Insurance Concepts Board Workshop December 8, 2003 Insurance - - PowerPoint PPT Presentation

Insurance Concepts

Board Workshop December 8, 2003

Board Workshop December 8, 2002

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Insurance Industry Insurance Industry

Property & Casualty

Examples:

• Auto
• Worker’s Compensation
• Medical Malpractice
• Homeowners

Life & Health

Examples:

• Group health plan
• Term life policy
• Disability
• Credit life

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Citizens: Lines of Business Citizens: Lines of Business

A package policy combining broad property coverage for the personal property and/or structure with broad personal liability coverage. Coverage applicable to the dwelling, appurtenant structures, unscheduled personal property and additional living expense are

• typical. Includes mobile homes at a fixed location.

Homeowners Multiple-Peril 3 Coverages which are generally written with property insurance, e.g., explosion, riot, and civil commotion; growing crops; flood; rain; and damage from aircraft and vehicle, etc. Allied Lines 2 Coverage protecting the insured against the loss to real or personal property from damage caused by the peril of fire or lightning, including business interruption, loss of rents, etc. Fire 1 Description Line of Business Line # glass, tornado, windstorm and hail; sprinkler and water damage;

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P&C Industry Information P&C Industry Information

• AM Best accumulates P&C industry information and publishes this information

annually in Best’s Aggregates and Averages.

• Consolidated industry assets $952 billion (Citizens $4 billion)
• Consolidated written premiums $323 billion (Citizens over $1 billion)
• The top ten P&C insurers net premiums comprise nearly 46% of the industry.

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State Regulation State Regulation

• Insurer Solvency

Solvency is the adequacy of an insurer’s net financial resources (capital and surplus) to support the nature and volume of business the insurer is writing. Solvency is monitored to protect the policyholders to assure that insurers have adequate funds to pay claims. Insurers are required to file Quarterly and Annual Statements with the State.

• Forms and Rates

All policy forms and policy rates must be filed with the State prior to use.

• Market Conduct

Insurance companies are monitored by the State for their compliance with Statute, treatment

• f policyholders, and adherence to the filed forms & rates.
• Licensing

All agent and agency licenses are issued by the State.

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Involuntary Markets Involuntary Markets

• States also establish market mechanisms that provide basic insurance coverages to

those that might not otherwise be able to obtain reasonably priced coverage. Florida has established the following: Automobile Joint Underwriting Association Worker’s Compensation Joint Underwriting Association Citizens Property Insurance Corporation

• Citizens is the largest residual market mechanism and is larger than all the others combined

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Statutory Statutory vs vs GAAP Accounting GAAP Accounting

• Citizens currently produces financial reports using two different bases of accounting:

Statutory and GAAP. Financial reports filed with the state insurance department are compiled on a statutory accounting basis.

Focus is on the income statement – performance measurement and matching revenues with expenses Focus is on the balance sheet – asset and liability measurement Intended for use by investors and management Designed for use by regulators Designed to evaluate financial condition under a ption going concern assum Designed to measure solvency at a point in time

GAAP Accounting Statutory Accounting

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Structure of the Annual Statement Structure of the Annual Statement

I Primary Financial Statements (Pages 2-5) III Other Financial Exhibits (Pages 12,13)

• Exhibit of Net Investment Income
• Exhibit of Capital Gains (Losses)
• Exhibit 1 – Analysis of

Nonadmitted Assets II Underwriting and Investment Exhibits (Pages 6-11)

• Premiums
• Losses
• Expenses

Financial Exhibits (Pages 6-13) IV Corporate Disclosure Information (Pages 14 and 16-26) V Investment Summaries and Verifications (Pages 15 and 27-39) Schedules A-E (Pages E01-E26) Schedules H, T, Y

• Supp. Exh. Inter.

(Pages 48-50 and 110-114) Schedule P (Pages 51 – 109) Schedule F (Pages 40-47) IX Investment Detail VIII Miscellaneous Information VII Loss and Loss Expense Analysis VI Reinsurance Annual Statement Detail Schedules (Pages 40-114 and E01-E26)

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Fundamental Accounting Concepts Fundamental Accounting Concepts

• Assets, as applicable to an insurance company, are all funds, property, goods,

securities, investments, rights of action or resources of any kind owned by the insurance company.

• Liabilities, as applicable to an insurance company, are any legally enforceable
• bligations (for example, amounts owed to policyholders that have not been paid

yet).

• An insurance company’s Balance Sheet shows what the company OWNS (assets)

and what the company OWES (liabilities) at a certain point in time.

• In contrast, an insurance company’s Income Statement shows activity of the

insurance company (revenues less expenses) during a certain time period (year to date for Citizens).

