FloridaFlorida HurricaneHurricane CatastropheCatastrophe FundFund

Hurricane Ivan

Hurricane Charley Hurricane Frances Hurricane Jeanne Fiscal Year 2003-2004 Annual Report State Board of Administration of Florida Hurricane Frances, September 5, 2004

The purpose of the Florida Hurricane Catastrophe Fund is to improve the

availability and affordability of

property insurance in Florida by providing reimbursements to

insurers for a portion of their catastrophic

hurricane losses. FFLORIDALORIDA HHURRICANEURRICANE CCATASTROPHEATASTROPHE FFUNDUND FFISCALISCAL YYEAREAR 2003-20042003-2004 AANNUALNNUAL RREPORTEPORT

Hurricane Ivan, September 5, 2004

At 11:45 AM EDT September 5, 2004, Hurricane Frances was over eastern Florida and Hurricane Ivan was off the coast of South America. EEXECUTIVEXECUTIVE MMESSAGEESSAGE

It is my pleasure to present the Florida Hurricane Catastrophe Fund (FHCF) annual report for fiscal year ending June 30, 2004. This report provides the financial status and operational activities of the FHCF during the past fiscal year.

The 2004 hurricane season was unprecedented with Florida enduring four of the season’s nine Atlantic hurricanes within a six-week period. Two of the four hurricanes had nearly identical paths across the state. The last time a state felt the impact of four hurricanes was Texas in 1886, and the last time three hurricanes struck Florida was 40 years ago. The FHCF met the challenge of this past hurricane season and was responsive to the needs of its participating insurers with timely loss reimbursements.

We would like to thank the State Board of Administration Trustees, the FHCF Advisory Council, the SBA/FHCF staff, and our service providers for their support and contributions during this past year. We hope you find this report informative and useful. We welcome any comments, thoughts, or ideas regarding the content of future issues.

For questions or additional information regarding the FHCF, please do not hesitate to contact our office or visit our website at www.sbafla.com/fhcf.

Jack E. Nicholson, Senior FHCF Officer Florida Hurricane Catastrophe Fund State Board of Administration of Florida OOVERVIEWVERVIEW

The Florida Hurricane Catastrophe Fund Statutes, with the purpose of providing a stable and (FHCF) is a tax-exempt trust fund created by the Florida ongoing source of reimbursement to insurers for a por- Legislature during a special session in November 1993. tion of their catastrophic hurricane losses in order to Following Hurricane Andrew, problems associated provide additional insurance capacity for the state. with the resi- The FHCF sup- dential property ports a public- insurance mar- private part- ket developed. nership that The availability preserves the of reinsurance private sector’s for hurricanes role as the became scarce primary risk and extremely bearer. In 2003 expensive. the FHCF pro- Many insurers vided $11 bil- were forced to lion of reinsur- re-evaluate their ance capacity exposure in Florida. State action was deemed neces- for the state of Florida. In 2004 the Florida Legislature sary to provide a stable and affordable reinsurance mar- expanded the claims-paying capacity of the FHCF from ket. The FHCF was created in Section 215.555, Florida $11 billion to $15 billion. The cost of FHCF coverage is

1 significantly less than the cost of private reinsurance ments of Section 215.555(2)(c), Florida Statutes. due to the FHCF’s tax-exempt status, low adminis- Most commercial property was exempted from the trative costs, and lack of a profit or risk-load. As a FHCF during the 1995 Legislative session. result, the FHCF has helped keep residential prop- erty insurance rates down, it has helped stabilize The FHCF is under the direction and control the market, it has enabled more insurance to be writ- of the State Board of Administration of Florida (SBA). ten in the state, and it has helped keep business out The SBA Trustees are the Governor, Jeb Bush, the of the residual market. Chief Financial Officer, Tom Gallagher, and the Attorney General, Charlie Crist. A nine member The FHCF acts as a state administered Advisory Council has been established to pro- reinsurance program and is mandatory for resi- vide the SBA with advice and information. The dential property insurers writing covered poli- membership consists of three consumer represen- cies in the state of Florida. Covered policies are tatives, a representative of insurers, a represen- residential property insurance policies that pro- tative of insurance agents, a representative of vide wind or hurricane coverage on structures reinsurers, and three technical experts — a me- located in Florida, including coverage on con- teorologist, an engineer, and an actuary. The Se- tents and coverage for additional living ex- nior FHCF Officer, Jack Nicholson, is responsible penses. Certain collateral protection policies for the day-to-day operations of the FHCF and covering personal residences are also consid- reports directly to the Executive Director of the ered covered policies if they meet the require- SBA, Coleman Stipanovich.

2 Section 215.555, Florida Statutes created the FHCF and: • requires certain insurers to participate in the • limits debt issuance and the amount of the FHCF as a condition of doing business in the assessments State • provides for debt security if the FHCF is • grants rulemaking authority terminated by law • establishes the procedures for developing rates • establishes an Advisory Council and collecting reimbursement premiums • provides that a violation of Section 215.555, • authorizes the investment and disbursement Florida Statutes, is a violation of the Insurance Code of moneys collected by the FHCF • provides explicit authority to the SBA for other • authorizes the issuance of debt secured by legal action premiums and assessments • provides for initial season claims paying • authorizes the imposition and collection capacity up to a limit of $15 billion of emergency assessments to retire bonds • establishes additional emergency assessment • requires insurers to participate at certain authority to help fund capacity for subsequent contract years coverage levels if bonds are outstanding

FHCF Mission Statement

The mission of the Florida Hurricane Catastrophe Fund (FHCF) is to responsibly and ethically administer the FHCF by:

• Understanding the catastrophe financing needs of its

beneficiaries and stakeholders.

• Striving to satisfy a portion of the hurricane catastrophe

financing needs of insurers in order to create additional

insurance capacity for the state.

