hartford Cas Ins Co 91 Group National/Other 2 29424 Hartford Casualty Insurance Co 91 Group National/Other 25 19682 Hartford Fire Insurance Co. 91 Group National/Other 26 37478 Hartford Ins Co. of the MW 91 Group National/Other 27 38261 Hartford Ins Co. of the SE 91 Group National/Other 24 30104 Hartford Underwriters Ins Co. 91 Group National/Other 24 22373 New York Underwriters Ins Co 91 Group National/Other 1

69 34690 Property & Cas Ins Co Of Hartford 91 Group National/Other 5 11000 Sentinel Insurance Co. Ltd. 91 Group National/Other 3 22411 Twin City Fire Ins Co 91 Group National/Other 2 29459 Twin City Fire Insurance Co. 91 Group National/Other 25 22608 State Natl Specialty Ins Co 93 Group National/Other 10 30562 American Manufacturers Mut Ins Co 108 Group National/Other 19 22918 American Motorists Ins Co 108 Group National/Other 19 22977 Lumbermens Mut Cas Co 108 Group National/Other 20 20524 Specialty Natl Ins Co 108 Group National/Other 1 11622 Specialty Surplus Ins Co 108 Group National/Other 6 12696 America First Ins Co 111 Group National/Other 6 18333 Atlas Assur Co Of Amer 111 Group National/Other 1 22640 Consolidated Ins Co 111 Group National/Other 11 21458 Employers Ins Of Wausau Mut Co 111 Group National/Other 8 11045 Excelsior Ins Co 111 Group National/Other 3 33588 First Liberty Insurance Corp. 111 Group National/Other 18 22659 Indiana Ins Co 111 Group National/Other 18 19917 Liberty Ins Underwriters Inc 111 Group National/Other 2 23035 Liberty Mutual Fire Ins Co. 111 Group National/Other 27 14486 Merchants & Business Mens Mut Ins Co 111 Group National/Other 8 24198 Peerless Ins Co 111 Group National/Other 1 24740 Safeco Insurance Co. of Am 111 Group National/Other 24 26042 Wausau Underwriters Ins Co 111 Group National/Other 4 19488 Amerisure Ins Co 124 Group National/Other 13 23396 Amerisure Mut Ins Co 124 Group National/Other 10 14982 Penn Millers Ins Co 125 Group National/Other 5 23450 American Family Home Ins Co 127 Group National/Other 6 12314 American Modern Ins Co of FL 127 Group Domestic 5 23523 Millers Cas Ins Co 130 Group National/Other 4 23531 Millers Ins Co 130 Group National/Other 2 23760 Nationwide General Ins Co 140 Group National/Other 3 25453 Nationwide Ins Co Of Amer 140 Group National/Other 1 10948 Nationwide Insurance Co. of FL 140 Group Pup 12 23779 Nationwide Mut Fire Ins Co 140 Group National/Other 17 23787 Nationwide Mut Ins Co 140 Group National/Other 1 41297 Scottsdale Insurance Co. 140 Group National/Other 21 23914 Northwestern Ntl Ins Co Milwaukee 143 Group National/Other 1 23965 Norfolk & Dedham Mut Fire Ins Co 144 Group National/Other 8 24066 American Fire & Cas Co 148 Group National/Other 19

70 24074 Ohio Cas Ins Co 148 Group National/Other 19 24090 West American Ins Co 148 Group National/Other 10 44393 West American Ins Co 148 Group National/Other 9 24147 Old Republic Ins Co 150 Group National/Other 7 35424 Old Republic Minnehoma Ins Co 150 Group National/Other 8 11851 Progressive Home Ins Co 155 Group National/Other 4 44288 Specialty Risk Ins Co 155 Group National/Other 3 24295 Providence Washington Ins Co 156 Group National/Other 9 21083 International Ins Co 158 Group National/Other 5 21105 North River Ins Co 158 Group National/Other 3 10936 Seneca Ins Co Inc 158 Group National/Other 4 25534 TIG Ins Co 158 Group National/Other 18 25518 TIG Premier Ins Co 158 Group National/Other 11 25445 TIG Specialty Ins Corp 158 Group National/Other 3 21113 United States Fire Ins Co 158 Group National/Other 7 24457 Reliance Ins Co 159 Group National/Other 11 24430 Reliance Natl Ind Co 159 Group National/Other 7 24473 United Pacific Ins Co 159 Group National/Other 11 19690 American Economy Ins Co 163 Group National/Other 16 19704 American States Ins Co 163 Group National/Other 17 37214 American States Preferred Ins Co 163 Group National/Other 11 24724 First Natl Ins Co Of Amer 163 Group National/Other 8 24732 General Ins Co Of Amer 163 Group National/Other 5 11215 Safeco Ins Co Of PA 163 Group National/Other 10 24767 St Paul Fire & Marine Ins Co 164 Group National/Other 9 25887 US Fidelity & Guaranty Co 164 Group National/Other 15 24937 Catawba Ins Co 168 Group National/Other 1 24945 Consolidated American Ins Co 168 Group National/Other 7 24953 South Carolina Ins Co 168 Group National/Other 10 24988 Sentry Insurance a Mutual Co. 169 Group National/Other 26 21180 Sentry Select Ins Co 169 Group National/Other 10 28053 Rockhill Insurance Co. 175 Group National/Other 3 11502 State Auto FL Ins Co 175 Group National/Other 1 25127 State Auto Prop & Cas Ins Co 175 Group National/Other 21 25135 State Automobile Mut Ins Co 175 Group National/Other 8 25143 State Farm Fire And Cas Co 176 Group National/Other 17 10739 State Farm Florida Ins Co. 176 Group Pup 13 25151 State Farm General Ins Co 176 Group National/Other 2 25941 United Svcs Automobile Assn. 200 Group National/Other 27 25968 USAA Casualty Insurance Co. 200 Group National/Other 27 18600 USAA General Indemnity Co. 200 Group National/Other 6 25984 Graphic Arts Mut Ins Co 201 Group National/Other 17 25976 Utica Mut Ins Co 201 Group National/Other 17