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Significant Statutory Accounting Concepts Significant Statutory Accounting Concepts

• Premium Recognition

–Premiums Written –Earned Premiums –Unearned Premiums –Ceded Premium

• Losses

–Loss reserves (Case and IBNR) –Losses Incurred

• Loss Adjustment Expenses
• Investment Valuation
• Nonadmitted Assets
• Other Insurance Liabilities
• Other Income Statement Items

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Premiums Premiums

• Premiums collected from policyholders in exchange for insurance protection are

the primary source of revenues for an insurance company. Premiums are usually received on or near the effective dates of the policies but since protection is provided over the policy terms, these premiums must also be earned over time as insurance coverage is provided.

–Premiums Written: Premiums are recorded in full as written at the beginning of the policy terms

(effective dates). Premiums written therefore relate to the underwriting commitments given to policyholders at that time. Found on the Income Statement.

–Earned Premiums: Premium income is earned over the policy term in direct relationship to the

amount of insurance protection provided. Earned Premiums therefore relate to the portions of the above underwriting commitments fulfilled during the period. Found on the Income Statement.

–Unearned Premiums: Represent the amount of premiums written that relate to the unexpired

portion for all policies (unfulfilled commitments) at the balance sheet date. A liability on the Balance

• Sheet. Also, Unearned premiums are shown net of ceded unearned premiums for statutory financials.

–Ceded Premium: Amount of premiums paid to assuming company (reinsurer) in exchange for

that company accepting all or part of insurance (or reinsurance) on a risk. (Opposite of assume.) Found on the Income Statement as reduction to Premiums Written.

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Premiums, cont’d Premiums, cont’d

The following is premium data from Citizens’ September 30, 2003 statutory financial statements:

Statutory Basis - Unaudited

Year to Date as of September 30, 2003

Personal Commercial High Lines Lines Risk Consolidated Account Account Account Selected Income Statement Data: Premiums Written - Direct 876,666,880 364,976,074 58,546,155 453,144,651 Change in Direct UPR (165,687,900) (100,483,339) (11,079,991) (54,124,570) Premiums Ceded (Reinsurance) (182,421,765) (63,371,860) (5,256,907) (113,792,998) Change in Ceded UPR 66,042,327 26,289,816 1,752,511 38,000,000 Net Premiums Earned $594,599,542 $227,410,691 $43,961,768 $323,227,083 Premiums Ceded Detail: FHCF (CAT Fund) ceded premiums 158,250,000 38,992,466 5,257,534 114,000,000 CAT Fund reimbursement received in 2003 (453,247) (245,618) (627) (207,002) Atlantic Preferred Assumption activity 24,625,011 24,625,011

• Total Premiums Ceded

$182,421,765 $63,371,860 $5,256,907 $113,792,998 Selected Balance Sheet Data: Direct Unearned Premiums 563,927,575 227,752,088 32,755,668 303,419,819 Ceded Unearned Premiums (66,730,978) (26,978,467) (1,752,511) (38,000,000) Net Unearned Premiums per Stat Balance Sheet $497,196,597 $200,773,621 $31,003,157 $265,419,819 Policies in Force 9/30/03: 748,157 324,757 3,886 419,514

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Losses Losses

• Losses – The largest expense for most property and casualty companies and for

the P&C industry as a whole is losses incurred. For 2001, industry wide, losses amounted to about 75% of premiums earned. Losses incurred divided by premiums earned is typically referred to as the “loss ratio”. Loss adjustment expenses (the costs of investigating and settling the losses) were another 13% of premiums earned. LAE divided by premiums earned is typically referred to as the “loss adjustment expense ratio”. –Losses Incurred – An expense on the Income Statement. Losses paid during the

calendar year plus the change in loss reserves from the beginning to the end of the year. The actuary determines the ultimate losses for each accident year. The current accident year ultimate losses plus changes to prior accident year ultimates equals losses incurred.

• There is no provision for losses that might occur in the future.

–Loss reserves - A liability on the Balance Sheet. Represents unpaid losses for events

that have occurred. Critical liability for P&C insurance company due to their relative dollar size and degree of difficulty in achieving an accurate estimation.

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Loss Events Loss Events

The sequence of events in the settlement of insurance claims is generally as follows:

• 1. The insured event occurs (the loss), such as a fire.
• 2. The loss is reported to the company.
• 3. The loss is investigated and the amount of settlement determined.
• 4. The claim is paid to or on behalf of the policyholder.
• 5. Where reinsurance applies, the company requests payment from the reinsurer for its

share of the loss.

• 6. Salvage and subrogation possibilities are followed up and collections recorded as they

are received as reductions of loss costs.

– Salvage is the amount received from sale of property the insurer has received under the terms of a claim settlement. – Subrogation is the amount received from a third party that is liable for a portion or all of the claim paid by the insurer.

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Loss Events, cont’d Loss Events, cont’d

• The claim payment lag or “tail” represents the time frame necessary for all

events listed on the previous slide to be completed. Property lines of business are usually settled much faster (have a shorter tail) than liability lines of business.