• Protecting the public interest by maintaining insurance

capacity in the state.

• Providing exceptional investment, financial, and

Headquarters of the State Board of Administration of Florida administrative services. Hermitage Centre, Tallahassee, Florida

3 20032003 -- 20042004 IINN RREVIEWEVIEW

2004 Hurricane Season1

The 2004 Atlantic hurricane season was Hurricane Ivan was the longest-lived intense unique in a number of ways: hurricane on record.

There were no Hurricane named storms before Jeanne was the first ma- August 1 when Alex jor hurricane to strike formed in the Western Florida north of West Atlantic. Palm Beach since 1893.

August had more Six major hurri- named storms (eight) canes formed this year – and major hurricanes Alex, Charley, Frances, (three) than any August Ivan, Jeanne, and Karl. on record. Eight named storms (hurricanes and tropical Four hurricanes made landfall along the United storms) made landfall in the United States this year – States coastline – Charley, Frances, Ivan, and Jeanne. Bonnie, Charley, Frances, Gaston, Hermine, Ivan, Jeanne, All four hurricanes impacted the state of Florida. The and Matthew. This is the most storms to make landfall last time four or more hurricanes made landfall in the in the United States in one year since 1916 when eight United States was in 1985 when six hurricanes made named storms also made U.S. landfall. U.S. landfall. In total, the 2004 hurricane season had fifteen Three hurricanes made landfall in the state of named storms (hurricanes and tropical storms) with Florida – Charley, Frances, and Jeanne. This is the seven reaching hurricane status. Six of the seven hurri- first time that this has occurred since 1964. Charley canes were major storms reaching Category 3, 4, and 5 was the first major hurricane to strike Florida since on the Saffir-Simpson Hurricane Scale. Opal in 1995 and the first Category 4 or greater hurri- cane to strike Florida since Andrew in 1992. The Atlantic hurricane season runs from June 1 through November 30.

4 Saffir-Simpson Hurricane Scale

Category Wind Speed (mph) Central Pressure

1 74 – 95 >– 980 2 96 – 110 965 – 979

3 111 – 130 945 – 964

4 131 – 155 920 – 944

5 > 155 < 920

Hurricanes Triggering FHCF Coverage

The four hurricanes that impacted the state damaged statewide, and policyholders are expected of Florida were among the most expensive in U.S. his- to file claims in all 67 Florida counties. Hurricanes tory. Their accumulated losses, in all the states they Charley, Frances, Ivan, and Jeanne are the first hurri- affected, exceeded those of Hurricane Andrew ad- canes to trigger FHCF coverage since hurricanes Erin justed to 2004 dollars. These losses are exceeded only and Opal in 1995. by losses from the terrorist attacks on September 112. According to the Florida Department of Financial Ser- Hurricane Charley strengthened rapidly vices, total estimated insured losses for the state of just before making landfall at Charlotte Harbor on Fri- Florida are $21.5 billion, one in every five homes were day, August 13, 2004, as a Category 4 hurricane on

August 13: Hurricane Charley September 5: Hurricane Frances

5 the Saffir-Simpson Hurricane Scale with 145 mph tember 6 near St. Marks in the Florida panhandle as a winds. Charley cut a path across the state causing tropical storm and dissipated later that day.1 Total substantial damage from Punta Gorda and Port Char- insured industry losses from Frances are estimated at lotte to Orlando and Daytona Beach before it exited $5.3 billion. into the Atlantic Ocean. Charley was not finished as it made three additional landfalls before dissipating H urricane Ivan reached Category 5 on August 15th. The high winds, heavy rain, and strength three times before it made landfall at Palm storm surge caused flooding and extensive damage. Shores, Alabama on Thursday, September 16, 2004, Total insured industry damage estimates from Char- as a Category 3 storm with 130 mph winds. Dam- ley are $8.1 billion, making it one of the most expen- age was particularly extensive in the Florida pan- sive hurricanes to hit the United States, second only handle with Pensacola experiencing significant de- to Hurricane Andrew in 1992.1 Hurricane Charley struction. Ivan weakened to a tropical depression activated the FHCF to the most significant extent since later that day as it moved northeastward through its creation in 1993. Alabama. The remnants of Ivan continued north- eastward off the Mid-Atlantic coastline and then Hurricane Frances made landfall near drifted southwestward across the state of Florida Sewall’s Point on Sunday, September 5, 2004, as a Cat- into the Gulf of Mexico. Ivan reintensified and egory 2 storm with winds at 105 mph and tracked made a second landfall as a tropical storm in Loui- slowly across the state causing extensive damage as siana on September 23rd. The storm dissipated on it moved west-northwest before exiting into the Gulf September 24th.1 Total insured industry damages of Mexico. Frances made a second landfall on Sep- from Ivan are estimated at $3.9 billion.

September 16: Hurricane Ivan September 25: Hurricane Jeanne

6 Hurricane Jeanne made landfall near Stuart more than 1.7 million claims, with the number ex- on Saturday, September 25, 2004, as a Category 3 storm pected to exceed 2 million. As of December 31, 2004, with winds at 120 mph at almost the same location of the 223 FHCF participating insurers, 133 are ex- Hurricane Frances landed just 20 days earlier. Jeanne pected to trigger coverage and 55 insurers are expected followed a path simi- to exhaust their lar to Frances as it FHCF maximum lim- moved rapidly across its of coverage. For the state causing con- each hurricane event, siderable damage. insurers are required Jeanne dissipated on to absorb a retention, September 26th as it which acts like a de- moved across the ductible, prior to trig- state of Georgia.1 To- gering FHCF cover- tal insured industry age. Total FHCF loss damages are esti- payments as of De- mated at $4.2 billion cember 31, 2004, were for Hurricane Jeanne. $1.5 billion. It is im- portant to note that The Florida Department of Financial Services all losses have not been paid, and the true liability of reported that the 2004 hurricane season resulted in the FHCF will not be known for some time.