71 26247 American Guarantee & Liability Ins 212 Group National/Other 3 22500 City Ins Co 212 Group National/Other 1 21326 Empire Fire & Marine Ins Co 212 Group National/Other 3 11185 Foremost Ins Co. Grand Rapids 212 Group National/Other 11 41513 Foremost Signature Ins Co 212 Group National/Other 3 22519 Home Ind Co 212 Group National/Other 10 22527 Home Ins Co 212 Group National/Other 8 29432 Home Ins Co Of IL 212 Group National/Other 4 19356 Maryland Cas Co 212 Group National/Other 14 41181 Universal Underwriters Ins Co 212 Group National/Other 2 16535 Zurich American Ins Co 212 Group National/Other 7 26271 Erie Ins Exch 213 Group National/Other 4 38156 Alpha Prop & Cas Ins Co 215 Group National/Other 1 10914 Kemper Independence Ins Co 215 Group National/Other 5 16063 Unitrin Auto & Home Ins Co 215 Group National/Other 4 34363 Central Nat Ins Co Of PR 217 Group National/Other 4 20265 Protective Natl Ins Co Of Omaha 217 Group National/Other 1 20427 American Cas Co Of Reading PA 218 Group National/Other 12 20761 Boston Old Colony Ins Co 218 Group National/Other 14 20788 Buckeye Union Ins Co 218 Group National/Other 15 20818 Commercial Ins Co Of Newark NJ 218 Group National/Other 14 20443 Continental Cas Co 218 Group National/Other 9 35289 Continental Ins Co 218 Group National/Other 15 42625 Continental Ins Co Of NJ 218 Group National/Other 1 35270 Fidelity & Cas Co Of NY 218 Group National/Other 17 20850 Firemens Ins Co Of Newark NJ 218 Group National/Other 12 34622 Glens Falls Ins Co 218 Group National/Other 14 20885 Kansas City Fire & Marine Ins Co 218 Group National/Other 14 22152 Mayflower Ins Co Ltd 218 Group National/Other 1 20478 National Fire Ins Co Of Hartford 218 Group National/Other 12 20893 National-Ben Franklin Ins Co Of IL 218 Group National/Other 15 35106 Niagara Fire Ins Co 218 Group National/Other 13 20508 Valley Forge Ins Co 218 Group National/Other 13 23248 Occidental Fire & Cas Co Of NC 225 Group National/Other 2 36560 Service Insurance Co (FL) 225 Group Domestic 26 23655 Modern Service Ins Co 227 Group National/Other 2 20001 Beacon Ins Co Of Amer 228 Group National/Other 4 24104 Ohio Farmers Ins Co 228 Group National/Other 20 24112 Westfield Ins Co 228 Group National/Other 19 24120 Westfield Natl Ins Co 228 Group National/Other 16 26018 Vermont Mut Ins Co 234 Group National/Other 6