• A relatively short time frame between events 1 (the loss occurs) and 2 (reported)

will generally produce more accurate reserves.

• The period of time between event 2 (reported) and event 3 (investigation

completed) is referred to as the “discovery period”.

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Loss Reserve Concepts Loss Reserve Concepts

• A company’s loss reserves should be adequate to provide for all amounts to be

paid, net of reinsurance, for all events that have occurred, but have not been

• paid. Property and Casualty companies do not and can not reserve for

future events.

• Loss reserves are grouped into two major categories:
• 1. Case Reserves – reserves assigned to reported cases on a specific claim basis by claims

personnel or on a formula basis. Once the company has completed its investigation, the case estimate should be more accurate. Even with good information, differences between the case estimate and the actual settlement (event 4) will commonly occur.

• 2. Incurred But Not Reported (IBNR) reserves – reserves assigned to loss events that

have occurred but have not been reported. The IBNR reserve attempts to estimate an unknown group of claims as to number (frequency) and dollar amount (severity). It is therefore a highly subjective estimate. Case reserves relate to known claims (reported claims) and ought to be more accurate.

• Any deficiency (understatement) or redundancy (overstatement) of these

reserves will be adjusted in future years in the year in which they are identified.

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Loss Information Time Frames Loss Information Time Frames

• For financial reporting, reinsurance rating, premium calculation and Annual Statement

preparation, loss information must be presented in a variety of time frames. The two most commonly used time frames are as follows: Refers to the losses that were recorded in the calendar year financial statements, regardless of when the actual loss event

• ccurred.

For example, at December 31, 2003, the losses paid for 2003 calendar year would be all payments made in the current calendar year regardless of when the loss occurred. The year the loss event occurred. Focuses on the total costs for loss events that occurred in a given year, regardless

• f when the loss was paid.

For example, at December 31, 2003, the losses paid for the 1998 accident year would be the payments made in years 1998 through 2003 relating to losses that

• ccurred in 1998.

Calendar Year Accident Year

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Losses, cont’d Losses, cont’d

The following illustrates the loss concepts previously mentioned. Data is from Citizens’ September 30, 2003 Statutory unaudited financials.

Year to Date as of September 30, 2003

Personal Commercial High Lines Lines Risk Consolidated Account Account Account Direct Earned Premiums, net of takeouts 699,646,295 253,160,050 47,466,164 399,020,081 Change in Prior AY Ultimates (A) (10,986,570) (5,846,662) (5,139,908)

• Ultimate Losses for AY 2003

143,950,237 124,194,490 13,371,428 6,384,319 Losses Incurred per FS 132,963,667 118,347,828 8,231,520 6,384,319 Losses Incurred 132,963,667 118,347,828 8,231,520 6,384,319 Loss Ratio (Calendar Year) 19% 47% 17% 2% Ultimate Losses for AY2003 143,950,237 124,194,490 13,371,428 6,384,319 Loss Ratio (2003 Accident Year) 21% 49% 28% 2% (A) - Change in Prior Accident Years Ultimate Losses by the actuary represents the aforementioned "redundancy" or

• verstatement of reserves for accident years 2002 and prior, as identified during the calendar year 2003.

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Losses, cont’d Losses, cont’d

Citizens’ Loss Reserves at September 30, 2003 per statutory Balance Sheet:

Personal C

• m

m ercial H igh Lines Lines R isk C

• nsolidated

A ccount A ccount A ccount Loss C ase R eserves 53,869,992 47,372,475 3,961,047 2,536,470 Loss IBN R R eserves 40,943,771 31,560,530 7,473,883 1,909,358 Total Loss R eserves, per Statutory B alance Sheet $94,813,763 $78,933,005 $11,434,930 $4,445,828

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Loss adjustment expenses Loss adjustment expenses

• Loss adjustment expenses (LAE) are costs incurred in connection with the

adjustment, recording and settlement of claims. The loss reserve concepts mentioned previously apply to LAE. LAE include the following:

– External fees for:

• Attorneys (defense, litigation) and related court costs
• Adjusters, settling agents, claims consultants (cost containment)
• Investigators (surveillance) and experts
• Third party administrators

– Internal fees for (salaries, fringe benefits, rent, utilities, etc):

• Claims department
• Legal department for matters related to claims
• Claims related allocations from other departments (accounting, IT, etc.
• LAE are required to be separated between two categories:
• 1. Defense and Cost Containment (D&CC) - defense, litigation and medical cost

containment expenses, whether internal costs or external fees.

• 2. Adjusting and Other (A&O) – Adjusting and other overhead expenses, whether

internal costs or external fees.