Total Estimated Insured Losses FHCF Participating Insurers Expected FHCF State of Florida (in billions) Losses - All Hurricanes As of 12/31/04

Source: Florida Office of Insurance Regulation 7 Operational Activities

In addition to activities related to the hurricane • Introduction of the Loss Reimbursement season, other major FHCF activities for the past fiscal Preparedness Program – Phase 2 year included: • A Strategic Planning Summit • A Participating Insurers Workshop • Five meetings of the Advisory Council • An Examiner Training Conference • Monitoring and responding to proposed • Staff support to the Florida Commission on legislation Hurricane Loss Projection Methodology • Development of the 2004 premium formula (FCHLPM) • Publication of bonding capacity estimates in • Updating and maintaining the FHCF May and October and FCHLPM web sites • Adoption of six rules • 143 Contract Year 2003 company exams of • Upgrades of FHCF credit ratings from S&P, exposure data were conducted representing Fitch, and Moody’s 99.34% of FHCF premium.

8 Legislation

During the 2004 legislative session, the passage Other changes included increasing the exposure of CS/CS/CS/CS for Senate Bill 2488 brought con- limit for insurers who choose to be exempted from par- siderable changes ticipation from to the Florida Hur- $500,000 to $10 mil- ricane Catastrophe lion, broadening Fund with a June 1, the selection of 2004 effective date. reinsurers, provid- The bill expanded ing for rulemaking the capacity of the authority to allow FHCF from $11 bil- the charging of in- lion to $15 billion, terest on late remit- allowing capacity tances, providing to grow with the for rulemaking au- Old and New Capitol Buildings, Tallahassee, Florida growth of insured thority to exclude values, and reset certain deductible the insurance industry aggregate retention (deduct- buy-back and commercial residential excess policies, and ible) to $4.5 billion which is designed to grow with providing greater flexibility for covering additional liv- exposure growth. The emergency assessment author- ing expenses. In addition, language was removed that ity was increased to finance the increased capacity to required recoveries from reinsurers in situations where 6% per year and 10% aggregate on all lines of prop- recoveries exceeded 100% of the insurer’s losses, and erty and casualty business excluding workers’ com- the word “audit” was replaced with “examination” to pensation and medical malpractice. The emergency avoid confusion between the FHCF’s program com- assessment base was expanded to include surplus pliance examinations and financial audits. lines, but the medical malpractice line was excluded from assessments for three years. This temporary ex- The bill also provided some important clarifica- clusion is applicable to any covered event occurring tions. It clarified that emergency assessments may be prior to June 1, 2007. A change was also made in the used for debt service coverage and to refinance debt way the emergency assessment is remitted by the and that mitigation appropriations are to be based on insurer. the most recent fiscal year-end audited financial state-

9 ments. In addition, the bill helped clarify how excess surance for multiple deductibles applied by insurers recoveries will be allocated between Citizens’ ac- for two or more hurricanes after the policyholder had counts. The bill also provided greater specificity re- absorbed one full hurricane deductible. The bill was garding the process for the publication of bonding signed by the Governor on December 21, 2004. The capacity estimates and notification requirements to Department of Financial Services is authorized to ad- insurers. minister the program, which will be funded with up to $150 million out of the FHCF. The FHCF is allowed Due to the natural disasters that occurred dur- to increase its premiums to recover the cost over a ing the 2004 hurricane season, Senate President Tom five-year period beginning June 1, 2006. The bill also Lee and House Speaker Allan Bense called the Legis- provided that in the future, insurers will be required lature into a Special Session in order to address hurri- to apply the hurricane deductible only once in a sea- cane related issues. House Bill 9A created a program son followed by application of the non-hurricane per- to reimburse policyholders of residential property in- ils deductible on all other losses.

Peak 1 min Hurricane Winds over Florida, 2004

10 History of Legislative Changes 2004 • Capacity was expanded by increasing emergency 1995 assessment authority sufficient to create $15 billion • Tax-exempt status granted to the FHCF and to allow future capacity to grow with exposure • Retention and Payout Multiples created growth • Three coverage options – 45%, 75%, and 90% • The increase in assessment authority additionally • Non-residential commercial property insurance allows subsequent season capacity to expand to excluded $15 billion • Exposure reporting date moved to September 1 • Insurance industry aggregate retention was reset to for exposures existing as of June 30 $4.5 billion and is designed to grow with exposure • Loss reimbursement preferences provided to growth limited apportionment companies • Emergency assessment authority increased to 6% for 1996 debt service on storms occurring in one contract year • FHCF Finance Corporation created with a 10% aggregate limit for all years • Provisions established for issuance of tax-exempt • Emergency assessment base expanded to include debt surplus lines with provision for the insurer to collect 1998 the assessments from policyholders as premiums • Advances provided to limited apportionment are paid companies and residual market mechanisms • Emergency assessments may be used for debt service 1999 coverage and may also be used to refinance debt • Subsequent Season Capacity created • Medical malpractice insurers excluded from • Initial Season Capacity temporarily limited to emergency assessments for any covered event $11 billion occurring prior to June 1, 2007 • Emergency assessments set at 4% for debt service on • Exemption exposure limit increased to $10 million storms occurring in one contract year and a 6% • Selection of reinsurers broadened aggregate limit applied for emergency assessments • Rulemaking authority allowing for interest charges for all years on late remittances • Limited insurers’ payout except for FRPCJUA and • Rulemaking authority allows for excluding certain FWUA (now known as Citizens Property Insurance deductible buy-back and commercial residential Corporation) excess policies 2002 • Mitigation appropriations to be based on the most • Added coverage for Additional Living Expense recent fiscal year-end audited financial statements (ALE) • Allocation of excess recoveries between Citizens • Added coverage for certain Collateral Protection Property Insurance Corporation accounts clarified Insurance Policies • Flexibility provided for ALE coverage • Provision established for inclusion of a rapid cash • Audit requirement language changed to reference buildup factor “examination” in lieu of “audit” 11 Rulemaking