72 40169 Metropolitan Cas Ins Co 241 Group National/Other 8 26298 Metropolitan Property & Cas Ins Co 241 Group National/Other 24 19259 Selective Ins Co Of SC 242 Group National/Other 5 39926 Selective Ins Co Of The Southeast 242 Group National/Other 4 28665 Cincinnati Cas Co 244 Group National/Other 11 10677 Cincinnati Insurance Co. 244 Group National/Other 27 23280 The Cincinnati Indemnity Co 244 Group National/Other 7 10324 Addison Insurance Co. 248 Group National/Other 10 19518 American Ind Co 248 Group National/Other 18 18295 Lafayette Ins Co 248 Group National/Other 2 13021 United Fire & Casualty Co. 248 Group National/Other 11 19496 United Fire & Indemnity Co. 248 Group National/Other 14 18090 Southern Heritage Ins Co 250 Group National/Other 8 13382 Harleysville-Atlantic Ins Co 253 Group National/Other 17 23582 Minnesota Fire & Cas Co 253 Group National/Other 13 17248 Safeway Property Insurance Co. 257 Group National/Other 15 12254 Omaha Ind Co 261 Group National/Other 2 37540 Omaha Prop & Cas Ins Co 261 Group National/Other 17 11134 Fidelity First Ins Co 264 Group National/Other 3 14990 Pennsylvania Ntl Mut Cas Ins Co 271 Group National/Other 5 13250 Workmen's Auto Insurance Co. 273 Group National/Other 2 18988 Auto-Owners Insurance Co. 280 Group National/Other 26 32700 Owners Insurance Co. 280 Group National/Other 23 10190 Southern-Owners Insurance Co. 280 Group National/Other 14 14184 Heritage Mut Ins Co 289 Group National/Other 12 13331 American Hardware Mut Ins Co 291 Group National/Other 18 11584 Integrity Ins Co 299 Group National/Other 1 22578 Horace Mann Insurance Co. 300 Group National/Other 16 22683 Teachers Insurance Co. 300 Group National/Other 27 15032 Guideone Mut Ins Co 303 Group National/Other 16 14559 Guideone Specialty Mut Ins Co 303 Group National/Other 1 31968 Merastar Ins Co 304 Group National/Other 23 32352 Prudential Prop & Cas Ins Co 304 Group National/Other 19 10847 Cumis Ins Society Inc 306 Group National/Other 10 40231 Old Dominion Ins Co 311 Group Domestic 22 33898 Aegis Security Insurance Co. 313 Group National/Other 27 37958 Acceptance Ins Co 329 Group National/Other 9 25003 Comco Ins Co 342 Group National/Other 1 12076 National Ins Co 343 Group National/Other 8 10669 Church Ins Co 344 Group National/Other 18 13978 Florists Mut Ins Co 349 Group National/Other 8 34789 GE Prop & Cas Ins Co 350 Group National/Other 21

73 39527 Heritage Ind Co 350 Group National/Other 5 34207 Westport Ins Corp 350 Group National/Other 1 41998 American Southern Home Ins Co. 361 Group Domestic 17 35912 American Western Home Ins Co. 361 Group National/Other 11 19178 Southern Gty Ins Co 400 Group National/Other 21 19216 Southern Ins Co 400 Group National/Other 2 22861 Southern Pilot Ins Co 400 Group National/Other 8 29572 Pafco General Ins Co 407 Group National/Other 5 28401 American Natl Prop & Cas Co 408 Group National/Other 23 39993 Colony Ins Co 457 Group National/Other 2 36927 Colony Specialty Ins Co 457 Group National/Other 2 35769 Lyndon Property Ins Co 458 Group National/Other 3 11177 First Financial Ins Co 479 Group National/Other 7 31216 Florida Farm Bureau Cas Ins Co 483 Group Pup 27 18325 Southern Farm Bureau Cas Ins Co 483 Group National/Other 9 11156 Homesite Insurance Co. of FL 501 Group Domestic 10 18619 Underwriters Ins Co 501 Group National/Other 1 24643 Newark Ins Co 515 Group National/Other 11 20532 Clarendon Natl Ins Co 517 Group National/Other 17 21806 Harbor Specialty Insurance Co. 517 Group National/Other 12 11075 Lion Ins Co 517 Group National/Other 4 37303 Redland Ins Co 517 Group National/Other 4 23132 Bankers Multiple Line Ins Co 529 Group National/Other 1 24589 American & Foreign Ins Co 553 Group National/Other 19 24880 Fire & Cas Ins Co Of CT 553 Group National/Other 1 24600 Globe Ind Co 553 Group National/Other 7 35262 Phoenix Assur Co Of NY 553 Group National/Other 1 20370 Royal & Sunalliance Personal Ins Co 553 Group National/Other 7 24678 Royal Ind Co 553 Group National/Other 22 26980 Royal Ins Co Of Amer 553 Group National/Other 19 24694 Safeguard Ins Co 553 Group National/Other 12 20354 Sea Ins Co Of Amer 553 Group National/Other 7 24902 Security Ins Co Of Hartford 553 Group National/Other 2 19534 Unisun Ins Co 553 Group National/Other 13 28045 Fortune Ins Co 567 Group National/Other 16 12530 Pegasus Ins Co 567 Group National/Other 7 31089 Republic Western Ins Co 574 Group National/Other 6 12912 Credit General Ins Co 602 Group National/Other 1 15741 United Comm Ins Co 606 Group National/Other 9 22667 Ace American Ins Co 626 Group National/Other 16 26417 ACE Ins Co. of the Midwest 626 Group National/Other 3 20699 Ace Prop & Cas Ins Co 626 Group National/Other 1