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Loss Adjustment Expenses, cont’d Loss Adjustment Expenses, cont’d

Citizens Loss Adjustment Expense detail from September 30, 2003 statutory financials:

P ersonal C

• m

m ercial H igh Lines Lines R isk C

• nsolidated

A ccount A ccount A ccount D & C C 5,301,835 2,768,813 751,897 1,781,125 A & O 8,514,572 7,656,474 327,307 530,791 Total Loss A djustm ent E xpenses 13,816,407 10,425,287 1,079,204 2,311,916 Loss A djustm ent E xpense R atio 2% 4% 2% 1% (A s a percent of E arned P rem ium ) Total LA E R eserves $24,747,129 $19,399,931 $2,152,867 $3,194,331

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Investment Valuation Investment Valuation

• Investments comprise about 82% of the total assets of P&C insurance companies.
• Funds for investments are generally provided by two sources:

–Policyholder premiums are received and invested to eventually pay claims, and –The company capital and surplus resources.

• Fixed income securities (bonds, preferred stocks, short-term investments) are a

significant part of the industry investment composition.

• A detailed investment inventory is included in the Annual Statement, which

Citizens files with the state. These schedules provide regulators with the data necessary to monitor the content and valuation of an insurer’s investment portfolio.

• Investments must be valued in accordance with the insurer’s state of domicile,

which generally adopt the NAIC guidelines.

• The NAIC Securities Valuation Office (SVO) assesses credit ratings and sets

security valuation procedures that provide insurers with a uniform method of valuing securities.

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Investment Valuation, cont’d Investment Valuation, cont’d

• Quarterly, the SVO publishes a CD-ROM that lists the SVO’s credit quality rating (“NAIC

designation”) and a market price quotation for each bond and stock filed by US domiciled

• insurers. The NAIC designation and the unit price determine the statutory balance sheet

values to be reported. Citizens obtains this CD-ROM and reports investment values accordingly.

• The following table shows the NAIC designations and the corresponding admitted values:
• At September 30, 2003, all of Citizens investments that were rated by the SVO had a NAIC

designation of Class 1. In or New Default Lower Quality Low Quality Medium Quality High Quality Highest Quality Explanation Amortized Value AAA to A- Class 1 Lower of Fair Value or Amortized Value CI, D Class 6 Lower of Fair Value or Amortized Value CCC+ to C Class 5 Lower of Fair Value or Amortized Value B+ to B- Class 4 Lower of Fair Value or Amortized Value BB+ to BB- Class 3 Amortized Value BBB+ to BBB- Class 2 Bond Admitted Value Corresponding S&P Rating NAIC Designation

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Investment Valuation, cont’d Investment Valuation, cont’d

Citizens’ investments per the statutory Balance Sheet at September 30, 2003 were as follows:

Personal Com m ercial High Lines Lines Risk Consolidated A ccount A ccount A ccount Long Term Bonds 2,541,969,509 198,034,702 13,302,664 2,330,632,143 Short-term Investments 1,428,351,137 909,448,400 148,682,767 370,219,970 Total Invested A ssets $3,970,320,646 $1,107,483,102 $161,985,431 $2,700,852,113 Total A ssets per Statutory Balance Sheet 4,089,169,920 Investm ents as a %

• f Total A

ssets 97%

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Non Non-

• invested Assets

invested Assets

• In addition to invested assets insurance companies have non-invested assets which

consist of:

–Premiums Receivable –Accrued Investment income –Fixed Assets –Reinsurance receivables/recoverables –Intercompany receivables

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Nonadmitted Nonadmitted assets assets

• Nonadmitted assets:

Certain assets, designated as nonadmitted assets, cannot be claimed as assets in the statutory balance sheet because the regulators are skeptical as to the availability of these assets for paying policyholder claims. This concept reduces the total assets reported and causes a corresponding reduction of the insurer’s surplus. Citizens typically has the following types of nonadmitted assets:

• Policyholder balances (premiums) more than 90 days past due
• Furniture, equipment and supplies
• Leasehold improvements
• Prepaid expenses
• At 9/30/03, Citizens had $5.3 million nonadmitted assets, of which $4.3 million

related to fixed assets such as furniture, equipment, and software.

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Other Insurance Liabilities Other Insurance Liabilities

The following are other insurance liabilities found on Citizens’ Balance Sheet:

• Suspended Cash – Represents premium cash receipts that have not yet been

identified to a particular policy. Referred to as “Remittances and items not allocated” on the Annual Statement.

• Advance Premiums – Represents premiums collected before the effective dates of

the policies. Statutory accounting principles provide that advance premiums be reported as a liability on the balance sheet and are not to be included in premiums written or unearned premiums.

• Escheat Funds – Generally, return premium or claims checks issued by Citizens

that have not been cashed by the payee and have been outstanding for a year or

• more. These funds are set aside and, if Citizens can not locate the payee to reissue

the checks, after 5 years the funds are remitted to the state as abandoned property pursuant to state law.