Specific policies and provisions of the FHCF 19-8.013, F.A.C. are outlined in the rules of the SBA. The rulemaking Issuance of Revenue Bonds process includes workshops, hearings, approval by the FHCF Advisory Council, and adoption by the SBA 19-8.028, F.A.C. Trustees. Each of these meetings is open to the public Reimbursement Premium Formula – Adoption of the and input from participating insurers and all interested 2004-2005 Contract Year Rates parties is encouraged. 19-8.029, F.A.C. The rules are continually updated in order to Insurer Reporting Requirements – Adoption of the 2004-2005 accommodate new procedures and forms necessary for Data Reporting Requirements of Insurer Exposure (Data Call) the administration of the FHCF. The following rules were adopted by the SBA this past fiscal year. 19-8.030, F.A.C. Insurer Responsibilities – Establishes certain deadlines and 19-8.010, F.A.C. other requirements for insurers required to participate in Reimbursement Contract – Adoption of the 2004-2005 the FHCF Reimbursement Contract Emergency Rules 19-8.012, F.A.C. In response to 2004 Legislation, Emergency Rules Procedures to Determine Ineligibility for Participation 19ER04-1 (Reimbursement Contract) and 19ER04-2 and Exemption from Participation in the FHCF (Data Call) were promulgated on May 12, 2004.

12 FHCF Participating Insurers Workshop

The FHCF hosted its Fourth Annual Par- • history of the FHCF and its coordination with ticipating Insurers Workshop on May 20 and 21, private reinsurance 2004. The workshop is designed to be an educa- • ratemaking and the use of models tional opportunity for participating insurers, to • Florida Department of Financial Services provide an avenue for the FHCF to receive addi- emergency response system and coordination with tional comments on its rules and documents, and the Insurance Disaster Assessment Team to focus on the activities of the FHCF and the in- • the loss reimbursement process and a practice drill surance industry. Comments and suggestions regarding This year’s workshop opened with guest changes to the rules, documents, and other statutory speaker Kevin McCarty, Director of the Office of In- changes were solicited and discussed. Also noted surance Regulation. Other topics were: were changes in the documents that resulted from sug- gestions made by participants during workshops in • key legislative changes impacting the FHCF and prior years. insurers • changes to the upcoming contract year’s Sessions were provided on exposure report- Reimbursement Contract and Insurer Reporting ing and loss reimbursement reporting to the FHCF. Requirements (Data Call) Phase II of the Loss Reimbursement Preparedness Pro- • overview of the FHCF examination program gram was also introduced at the workshop.

13 Examination Program

The SBA routinely conducts examinations of revealed several common errors. These include, but exposure data submitted by participating companies. are not limited to: The examinations are limited in scope and are in- • incorrectly reporting ZIP Codes and construction tended to verify that participating companies are characteristics (e.g., reporting the mailing ZIP Code properly reporting their exposure. In addition, the rather than the property location ZIP Code), examinations are used to review participating insurer • omitting coverages or endorsements to property compliance with FHCF data reporting requirements. coverage, • reporting policies or coverages not required to be Every participating company is required to reported (e.g., builders risk, wind exclusion, business report its exposure data annually and at that time to interruption), generate an examination file. All records, including • failure to report percentage deductibles. exposure filings, policy files, and any other support- ing documentation, must be retained with the exami- The SBA has also developed and implemented nation file. an examination program to ensure proper reporting of claims to the FHCF. Companies are required to retain The SBA provides notification to a company complete, accurate, and detailed records, at the policy at least 60 days prior to com- level, of all reported expo- mencement of an examina- sures and reported claims tion. The notification in- until the FHCF has com- cludes detailed instructions pleted an examination of to the company on the re- these specific records. Re- quired records needed for tention of records is im- the examination. All infor- perative since an examina- mation that supports a tion may result in a company’s exposure is sub- resubmission, other correc- ject to examination. tive action, or an adjust- ment to a company’s FHCF Previously con- premium or loss recovery. ducted examinations have

14 FHCF Examination Adjustments As of 12-31-04

Contract Year Additional Premium Due Premium Refunds Made Net Results

1994 $7,832,037.76 ($10,572,916.19) ($2,740,878.43)

1995 $4,141,449.91 ($4,975,537.28) ($834,087.37)

1996 $3,095,482.35 ($2,389,171.29) $706,311.06

1997 $3,457,428.35 ($4,166,782.27) ($709,353.92)

1998 $9,763,879.16 ($4,724,819.63) $5,039,059.53

1999 $8,777,956.40 ($2,286,886.83) $6,491,069.57

2000 $592,573.83 ($2,173,802.99) ($1,581,229.16)

2001 $1,586,752.46 ($1,219,890.39) $366,862.07

2002 $1,225,831.87 ($1,542,388.46) ($316,556.59)

2003 $1,854,969.20 ($3,474,562.17) ($1,619,592.97)

The FHCF conducted 18 examinations related to losses reported as a result of Hurricane Erin and Hurricane Opal in 1995. All outstanding claims from Hurricane Erin and Hurricane Opal were closed this fiscal year. The FHCF will begin the examinations of companies reporting claims as a result of the 2004 events in mid-2005.