74 18279 Bankers Standard Ins Co 626 Group National/Other 8 20591 Bankers Std Fire & Marine Co 626 Group National/Other 13 20710 Century Ind Co 626 Group National/Other 6 43575 Indemnity Ins Co Of North Amer 626 Group National/Other 6 22713 Insurance Co Of North Amer 626 Group National/Other 17 22748 Pacific Employers Ins Co 626 Group National/Other 18 21121 Westchester Fire Ins Co 626 Group National/Other 4 10172 Westchester Surplus Lines Ins Co 626 Group National/Other 3 34193 Agway Ind Ins Co 649 Group National/Other 3 16810 American Mercury Insurance Co. 660 Group National/Other 13 12157 Companion Prop & Cas Ins Co 661 Group National/Other 16 25180 Fidelity Natl Ins Co 670 Group National/Other 4 10955 Liberty American Ins Co 677 Group National/Other 8 32760 Mobile USA Ins Co 677 Group National/Other 20 18058 Philadelphia Ind Ins Co 677 Group National/Other 5 13099 Wasatch Crest Ins Co 685 Group National/Other 8 33162 Bankers Ins Co 689 Group National/Other 14 16578 First Comm Ins Co 689 Group National/Other 13 13990 First Community Insurance Co. 689 Group Domestic 17 19623 American Summit Ins Co 732 Group National/Other 17 31151 American Colonial Ins Co Inc 754 Group Domestic 4 21849 American Automobile Ins Co. 761 Group National/Other 22 21857 American Ins Co 761 Group National/Other 11 21865 Associated Indemnity Corp. 761 Group National/Other 27 21873 Firemans Fund Ins Co 761 Group National/Other 27 39640 Firemans Fund Ins Co Of OH 761 Group National/Other 13 37273 Firemans Fund Ins Co Of WI 761 Group National/Other 7 22829 Interstate Fire & Cas Co 761 Group National/Other 7 11630 Jefferson Ins Co 761 Group National/Other 12 33189 Monticello Ins Co 761 Group National/Other 9 21881 National Surety Corp 761 Group National/Other 16 26743 Caliber One Ind Co 767 Group National/Other 3 39020 Essex Insurance Co. 785 Group National/Other 8 35378 Evanston Ins Co 785 Group National/Other 3 28932 Markel American Insurance Co. 785 Group National/Other 1 38970 Markel Ins Co 785 Group National/Other 4 39217 QBE Ins Corp 796 Group National/Other 1 19941 American Commerce Insurance Co 816 Group National/Other 24 13900 ARI Mut Ins Co 848 Group National/Other 8 36838 General Agents Ins Co Of Amer Inc 852 Group National/Other 1 15059 Public Service Mut Ins Co 853 Group National/Other 7 12416 Protective Ins Co 867 Group National/Other 5