Personal Commercial High Lines Lines Risk Consolidated Account Account Account Suspended Cash $44,128,588 $23,120,326 $2,770,034 $18,238,228 Advance Premiums $28,230,070 $7,680,915 $13,072 $20,536,083 Escheat Funds $4,715,783 $4,478,499 $21,369 $215,915

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Other Income Statement Items Other Income Statement Items

Other selected financial statement items to note include:

• Underwriting Expenses:

–Acquisition Expenses –Administrative Expenses –Ratios –Industry Expense Comparison

• Other Expenses (not typical)

–Takeout Bonuses

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Acquisition expenses Acquisition expenses

• Acquisition expenses

–Commissions to agents, premium taxes and similar expenses incurred when a policy is written are acquisition expenses. For statutory accounting, acquisition expenses are recognized immediately as an expense on the income statement at the time a policy is written (in contrast to the premiums which are earned over the life of the policy). The immediate recognition of all acquisition expenses is sometimes referred to as the “surplus drain” caused by statutory accounting

• guidelines. GAAP does not allow immediate recognition…instead, these

expenses are put off or “deferred” and recognized only in proportion to the recognition of the related earned premium.

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Administrative Expenses Administrative Expenses

• Ass

Year to date as of September 30, 2003, Citizens had incurred approximately $18 million in Administrative Expenses, comprised of the following types of expenses:

umption printing costs

• Bank Charges
• Maintenance and Repairs
• Depreciation
• Other Professional Consulting Fees
• Rent
• Board Travel and Meals
• Advertising
• Employee Travel and Meals
• Postage
• Insurance
• Subscriptions and Dues
• Printing
• Office supplies
• Actuarial fees
• Recruiting
• Accounting tax services
• Training
• Audit fees
• Temporary employee expenses
• Legal fees
• Payroll taxes, unemployment taxes
• Telecommunications
• Salaries and other employee benefits

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Ratios Ratios

A combined ratio is the statutory ratio that measures the amount that an insurer must pay to cover claims and expenses per dollar of earned premium. A ratio above 100 indicates that a carrier is paying out more in claims and expenses than it is taking in premiums. Carriers often consider it a more appropriate indicator of company performance than earnings because earnings also include profits on the company’s investments. A company with higher than 100-combined ratio can still be profitable because of investment income. Citizens has an

• utstanding combined ratio. The following ratios were calculated based on September 30, 2003 statutory

financials:

Consolidated PLA CLA HRA 699,646,295 253,160,050 47,466,164 399,020,081 Losses Incurred 132,963,667 118,347,828 8,231,520 6,384,319 Loss Ratio (Calendar Year) 19% 47% 17% 2% Loss Adjustment Expenses 13,816,407 10,425,287 1,079,204 2,311,916 Loss Adjustment Expense Ratio 2% 4% 2% 1% Servicing Carrier Fees 8,452,085 8,452,085

• Producer Commissions

79,243,252 26,083,087 7,185,723 45,974,442 Ceding Commission (2,031,563) (2,031,563)

• Taxes & Assessments

16,517,377 7,515,164 1,189,976 7,812,237 Other Underwriting Expense 1,702,116 851,700 472,054 378,362 Total policy acquisition expenses 103,883,267 40,870,473 8,847,753 54,165,041 Policy Acquisition Expense Ratio 15% 16% 19% 14% Administrative Expenses 18,448,271 8,895,846 1,443,467 8,108,958 Other Processing Fees 1,218,409 1,207,159 11,250

• Total Administrative Expenses

19,666,680 10,103,005 1,454,717 8,108,958 Admin Expense Ratio 3% 4% 3% 2% Total Underwriting Expenses 270,330,021 179,746,593 19,613,194 70,970,234 Combined Ratio 39% 71% 41% 18% Direct Earned Premiums, net of takeouts

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Industry Expense Comparison Industry Expense Comparison

The following chart is a comparison of certain Citizens’ PLA/CLA data to the industry data as

• btained from ISO:

(1) G eneral and A dm inistrative Expenses are presented as percentages of D irect E arned Prem ium . (2) Loss A djustm ent Expenses are presented as percentages of E arned Prem ium (including Take-outs, but excluding reinsurance). (3) Producer C om m issions and O ther A cquisition C osts are presented as percentages of D irect W ritten Prem ium . (4) O ther A cquisition C osts include service com pany fees and processing fees. Taxes and A ssessm ents are not included in the industry data, so they are not included in C itizens' O ther A cquisition C osts on this page. (5) 2002 uses 2001 Industry data because 2002 data not yet available.