15 FHCF Loss Reimbursement

In prior years, only two hurricanes had ties or municipalities and the other is through the FHCF resulted in reimbursement to participating insurers; Finance Corporation. The FHCF Finance Corporation was however, the 2004 hurricane season brought numer- created in the statute to allow the FHCF greater flexibility ous loss recoveries from the FHCF. On August 20, in planning. 2004, just one week after the occurrence of Hurricane Charley, the FHCF issued its first loss payment. For In 2004, the FHCF Finance Corporation obtained companies submitting complete requests and having an upgrade in its credit rating from Moody’s, Standard no outstanding FHCF issues, disbursements were and Poor’s, and Fitch. Moody’s upgraded the FHCF made within 2-6 business days. credit rating from A1 to Aa3, Standard and Poor’s up- graded the FHCF’s credit rating from A+ to AA-, and A recap of FHCF reimbursements to partici- Fitch upgraded its credit rating from A+ to AA. pating insurers as of year end follows: The FHCF Finance Corporation has validated the Number of Total Recovery issuance of up to $10 billion of revenue bonds with the Companies with Paid (Excess of Florida Supreme Court. The FHCF Finance Corporation As of 12-31-04 FHCF Recoveries Retention) also has a United States Internal Revenue Service private 1995 letter ruling regarding the ability to issue tax-exempt debt. Erin, Opal 9 $13,133,973 The initial ruling was granted on March 27, 1998, for 2004 five years until June 30, 2003. The ruling was renewed Charley, Frances, on June 13, 2003, for an additional five years, expiring Ivan, Jeanne 63* $1,451,905,978 on June 30, 2008. TOTAL $1,465,039,951

*133 insurers are expected to seek loss reimbursement from the FHCF The FHCF has prepared preliminary bond docu- Bonding Program ments and has a team of professionals in place to facilitate a series of bonding transactions should a major hurricane Revenue bonds are required to be issued if the occur that requires bonding. The bonding team was very FHCF’s cash balance is anticipated to be insufficient to active during the 2004 hurricane season. Fortunately, the reimburse losses. There are two ways in which revenue FHCF will be able to pay all reimbursements out of the bonds can be issued. One is in conjunction with coun- FHCF’s cash balance and bonding will not be required.

16 Estimated FHCF Claims Paying Capacity ($ billions) Projected Initial Subsequent 12/31 Season Claims Season Claims Year Bonding Capacity Fund Balance Paying Capacity Paying Capacity

1994 $2.0 $0.3 $2.3 1995 4.0 0.9 4.9 May October 1996 5.0 $5.0 1.4 6.4 1997 5.5 6.0 2.0 8.0 1998 8.5 8.5 2.5 11.0 Initial/Subsequent Initial/Subsequent Season Season 1999 8.7 7.9/3.9 3.1 11.0 $4.4 2000 7.4/4.5 7.3/5.5 3.7 11.0 5.9 2001 6.7/7.1 6.7/7.4 4.3 11.0 7.9 2002 6.1/9.2 6.1/10.3 4.9 11.0 10.8 2003 5.5/10.5 5.5/10.5 5.5 11.0 11.0 2004 8.9/15.0 8.9/14.4 6.1 15.0 15.0

• The 1995 Legislative Session required bonding estimates to be published twice a year. • 1998 reflects a private letter ruling granting tax-exempt status to bonds. • The 1999 Legislative Session resulted in limiting the overall capacity of the FHCF to $11 billion and providing for subsequent season capacity. • Initial Season and Subsequent Season Claims Paying Capacity is based on the October Bonding Capacity Estimates. • Subsequent Season Claims Paying Capacity consists of bonding plus available cash. • The 2004 Legislative Session expanded the overall capacity of the FHCF to $15 billion.

17 Litigation

The FHCF was not involved in any litigation in the event of a hurricane, provide research into means to during the 2003-2004 fiscal year. reduce such losses, assist the public in determining the ap- propriateness of particular Public upgrades to structures or in Contributions the financing of such up- grades, or to protect local in- When the Internal frastructure from potential Revenue Service (IRS) issued damage from a hurricane. a private letter ruling Moneys shall first be avail- granting tax-exempt status able for appropriation under to the FHCF, it contained a this paragraph in fiscal year requirement that a certain 1997-1998. Moneys in ex- amount of the funds in the cess of the $10 million speci- FHCF be devoted to hurri- fied in this paragraph shall cane mitigation purposes. not be available for appro- The purposes are specified priation under this para- in Section 215.555(7)(c), graph if the State Board of Florida Statutes: Administration finds that an appropriation of invest- Each fiscal year, the Legislature ment income from the fund shall appropriate from the invest- would jeopardize the actu- ment income of the Florida Hur- arial soundness of the fund. ricane Catastrophe Fund an amount no less than $10 million and no more than 35 per- Beginning in 1999, the Florida Legislature cre- cent of the investment income from the prior fiscal year for ated Section 215.559, Florida Statutes, which annually the purpose of providing funding for local governments, appropriates $10 million from the FHCF to the Depart- state agencies, public and private educational institutions, ment of Community Affairs for the Hurricane Loss and nonprofit organizations to support programs intended Mitigation Program. to improve hurricane preparedness, reduce potential losses

18 2004 Legislative Session Mitigation Funding

Department of Community Affairs: Hurricane Loss Mitigation Program: • retrofit public hurricane shelters $3,000,000 • hurricane loss mitigation programs $7,000,000 Total Appropriation $10,000,000

FHCF Hurricane Mitigation Funding Appropriations Total Total Carried Forward Current Year Available for Appropriated Vetoed by Funded Year From Prior Years Appropriation Appropriation by Florida Governor by FHCF (a) (b) (c) = (a) + (b) Legislature