75 34932 Consolidated Prop & Cas Ins Co Inc 885 Group National/Other 3 35777 International Ind Co 885 Group National/Other 1 39462 Queensway Intl Ind Co 885 Group National/Other 3 25348 Indemnity Ins Co Of North Amer 901 Group National/Other 8 42048 Diamond State Ins Co 920 Group National/Other 13 13064 United Natl Ins Co 920 Group National/Other 2 24031 Northland Cas Co 923 Group National/Other 5 24015 Northland Ins Co 923 Group National/Other 17 36765 Gulf Guaranty Ins Co 948 Group National/Other 1 38806 Insura Prop & Cas Ins Co 958 Group National/Other 4 15156 Shelby Ins Co 958 Group National/Other 13 11762 Vesta Fire Ins Corp 958 Group National/Other 14 42668 Vesta Ins Corp 958 Group National/Other 3 42250 Frontier Pacific Ins Co 961 Group National/Other 5 10314 Home & Auto Ins Co 967 Group Pup 3 15075 Union American Ins Co 967 Group National/Other 5 15989 Axa Global Risks Us Underwriters 968 Group National/Other 2 16187 AXA Re Prop & Cas Ins Co 968 Group National/Other 10 22241 Medmarc Cas Ins Co 1113 Group National/Other 9 22489 Highlands Ins Co 1116 Group National/Other 11 23086 LMI Ins Co 1116 Group National/Other 1 23906 Northwestern Natl Cas Co 1116 Group National/Other 8 12661 State Capital Ins Co 1116 Group National/Other 13 20613 American Employers Ins Co 1129 Group National/Other 18 27154 Atlantic Specialty Ins Co 1129 Group National/Other 3 21946 Camden Fire Ins Assoc 1129 Group National/Other 12 20648 Employers Fire Ins Co 1129 Group National/Other 17 38369 Northern Assur Co Of Amer 1129 Group National/Other 18 20621 OneBeacon America Ins Co 1129 Group National/Other 18 21970 OneBeacon Ins Co 1129 Group National/Other 18 21962 Pennsylvania General Ins Co 1129 Group National/Other 18 25712 Tri-State Ins Co 1129 Group National/Other 13 11072 Home Pointe Ins Co 1141 Group Domestic 6 11231 Generali Us Branch 1169 Group National/Other 10 12726 Aries Ins Co Inc 1196 Group National/Other 1 32859 Penn-Amer Ins Co 1218 Group National/Other 2 43044 Response Ins Co 1234 Group National/Other 5 10203 Argus Fire & Casualty Ins Co. 1235 Group Domestic 13 25402 Amcomp Assur Corp 1237 Group National/Other 10 24961 Connie Lee Ins Co 1248 Group National/Other 2 22284 California Compensation Ins Co 1252 Group National/Other 6 22950 Acstar Ins Co 1276 Group National/Other 4

76 11150 Arch Ins Co 1279 Group National/Other 1 24821 Meritplan Insurance Co. 1281 Group National/Other 8 24554 XL Ins Amer Inc 1285 Group National/Other 6 12813 Auto Club Insurance Co. of FL 1318 Group National/Other 5 14400 Lititz Mut Ins Co 1319 Group National/Other 11 17620 Penn Charter Mut Ins Co 1319 Group National/Other 10 33855 Lincoln General Ins Co 1326 Group National/Other 3 24813 Balboa Ins Co 1330 Group National/Other 18 10663 Florida Select Ins Co 1341 Group Domestic 11 10872 American Strategic Ins Corp. 1344 Group Domestic 14 12196 ASI Assurance Corp. 1344 Group Domestic 7 11059 ASI Lloyds 1344 Group National/Other 5 13142 ASI Preferred Insurance Corp. 1344 Group Domestic 4 14834 New York Central Mut Fire Ins Co 2518 Group National/Other 6 10902 Atlantic Preferred Ins Co 2578 Group Domestic 8 11577 Florida Preferred Prop Ins Co 2578 Group Domestic 3 10661 Southern Family Ins Co 2578 Group Domestic 10 27980 Federated Natl Ins Co 2879 Group Domestic 13 37850 Pacific Specialty Ins Co 2898 Group National/Other 3 12904 Tokio Marine & Nichido Fire Ins Co 3098 Group National/Other 19 43117 American Equity Ins Co 3321 Group National/Other 4 26620 AXIS Surplus Insurance Co. 3416 Group National/Other 8 10953 Cypress Prop & Cas Ins Co 3456 Group Domestic 13 38644 Omega Insurance Co. 3484 Group Domestic 24 29050 Tower Hill Preferred Ins Co. 3484 Group Domestic 14 11027 Tower Hill Prime Insurance Company 3484 Group Domestic 12 12011 Tower Hill Select Insurance Co 3484 Group Domestic 8 12538 Tower Hill Signature Ins Co. 3484 Group Domestic 6 11853 Ranchers & Farmers Ins Co. 3497 Group National/Other 4 18163 Cooperativa de Seguros 3526 Group National/Other 10 25615 Charter Oak Fire Ins Co 3548 Group National/Other 18 10647 Frst Floridian Auto & Home Ins 3548 Group Pup 16 25666 Travelers Indemnity Co. of Am 3548 Group National/Other 27 12152 USIC of Florida Inc. 3593 Group National/Other 4 10182 Usf&G Specialty Ins Co 3829 Group National/Other 7 12563 Safe Harbor Insurance Co. 4051 Group Domestic 6 12438 Homewise Ins Co 4111 Group Domestic 4 12582 Homewise Preferred Ins Co 4111 Group Domestic 5 12568 Northern Capital Insurance Co. 4486 Group Domestic 3 13563 American Platinum P&C Ins Co. 4663 Group Domestic 1 12873 Privilege Underwriters Recpl 4664 Group Domestic 5

77 12359 American Traditions Ins Co. 4686 Group Domestic 6 12957 Modern USA Insurance Co. 4686 Group Domestic 5 10860 Sunshine State Insurance Co. 4689 Group Domestic 14 10717 Aspen Specialty Insurance Co. 4698 Group National/Other 2 29734 Conifer Insurance Co. 4720 Group National/Other 1 10149 HomeWise Insurance Co. 4735 Group Domestic 6