10.2% 7.9% 14.1% 6.1% 3.8% 7.5% 6.8% 2.5% 9.9% 8.0% 14.1% 5.7% 10.9% 7.9% 6.9% 4.9% 11.8% 7.3% 13.9% 5.5% 4.4% 7.4% 7.1% 5.2% 11.8% 7.3% 13.9% 5.5% 6.2% 4.6% 7.8% 3.8%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Industry Citizens Industry Citizens Industry Citizens Industry C itizens 1999 1999 2000 2000 2001 2001 2001 (5) 2002

A G E N C Y & D IR E C T W R IT E R S C O M B IN E D Loss A djustm ent Expenses (2) O ther A cquisition C osts (3),(4) Producer C om m issions (3) G eneral and A dm inistrative (1)

38.2% 20.5% 37.8% 30.5% 38.5% 24.1% 38.5% 22.4%

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Takeout Bonuses Takeout Bonuses

• Takeout Bonuses expensed on Citizens income statement represent the amounts paid into

depopulation escrow accounts year to date pursuant to assumption agreements with takeout

• companies. The takeout company (or assuming company) agrees to remove policies from

Citizens and Citizens agrees to pay the assuming company (1) unearned premium (less certain fees and surcharges, less ceding commission) and (2) takeout bonuses under certain programs.

• Most recent assumption activity occurred during 2003 in which Atlantic Preferred removed

28,219 policies from Citizens under the Enhanced Takeout Program. Citizens paid $300 per policy (or $8,465,700) into escrow as a takeout bonus. These funds remain in escrow for 3

• years. At the end of three years, Citizens conducts a back-end audit to determine if the

policy is still eligible for the bonus pursuant to the requirements under the applicable takeout

• program. The funds are then distributed to the assuming company for the eligible policies.

Any bonuses paid on ineligible policies are returned to Citizens.

• Year to date at September 30, 2003, Citizens detail of Takeout Bonuses Expensed per the

Statutory Income Statement is as follows: $7,021,064 Total Takeout Bonus Expense (1,444,636) Received from escrow pursuant to back-end audits 8,465,700 Payments to Atlantic Preferred escrow account

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Review Questions Review Questions

• 1. Citizens currently writes which lines of business?

a. Fire, Worker’s compensation, Homeowners’ multi peril

• b. Homeowners’ multi peril, Fire, Burglary and Theft

c. Homeowners’ multi peril, Allied Lines, Auto liability

• d. Fire, Allied Lines, Homeowners’ multi peril
• 2. Citizens’ High Risk Account (HRA) is made up of which line of business?

a. Fire

• b. Allied Lines

c. Homeowners’ multi peril

• d. Commercial multi peril
• 3. What tool is used by state regulators to monitor solvency of insurance

companies?

a. GAAP audited financial statements

• b. Form 941 tax returns

c. NAIC Annual Statement

• d. SEC 10Q filings

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Review Questions, cont’d Review Questions, cont’d

• 4. In Statutory Accounting, the focus is on

a) The Balance Sheet - asset and liability measurement b) The Income Statement - matching revenues with expenses

• 5. Which statement shows the activity of the insurance company over a certain

time period (i.e. year to date activity)?

a) Balance Sheet b) Income Statement

• 6. What portion of the premium for a policy is recorded as Written Premium on the

effective date of the policy?

a) 50% b) 100% c) An amount equal to the cash collected, if cash collected is less than the premium due for the policy.

• 7. Unearned premiums are the amount of premiums written that relate to the

unexpired portion for all policies and are:

a) Liabilities found on the Balance Sheet b) Expenses found on the Income Statement

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Review Questions, cont’d Review Questions, cont’d

• 8. Ceded Premium is:

a) Reinsurance premiums received by Citizens for accepting all or part of a ceding company’s insurance on a risk. b) Reinsurance premiums paid by Citizens to assuming company in exchange for that company accepting all or part of Citizens’ insurance on a risk.

• 9. In Statutory Accounting, which of the following includes a provision for losses

that might occur in the future?

a) Losses Incurred b) Case Loss Reserves c) IBNR Loss Reserves d) None of the above

• 10. Liability lines of business usually have a much shorter tail than property lines of

business.

a) True b) False

• 11. In terms of the sequence of events for a typical loss, the “tail” refers to:

a) The period of time after the loss is reported to completion of the investigation. b) The period of time between the loss event occurring and collection of salvage/subro, if any. c) The period of time between the loss event occurring and the loss being reported to the company.

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Review Questions, cont’d Review Questions, cont’d

• 12. In terms of the sequence of events for a typical loss, the “discovery period” refers to:

a) The period of time after the loss is reported to completion of the investigation. b) The period of time between the loss event occurring and collection of salvage/subro, if any. c) The period of time between the loss event occurring and the loss being reported to the company.

• 13. The difference between Case reserves and IBNR reserves is that case reserves relate to

reported losses and IBNR reserves relate to loss events that have occurred but have not been reported.

a) True b) False

• 14. Which of the following is not a loss adjustment expense?

a) Fees paid to Adjusters. b) Attorney fees incurred in defense of a claim. c) Loss payments to policyholders. d) Salaries of the claims department.