1997 $0 $10,000,000 $10,000,000 $10,000,000 $2,822,400 $7,177,660

1998 $2,822,400 $10,000,000 $12,822,400 $12,500,000 $0 $12,500,000

1999 $322,400 $10,000,000 $10,322,400 $10,300,000 $2,200,000 $8,100,000

2000 $2,222,400 $10,000,000 $12,222,400 $12,200,000 $0 $12,200,000

2001 $22,400 $30,000,000 $30,022,400 $30,000,000 $0 $30,000,000

2002 $22,400 $19,075,309 $19,097,709 $19,075,309 $0 $19,075,309

2003 $22,400 $10,000,000 $10,022,400 $10,000,000 $0 $10,000,000

2004 $22,400 $10,000,000 $10,022,400 $10,000,000 $0 $10,000,000

2005 $22,400

Total Funds provided to State of Florida from FHCF $109,052,909

19 CCONSUMER IINFORMATION

Following Hurricane Andrew, residential 3) The FHCF has no underwriting costs since it is a property insurers began to re-evaluate their commit- mandatory state program requiring a certain level of ment to the Florida market in light of the fact that there participation by all insurers who write residential were major difficulties obtaining private reinsurance. property insurance in the state. The Florida Hurricane Catastrophe Fund (FHCF) was created in a special legislative session in November 4) Since the FHCF is a program that benefits the citi- 1993 in the aftermath of Hurricane Andrew in order zens of the state and is under the control of elected to provide additional reinsurance capacity to enable officials, the FHCF is a tax-exempt entity that does insurers to continue to write business in the state. The not pay federal income taxes or state taxes. FHCF has been important in helping insurers to meet their responsibilities to Florida residential policyhold- 5) The FHCF has the ability to issue tax-exempt debt ers following the catastrophic hurricanes that hit which will result in lower financing costs should the Florida. need arise to finance losses with revenue bonds.

The FHCF provides very economical cover- The FHCF is financed by three sources, age for insurers writing residential insurance in the 1) reimbursement premiums charged to participating state. It is estimated that coverage purchased through insurers, 2) investment earnings, and 3) emergency the FHCF costs insurers between one-fourth to one- assessments on all Florida property and casualty busi- third what it would cost in the private reinsurance ness (excluding medical malpractice for three years market. and workers’ compensation, but including surplus lines). Emergency assessments have never been lev- There are several reasons for these cost sav- ied, but would be required in situations where the ings, which include the following: available cash balance of the fund is insufficient to reimburse losses to insurers. 1) The FHCF operating cost is less than 1% of the an- nual premium collected compared with the operating For additional information regarding the costs associated with private reinsurance, which can FHCF, please review the information provided on the range between 10% to 15% of the premium collected. FHCF website at www.sbafla.com/fhcf. Most of the documents, including the FHCF’s most recent annual 2) The FHCF does not include a factor for profits in its report, are published on the website as well as a cur- rates, neither does it pay reinsurance brokerage com- rent listing of FHCF participating insurers. If you missions. have additional questions, please feel free to contact the FHCF staff.

20 FHCF AT-A-GLANCE

Fiscal Year 2003-2004 (as of 12-31-04)

Created: November, 1993

No. of Participating Insurers: 223

Premium Billed: $616.07 million

Exposure: $1,317.9 billion

Projected Fund Balance: $6.1 billion

Mitigation Funding for 2004: $10,000,000

Claims Paying Capacity: Initial Season $15 billion Subsequent Season $15 billion

Bonding Capacity: Initial Season $8.88 billion Subsequent Season $14.37 billion

Emergency Assessments (available): $1,610.7 million (6%) Initial Season (required) $595.5 million (2.22%) Subsequent Season (required) $979.7 million (3.65%)

Assessment Base: $26.8 billion includes Surplus Lines and all P&C lines except worker’s compensation, and accident and health, and medical malpractice until June 1, 2007. Retention Multiples: $11 Billion xs $4.866 Billion $15 Billion xs $4.5 Billion 90% 9.4642 7.2607 75% 11.3570 8.7128 45% 18.9283 14.5213

Payout Multiple: 21.4288 24.2409

Moody’s, Standard & Poor’s, and Fitch Ratings: Aa3/AA-/AA

Tax Status: Tax-Exempt Trust Fund Tax-Exempt Bonds 21 SSTATISTICALTATISTICAL IINFORMATIONNFORMATION

2004 Exposure 2003 Exposure Concentration by County Concentration by County ($ billions) ($ billions) Total % of Total Total % of Total County Exposure* Exposure County Exposure* Exposure Palm Beach $133.3 10.12% Palm Beach $122.2 10.23% Broward 123.4 9.36 Broward 114.8 9.61 Miami-Dade 119.0 9.03 Miami-Dade 112.4 9.41 Orange 78.0 5.92 Orange 68.7 5.75 Hillsborough 73.7 5.59 Hillsborough 66.2 5.54 Pinellas 69.1 5.24 Pinellas 64.8 5.43 Lee 56.5 4.29 Lee 49.9 4.18 Duval 54.4 4.13 Duval 49.1 4.11 Collier 45.0 3.41 Collier 41.0 3.43 Brevard 41.4 3.14 Brevard 37.6 3.15 Other 524.1 39.77 Other 467.7 39.16 Total $1,317.9 100.00% Total $1,194.4 100.00%

*Updated as of 12/31/04 22 Participating Insurers by Coverage Option Selection

FHCF Premium by Coverage Option

45% 75% 90%

# of % of % of # of % of % of # of % of % of Insurers Insurers Premium Insurers Insurers Premium Insurers Insurers Premium 1995/96 187 64.4% 12.2% 17 5.9% 2.8% 86 29.7% 85.0%