78 Appendix C – Citizens Policies and Occupied Housing Units by Florida Legislative District as of 12/31/11 Table 1. Citizens Policies and Occupied Housing Units by Florida House District as of 12/31/11 House District Owner- Occupied Housing Units Renter- Occupied Housing Units Total Occupied Housing Units (OHUs) Citizen Multi- Peril Policy Count Citizen Wind Only Policy Count Citizen Total Policy Count Citizen % of Total OHUs 1 41,111 17,845 58,956 2,620 21 2,641 4% 2 38,802 24,479 63,281 15,017 9,045 24,062 38% 3 46,019 13,336 59,355 4,642 608 5,250 9% 4 40,034 23,901 63,935 8,715 2,838 11,553 18% 5 44,703 14,801 59,504 12,516 6,695 19,211 32% 6 40,182 24,688 64,870 12,286 5,325 17,611 27% 7 41,797 12,739 54,536 7,598 3,318 10,916 20% 8 27,974 33,963 61,937 2,289 2,289 4% 9 42,043 20,177 62,220 1,252 1,252 2% 10 42,247 14,249 56,496 2,592 2,592 5% 11 43,991 17,908 61,899 6,206 2,231 8,437 14% 12 38,645 22,210 60,855 1,342 1,342 2% 13 30,842 31,868 62,710 1,072 1,072 2% 14 38,795 20,259 59,054 1,403 1,403 2% 15 39,585 20,607 60,192 1,471 1,471 2% 16 41,668 24,866 66,534 1,126 1,126 2% 17 47,170 14,468 61,638 4,275 1,297 5,572 9% 18 41,972 13,004 54,976 1,287 1,287 2% 19 43,048 13,704 56,752 3,655 3,655 6% 20 30,833 30,752 61,585 2,019 2,019 3% 21 41,035 21,029 62,064 2,547 2,547 4% 22 51,572 14,369 65,941 3,838 380 4,218 6% 23 47,795 16,081 63,876 2,844 2,844 4% 24 51,282 14,325 65,607 5,498 2,796 8,294 13% 25 53,779 18,331 72,110 16,487 8,169 24,656 34% 26 37,467 25,725 63,192 6,756 2,654 9,410 15% 27 48,627 11,586 60,213 4,348 903 5,251 9% 28 43,827 14,350 58,177 1,154 1,154 2% 29 41,059 20,544 61,603 956 956 2% 30 36,910 29,190 66,100 1,309 1,309 2% 31 48,710 13,751 62,461 2,590 2,590 4%

79 32 45,798 14,918 60,716 1,876 1,876 3% 33 62,719 8,636 71,355 2,717 2,717 4% 34 57,804 12,091 69,895 9,070 55 9,125 13% 35 52,070 13,084 65,154 37,587 141 37,728 58% 36 48,403 20,697 69,100 43,368 1,736 45,104 65% 37 50,093 10,037 60,130 25,846 25,846 43% 38 47,743 12,639 60,382 13,175 13,175 22% 39 43,284 14,435 57,719 3,123 3,123 5% 40 37,916 23,117 61,033 2,935 2,935 5% 41 43,064 17,699 60,763 2,549 2,549 4% 42 41,102 14,020 55,122 2,325 2,325 4% 43 30,227 21,439 51,666 1,217 1,217 2% 44 37,292 18,111 55,403 847 847 2% 45 34,429 18,771 53,200 1,088 1,088 2% 46 18,503 39,019 57,522 1,092 1,092 2% 47 40,170 32,311 72,481 1,570 1,570 2% 48 30,376 24,436 54,812 1,198 1,198 2% 49 30,755 25,072 55,827 1,213 1,213 2% 50 43,637 15,082 58,719 2,399 2,399 4% 51 48,621 18,310 66,931 8,285 630 8,915 13% 52 50,403 19,530 69,933 10,159 916 11,075 16% 53 49,271 15,788 65,059 10,365 557 10,922 17% 54 51,559 16,527 68,086 9,826 2,045 11,871 17% 55 47,936 14,864 62,800 3,300 3,300 5% 56 37,360 14,115 51,475 2,338 2,338 5% 57 46,178 10,446 56,624 7,966 7,966 14% 58 36,040 21,463 57,503 8,293 8,293 14% 59 38,579 22,192 60,771 8,492 8,492 14% 60 41,857 28,975 70,832 17,100 17,100 24% 61 26,511 32,764 59,275 11,178 11,178 19% 62 33,002 28,151 61,153 14,987 14,987 25% 63 33,792 28,391 62,183 8,509 8,509 14% 64 46,835 16,399 63,234 15,087 15,087 24% 65 53,638 19,012 72,650 28,305 28 28,333 39% 66 51,855 21,213 73,068 30,454 2,700 33,154 45% 67 44,503 25,650 70,153 21,100 21,100 30% 68 44,688 29,608 74,296 21,830 21,830 29% 69 53,171 20,886 74,057 32,117 5,530 37,647 51% 70 30,614 26,383 56,997 14,347 400 14,747 26% 71 51,367 23,952 75,319 25,181 5,371 30,552 41% 72 53,171 21,680 74,851 20,564 4,967 25,531 34% 73 53,146 11,687 64,833 7,671 7,671 12% 74 58,907 14,675 73,582 32,997 19,104 52,101 71%