• 15. Nonadmitted assets are:

a) Assets that the company must sell within one year of acquisition. b) Assets that are not allowed as assets on the statutory balance sheet. c) Assets that are not allowed to be used by the company because they are out of date. d) Assets that can not admit to their own shortcomings.

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Review Questions, cont’d Review Questions, cont’d

• 16. Policy Acquisition Expenses such as commissions to agents and premium taxes:

a) Are recognized immediately for Statutory accounting. b) Are recognized when paid for GAAP accounting. c) Are treated the same for Statutory accounting and GAAP accounting.

• 17. Takeout Bonuses expensed on Citizens’ income statement represent:

a) Bonuses paid to employees. b) Payments to policyholders for incentives to continue buying insurance with Citizens. c) Payments to depopulation escrow accounts as incentives pursuant to assumption agreements.

• 18. Premiums collected before the effective date of the policy are called?

a) Suspended Cash. b) Advance premiums. c) Escheat funds. d) Unearned premiums.

• 19. Premiums collected that have not been identified to a particular policy are called:

a) Unearned premiums. b) Advance premiums. c) Suspended Cash. d) Escheat funds.

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Review Questions, cont’d Review Questions, cont’d

• 20. Escheat funds become the property of Citizens, only if, after 5 years Citizens is

unable to locate the payee to reissue the check.

a) True. b) False.

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Review Questions, cont’d Review Questions, cont’d

Answer Key:

• 20. B
• 15. B
• 10. B
• 5. B
• 19. C
• 14. C
• 9. D
• 4. A
• 18. B
• 13. A
• 8. B
• 3. C
• 17. C
• 12. A
• 7. A
• 2. B
• 16. A
• 11. B
• 6. B
• 1. D

Board Workshop December 8, 2002

Financial Resources Financial Resources

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42

Financial Resources

Citizens has at its disposal both the typical resources availabl Citizens has at its disposal both the typical resources available to all e to all P&C companies that conduct business in the State, as well as spe P&C companies that conduct business in the State, as well as special cial assessment powers granted to Citizens by the State Legislature. assessment powers granted to Citizens by the State Legislature.

Citizens Financial Resources

Typical Financial Resources Typical Financial Resources Typical Financial Resources Special Assessment Powers Special Assessment Powers Special Assessment Powers

• Insurance Premiums
• Investment Income
• Operating Surplus from Prior Years
• Florida Hurricane Catastrophe Fund

Reimbursements

• Private Reinsurance Coverage
• Insurance Premiums
• Investment Income
• Operating Surplus from Prior Years
• Florida Hurricane Catastrophe Fund

Reimbursements

• Private Reinsurance Coverage
• Regular Assessments
• Market Equalization Surcharges on

Citizens Policyholders

• Emergency Assessments to Repay Debt
• Regular Assessments
• Market Equalization Surcharges on

Citizens Policyholders

• Emergency Assessments to Repay Debt

Source: Citizens Property Insurance Corporation

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Financial Resources Financial Resources

REGULAR ASSESSMENTS $72M $840M ADJUSTED SURLPUS 85% of $3,058M ($2,600 in Recoveries) Excess $1,000 M (Retention) CAT FUND RECOVERIES 1999 PRE-EVENT NOTES $1,000M REGULAR ASSESSMENTS $458M $160M REGULAR ASSESSMENTS 1997 PRE-EVENT NOTES $450M $1,000 M $4,058 M $5,580 M

HRA Financial Resources

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Financial Resources Financial Resources

PLA/CLA Financial Resources

ADJUSTED SURPLUS $52M $385M ADJUSTED SURLPUS 85% of $1,149M ($977M in Recoveries) Excess $385M (Retention) CAT FUND RECOVERIES ADJUSTED SURPLUS $173M REGULAR ASSESSMENTS $1,380M

1997 PRE-EVENT NOTES $100M

LINE OF CREDIT $675M $385M $2,967M $3,742M $1,535M

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Insurance Premiums and PIF Insurance Premiums and PIF

499,711 465,008 431,764 414,123 397,676 420,000*

PIF

257,030 107,731 67,971 102,990 208,612 328,643*

PIF PLA/CLA Premium Premium

$299,924,010 $353,077,788

1998

$312,563,018 $161,381,000

1999

$338,490,926 $77,158,783

2000

$416,746,787 $129,326,701

2001

$504,791,970 $299,040,063

2002

$600,000,000 $550,000,000

Projected 2003 HRA

* As of September 30, 2003

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GAAP Surplus GAAP Surplus

* As of September 30, 2003

$- $100 $200 $300 $400 $500 $600 $700 $800 1997 1999 2001 2003* PLA/CLA HRA

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Florida Hurricane Catastrophe Florida Hurricane Catastrophe Fund Reinsurance Fund Reinsurance

• Florida Hurricane Catastrophe Fund (“Cat Fund”) is a unit of

the State Board of Administration which provides reinsurance to all Florida insurers with residential property exposures