1996/97 177 60.6% 9.9% 16 5.5% 2.2% 99 33.9% 87.9%

1997/98 170 55.4% 7.0% 15 4.9% 2.0% 122 39.7% 91.0%

1998/99 148 48.7% 6.2% 8 2.6% 1.3% 148 48.7% 92.5%

1999/00 122 42.4% 5.2% 8 2.8% 1.2% 158 54.8% 93.6%

2000/01 122 42.2% 4.06% 5 1.7% 0.025% 162 56.1% 95.91%

2001/02 99 35.5% 2.14% 2 0.7% 0.001% 178 63.8% 97.86%

2002/03 65 24.8% 1.30% 2 0.8% 0.001% 195 74.4% 98.70%

2003/04 57 23.8% 1.56% 1 0.4% 0.000% 182 75.8% 98.44%

2004/05 46 20.7% 1.00% 1 0.5% 0.000% 175 78.8% 99.00%

23 Statistical Summary as of 12/31/04 ($ billions)

October Projected Claims Projected Contract FHCF Bonding 12/31 Paying Payout Number of Year Premium (1) Capacity Fund Balance(2) Capacity (3) Multiple Exposure (4) Participants (a) (b) (c)=(a)+(b) 95/96 $0.439 $4.0 $0.9 $4.9 11.14 $747.3 290 96/97 0.423 5.0 1.4 6.4 15.21 754.4 292 97/98 0.465 6.0 2.0 8.0 17.15 760.4 307 98/99 0.446 8.5 2.5 11.0 24.72 770.5 304 99/00 0.435 7.9 3.1 11.0 25.31 798.8 288 00/01 0.439 7.3 3.7 11.0 25.07 881.3 289 01/02 0.478 6.7 4.3 11.0 23.02 922.1 279 02/03 0.499 6.1 4.9 11.0 22.06 1,100.1 262 03/04 0.490 5.5 5.5 11.0 22.45 1,196.2 229 04/05a 0.513 ------11.0 21.43 50.6 50 04/05b 0.619 8.9 6.1 15.0 24.24 1,267.3 173

(1) - FHCF premium for contract years 95/96, 96/97, and 97/98 are as of 12/31/03. - FHCF premium for contract years 98/99 and 99/00 is the premium received as of 12/31 each year. By definition, these premium factors were used to calculate the - Projected Payout Multiple for each contract year, and as such, have not been updated to reflect subsequent changes. - FHCF premium for contract years 00/01 through 04/05 is the premium billed as of 12/31 of each year. By definition, similar to the above, this premium is locked. - FHCF premium for contract year 04/05a is as if all companies chose the transitional option. FHCF premium for Contract Year 04/05b is as if all companies did not choose the transitional option. Actual FHCF premium billed for contract year 04/05 at 12/31/04 was $616.07 million. (2) Beginning with Contract Year 02/03, Fund Balance represents the “Net assets: Unrestricted” as reported on the 12/31 FHCF Statement of Net Assets. (3) The 1999 Legislative Session resulted in limiting the overall single-season capacity to $11 billion and provided for subsequent season capacity. (4) Excludes Section II (Excess insurance).

Retention Multiples Contract Year 45% 75% 90% 95/96 12.44387 7.46632 6.22194 96/97 12.39750 7.43850 6.19875 97/98 12.40000 7.44000 6.20000 98/99 12.40000 7.44000 6.20000 99/00 13.26862 7.96117 6.63431 00/01 14.29810 8.57886 7.14905 01/02 13.90554 8.34333 6.95277 02/03 16.06212 9.63727 8.03106 03/04 17.89329 10.73597 8.94665 04/05 $11B xs $4.9B 18.92832 11.35700 9.46416 04/05 $15B xs $4.5B 14.52133 8.71280 7.26067

24 2004 TROPICAL CYCLONES IN THE ATLANTIC BASIN H Alex TS Bonnie H Charley H Danielle TS Earl H Frances TS Gaston TS Hermine H Ivan* H Jeanne H Karl TS Lisa TS Matthew TS Nicole TS Otto TS Tropical Storm H Hurricane Storms making landfall in Florida *made landfall in Alabama with extensive damage in Florida The FHCF was required to pay losses for the 2004 hurricane season.

2003 TROPICAL CYCLONES IN THE ATLANTIC BASIN TS Ana TS Bill H Claudette H Danny H Erika H Fabian TS Grace TS Henri* H Isabel H Juan H Kate TS Larry TS Mindy TS Nicholas TS Odette TS Peter TS Tropical Storm H Hurricane Storms making landfall in Florida *made landfall in Florida as a Tropical Depression The FHCF was not required to pay losses for the 2003 hurricane season. 25 THE PEOPLE WHO MAKE IT POSSIBLE

STATE BOARD OF ADMINISTRATION OF FLORIDA Trustees Florida Hurricane Catastrophe Fund Staff 1801 Hermitage Boulevard, Suite 100, Tallahassee, FL 32308 The Honorable Jeb Bush Governor, State of Florida Jack E. Nicholson, Ph.D., CLU, CPCU Donna Sirmons The Capitol Senior FHCF Officer Management Review Analyst Tallahassee, FL 32399-0001 Ph: (850) 413-1340 Ph: (850) 413-1349 e-mail: [email protected] e-mail: [email protected]

The Honorable Charlie Crist Attorney General, State of Florida Anne T. Bert, CPM Ramona A. Worley The Capitol Director of Operations Budget Analyst Tallahassee, FL 32399-1050 Ph: (850) 413-1342 Ph: (850) 413-1343 e-mail: [email protected] e-mail: [email protected] The Honorable Tom Gallagher Chief Financial Officer, Tracy L. Allen, J.D., LLM State of Florida Senior Attorney Marcie Vernon The Capitol Ph: (850) 413-1341 Audit Program Analyst Tallahassee, FL 32399-0300 e-mail: [email protected] Ph: (850) 413-1345 e-mail: [email protected]

Executive Director Gina Wilson, CPA (GA), CPM, CPCU, ARe Patti Elsbernd Manager, FHCF Audit Program Management Assistant, Audit Pro- Coleman Stipanovich Ph: (850) 413-1348 gram State Board of Administration e-mail: [email protected] Ph: (850) 413-1346 of Florida e-mail: [email protected] 1801 Hermitage Boulevard, Suite 100 Tallahassee, FL 32308 Ph: (850) 488-4406