80 75 58,475 14,895 73,370 20,344 1,226 21,570 29% 76 55,506 16,616 72,122 28,617 11,612 40,229 56% 77 45,499 16,817 62,316 11,514 576 12,090 19% 78 39,302 25,664 64,966 7,312 878 8,190 13% 79 44,170 16,244 60,414 13,214 567 13,781 23% 80 38,388 15,882 54,270 3,417 3,417 6% 81 44,826 13,149 57,975 8,398 8,398 14% 82 51,925 14,347 66,272 14,670 2,484 17,154 26% 83 48,166 13,963 62,129 4,802 4,802 8% 84 44,328 19,736 64,064 9,859 862 10,721 17% 85 51,408 14,354 65,762 16,647 5,625 22,272 34% 86 43,754 16,085 59,839 7,655 1 7,656 13% 87 28,609 22,907 51,516 14,280 1,422 15,702 30% 88 29,917 29,127 59,044 20,397 6,966 27,363 46% 89 52,058 23,451 75,509 31,146 15,429 46,575 62% 90 50,790 13,620 64,410 13,929 35 13,964 22% 91 64,743 15,826 80,569 15,232 15,232 19% 92 36,560 25,406 61,966 19,259 2,961 22,220 36% 93 53,199 28,210 81,409 38,020 19,703 57,723 71% 94 30,580 29,284 59,864 18,218 4,879 23,097 39% 95 37,188 20,626 57,814 14,432 14,432 25% 96 44,836 15,984 60,820 13,534 13,534 22% 97 41,910 17,185 59,095 12,613 12,613 21% 98 45,914 15,818 61,732 13,970 13,970 23% 99 40,252 17,480 57,732 19,169 964 20,133 35% 100 45,318 32,396 77,714 22,771 9,325 32,096 41% 101 33,657 21,691 55,348 21,844 1,912 23,756 43% 102 33,950 16,803 50,753 15,794 15,794 31% 103 34,354 12,067 46,421 11,561 11,561 25% 104 43,531 9,831 53,362 11,339 11,339 21% 105 29,556 17,072 46,628 9,484 85 9,569 21% 106 57,095 18,308 75,403 20,617 8,626 29,243 39% 107 31,163 20,839 52,002 17,475 4,351 21,826 42% 108 24,958 28,280 53,238 17,298 4,738 22,036 41% 109 20,706 33,334 54,040 11,310 396 11,706 22% 110 26,747 26,374 53,121 11,128 11,128 21% 111 21,909 29,941 51,850 12,870 12,870 25% 112 29,154 37,198 66,352 19,454 4,815 24,269 37% 113 23,132 52,632 75,764 10,639 4,050 14,689 19% 114 35,592 19,254 54,846 26,185 7,578 33,763 62% 115 37,125 18,608 55,733 21,899 6,062 27,961 50% 116 34,943 18,553 53,496 16,894 16,894 32% 117 23,981 23,140 47,121 18,202 4,226 22,428 48%

81 118 37,768 11,173 48,941 19,249 19,249 39% 119 35,304 12,383 47,687 15,796 15,796 33% 120 34,820 21,890 56,710 33,347 22,692 56,039 99%