• Cat Fund bonds would be secured by assessments on all lines
• f property and casualty insurance except workers’

compensation

• Bond ratings of A1/A+

$385 million $977 million $43 million PLA/CLA $1,000 million Retention $2,600 million Coverage $113 million Premium HRA

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Florida Hurricane Catastrophe Fund Florida Hurricane Catastrophe Fund Resources Resources

$0.9 $1.4 $2.0 $2.5 $3.7 $4.3 $4.9 $5.5 $7.3 $6.7 $6.1 $5.5 $4.4 $5.9 $7.9 $10.8 $11.0 $3.1 $7.9 $8.5 $5.0 $4.0 $6.0 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 1 9 9 9 S e c

• n

d S e a s

• n

2 2 S e c

• n

d S e a s

• n

2 1 2 S e c

• n

d S e a s

• n

2 2 2 2 S e c

• n

d S e a s

• n

2 3 2 3 S e c

• n

d S e a s

• n

Second Season Capacity* Bond proceeds Cash

*State of Florida Legislature authorized Second Season Cat Fund coverage beginning in 1999

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HRA Use of Other Reinsurance Products HRA Use of Other Reinsurance Products

• The Act requires Citizens to "make its best efforts to procure

catastrophic reinsurance at reasonable rates".

• The Board evaluated catastrophic reinsurance for the 2003

hurricane season and voted that such reinsurance could not be obtained at reasonable rates.

• As such, no private reinsurance recoveries were available to

the High-Risk Account for 2003.

• The Board will re-evaluate reinsurance programs and rates

again in 2004.

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Regular Assessments Regular Assessments

• Must be levied to fund a deficit in any plan year
• Levied up to the greater of 10% of the regular assessment

base or 10% of the Plan Year Deficit

• Levied on assessable insurers and assessable insureds

collectively in proportion to their share of statewide direct written premium in prior year

• Insurers are obligated to pay within 30 days
• Insurers may pass regular assessment through to their

policyholders through rate filing process

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Plan Year Regular Assessment Base Plan Year Regular Assessment Base

2003 Storm Season Regular Assessment Base $ in Millions

$- $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 1998 1999 2000 2001 2002 2003 CLA PLA HRA

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Market Equalization Surcharge Market Equalization Surcharge

• Levied on Citizens` policyholders at a rate equal to the

regular assessment rate

• Revenue realized upon policy renewals or issuance over 12

months

• Intended to treat Citizens policyholders and voluntary

market policyholders in a similar fashion

• Imposed on all three accounts (HRA, PLA, CLA)

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Emergency Assessments Emergency Assessments

• Must be imposed upon determination that regular

assessments are insufficient to fully fund a Plan Year Deficit

• Levied up to the greater of 10% of the emergency

assessment base or 10% of the Plan Year Deficit, plus interest, reserves and other financing costs

• Levied as a uniform percentage of premiums on all policies

in the subject lines of business (including Citizens)

• Collected by insurers upon issuance or renewal of policies

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Plan Year Emergency Assessment Base Plan Year Emergency Assessment Base

2003 Storm Season Emergency Assessment Base $ in Millions

$- $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 1998 1999 2000 2001 2002 2003 CLA PLA HRA

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HRA Multiple Event Probable Maximum HRA Multiple Event Probable Maximum Loss, with Loss Net of Deductibles Loss, with Loss Net of Deductibles

Note: PML Analysis of Insurance in Force as of September 30, 2003 utilizing RiskLink v4.3

$5,492 $4,000 $2,239 $1,328 $293 PLA/CLA (in millions) $10,759 250 99.6% $1,264 10 90.0% $14,320 500 99.8% $7,000 100 99.0% $4,557 50 98.0% HRA (in millions) Return period (years) Annual Probability of Non-Exceedance

PML Analysis

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HRA’s 2003 PML vs. Resources HRA’s 2003 PML vs. Resources

Funding Gap of $1,420 M to meet Board mandated 100 yr PML Coverage

,580M ,580M ,130M ,530M 40M $1,000M PRE-EVENT NOTES $690M FHCF RECOVERY

$840M

$2,600M PRE-EVENT NOTES $450M

ADJUSTED SURPLUS

REGULAR ASSESSMENTS

FHCF Attachment Point $1,000M

$5 $4 $4 $1 $8 100 YEAR PML $7,000M

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PLA/ PLA/CLA’s CLA’s 2003 PML vs. Resources 2003 PML vs. Resources

$3,742M $3,067M $2,967M $1,5872M $610M

FH C F R EC O VER Y 1997 PR E-EVEN T N O TES LIN E O F C R ED IT $675M $100 M R EG U LA R A SSESSM EN TS $1,380M

A s of Septem ber 30, 2003

$977M $610M A D JU STED SU R PLU S 100 YEA R PM L $2,240M 250 YEA R PM L $4,000M

FH C F A ttachm ent Point $385M