82 Table 2. Citizens Policies and Occupied Housing Units by Florida Senate District as of 12/31/11 Senate District Owner‐ Occupied Housing Units Renter‐ Occupied Housing Units Total Occupied Housing Units (OHUs) Citizen Multi‐ Peril Policy Count Citizen Wind Only Policy Count Citizen Total Policy Count Citizen % of Total OHUs 1 124,016 63,152 187,168 33,480 14,858 48,338 26% 2 126,835 55,898 182,733 22,316 9,674 31,990 18% 3 113,293 67,437 180,730 1,116 3,318 4,434 2% 4 124,029 68,702 192,731 9,046 2,231 11,277 6% 5 151,612 37,093 188,705 12,488 380 12,868 7% 6 142,086 49,591 191,677 20,038 8,850 28,888 15% 7 114,570 64,217 178,787 5,337 5,337 3% 8 138,961 57,041 196,002 21,666 6,969 28,635 15% 9 109,497 69,016 178,513 3,574 3,574 2% 10 124,713 58,034 182,747 3,528 3,528 2% 11 158,267 38,895 197,162 7,090 7,090 4% 12 89,569 77,578 167,147 3,209 3,209 2% 13 120,183 66,528 186,711 7,313 7,313 4% 14 94,909 63,477 158,386 3,740 3,740 2% 15 124,901 57,245 182,146 7,814 7,814 4% 16 145,697 53,291 198,988 28,841 2,275 31,116 16% 17 139,599 46,586 186,185 46,261 46,261 25% 18 147,655 46,247 193,902 101,679 1,932 103,611 53% 19 84,445 92,582 177,027 36,975 36,975 21% 20 147,938 65,248 213,186 75,810 1,196 77,006 36% 21 133,063 42,346 175,409 8,246 8,246 5% 22 141,748 76,298 218,046 74,887 7,064 81,951 38% 23 141,430 51,586 193,016 36,988 9,426 46,414 24% 24 114,465 56,102 170,567 23,148 23,148 14% 25 146,179 36,236 182,415 31,996 5,933 37,929 21% 26 145,291 49,572 194,863 34,713 1,750 36,463 19% 27 110,561 73,020 183,581 50,493 11,783 62,276 34% 28 163,185 52,444 215,629 75,956 29,224 105,180 49% 29 133,025 44,386 177,411 38,967 18 38,985 22% 30 147,023 58,295 205,318 51,376 12,924 64,300 31% 31 101,193 74,426 175,619 51,394 7,946 59,340 34% 32 152,397 51,799 204,196 34,843 4,912 39,755 19% 33 131,122 55,936 187,058 53,045 5,913 58,958 32% 34 161,408 68,101 229,509 83,491 31,802 115,293 50% 35 110,985 96,677 207,662 67,961 32,574 100,535 48%

83 36 91,331 63,343 154,674 52,533 5,462 57,995 37% 37 108,229 39,374 147,603 52,953 52,953 36% 38 84,527 62,882 147,409 38,181 38,181 26% 39 78,236 77,518 155,754 56,857 26,564 83,421 54% 40 80,806 93,624 174,430 43,811 528 44,339 25%

84 Appendix D – References Cole, Cassandra R., David Macpherson, Patrick Maroney, Kathleen A. McCullough, James W. Newman, and Charles M. Nyce, 2009. “A Review of the Development of Residual Market Mechanisms in Florida,” Journal of Insurance Regulation, Summer 2009, v.27 no. 4, pp. 55-80. Cole, Cassandra R., David A. Macpherson, Patrick F. Maroney, Kathleen A. McCullough, James W. Newman, and Charles Nyce, 2011. “The Use of Post-loss Financing of Catastrophic Risk,” Risk Management and Insurance Review, 2011 Vol. 14 No.2, pg. 265-298.

Diamond, Randy, 2007. “Panel Evaluating Citizens to Hear from Homeowners Claims Brewing Long After Storms.” Florida Catastrophic Storm Risk Management Center. Mitigation Credit Study, 2010, Available at www.stormrisk.org. Florida Catastrophic Storm Risk Management Center. The State of Florida’s Property Insurance Market 2011, Available at www.stormrisk.org. Harrison, Conner, 2004. Reinsurance Principles and Practices, American Institute for Chartered Property Casualty Underwriters. Newman, James W., 2010. “Insurance Residual Markets: Historical and Public Policy Perspectives,” Available at www.stormrisk.org.

Newman, James W., 2009. “Residual Market Subsidies in Florida’s Property Insurance Market,” Available at www.stormrisk.org. Nyce Charles M. and Patrick F. Maroney, 2011. “Are Territorial Rating Models Outdated in Residential Property Insurance Markets? Evidence from the Florida Property Insurance Market,” Risk Management and Insurance Review, 2011 Vol. 14 No. 2 pg. 201-232. Office of Program Policy Analysis and Government Accountability (OPPAGA), 2010. “Public Adjuster Representation in Citizens Property Insurance Corporation Claims Extends the Time to Reach a Settlement and Also Increase Payments to Citizen’s Policyholders,” Florida Legislature’s Office of Program Policy Analysis and Government Accountability, January 2010. Raymond James, for Florida Hurricane Catastrophe Fund. Claims Paying Capacity Estimates, May 2012.

University of Florida, 2011. “UF: Florida Population Soars in Century’s First Decade, but Rate is Slowing,” Milenko Martinovich, June 2011.

You can also read