(as of 12/31/04) 26 FHCF Advisory FHCF Service Providers Council Members Financial Services: Examination

Raymond James & Associates Services: John Auer, CPCU 880 Cavillon Parkway American Strategic Insurance Corp. St. Petersburg, FL 33716 Kevin Machia, CFE St. Petersburg, FL Ph: (727) 567-1288 Montgomery, VT

Jim W. Henderson, CPA, CPCU Wendell McDavid, AIE Brown & Brown, Inc. Ellenwood, GA Daytona Beach, FL Administrative Timothy J. Butler, CFE, ARe, CPM Leslie Hudson Services: President WESH-TV Regulatory Insurance Consulting Winter Park, FL Paragon Strategic Solutions Inc. Services, Inc. 3600 American Boulevard West Tallahassee, FL William H. Huffcut (Chair) Suite 700 Tallahassee, FL Minneapolis, MN 55431 James E. Salter, CPA, CFE Ph: (800) 689-3863 President Yolanda Cash Jackson, Esquire BD Regulatory Services, LLC Becker & Poliakoff Williston, VT Ft. Lauderdale, FL Actuarial Consulting Harold S. Tattershall, AIE Larry Johnson, FCAS, MAAA Services: San Antonio, TX Allstate Insurance Company Northbrook, IL Paragon Strategic Solutions Inc. Financial Auditing 3600 American Boulevard West Robert M. Peduto Suite 700 GE Insurance Solutions Services: Minneapolis, MN 55431 Overland Park, KS Ph: (800) 689-3863 Ernst & Young LLP Michael J. Svaldi Minneapolis, MN Miami, FL

Joseph Varon, P.E. (Vice Chair) The Haskell Company Jacksonville, FL

1 Source: Summary of 2004 Atlantic Tropical Cyclone Activity and Verification of Author’s Seasonal and Monthly Forecasts, 19 November 2004, William M. Gray and Philip J. Klotzbach with special assistance from William Thorson

2 “Good Riddance” by Chris Krideler, Florida Today, November 29, 2004

27 AUDITED FINANCIAL STATEMENTS

Financial Statements and Other Financial Information Florida Hurricane Catastrophe Fund Years ended June 30, 2004 and 2003

Report of Independent Auditors

The Trustees of the State Board of Administration of Florida Florida Hurricane Catastrophe Fund

We have audited the accompanying financial statements of the Florida Hurricane Catastrophe Fund as of and for the years ended June 30, 2004 and 2003. These financial statements are the responsibility of the Florida Hurricane Catastrophe Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States and the standards for financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As described in Note 1, the financial statements present only the financial position of the Florida Hurricane Catastrophe Fund and are not intended to present fairly the financial position of the State Board of Administration of Florida and the results of its operations and cash flows of its proprietary fund types and nonexpendable trust funds, in conformity with accounting principles generally accepted in the United States.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Florida Hurricane Catastrophe Fund as of June 30, 2004 and 2003, and the results of its operations for the years then ended, in conformity with accounting principles generally accepted in the United States.

In accordance with Government Auditing Standards, we have issued our report dated September 7, 2004, on our consideration of the Florida Hurricane Catastrophe Fund’s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, and grants. That report is an integral part of an audit performed in accor- dance with Government Auditing Standards and should be read in conjunction with this report when considering the results of our audits.

September 7, 2004, except for Note 9, as to which the date is October 28, 2004

A Member Practice of Ernst & Young Global

28 Florida Hurricane Catastrophe Fund Statements of Net Assets (In Thousands) June 30 2004 2003 Assets Current assets: Cash and cash equivalents $ 35,005 $ 3 Short-term investments 3,477,920 2,286,248 Security lending receivable 1,245 751 Security lending pending investment sales – 4,499 Security lending collateral 954,050 860,094 Accrued interest 8,383 12,483 Premiums receivable, net 2 120 Total current assets 4,476,605 3,164,198

Long-term assets: Long-term investments 1,989,587 2,644,432 Capital assets, net of accumulated depreciation of $85 and $109 for June 30, 2004 and 2003, respectively 15 29 Total long-term assets 1,989,602 2,644,461 Total assets $6,466,207 $5,808,659

Liabilities and net assets Current liabilities: Obligation under security lending agreement $ 951,017 $ 847,344 Premium refunds payable – 214 Accrued expenses 1,134 1,143 Pending investment purchases 34,998 – Security lending pending investment purchases 2,781 16,846 Total current liabilities 989,930 865,547

Long-term liabilities: Compensated absences, net of current portion 85 92 Total long-term liabilities 85 92 Total liabilities 990,015 865,639

Net assets: Unrestricted 5,476,155 4,942,969 Invested in capital assets, net of related debt 15 29 Restricted for hurricane mitigation 22 22 Total net assets 5,476,192 4,943,020 Total liabilities and net assets $6,466,207 $5,808,659

See accompanying notes.

29 Florida Hurricane Catastrophe Fund Statements of Revenues, Expenses, and Changes in Net Assets (In Thousands) Year Ended June 30 2004 2003 Operating revenues: Current contract year premium revenue $ 488,465 $ 498,367 Prior contract year adjustment: Premium billed 1,729 1,302 Premium refunded (1,612) (1,466) Premium interest (27) (30) Net premium revenue 488,555 498,173

Total operating revenues 488,555 498,173

Operating expenses: Hurricane losses – (301) Administrative and actuarial fees 2,305 2,340 Other professional fees 789 939 Personnel expenses 659 625 Depreciation 15 14 Other 160 164 Total operating expenses 3,928 3,781

Operating income 484,627 494,392

Nonoperating revenue (expense): Investment income 56,953 104,818 Investment advisor fees (882) (838) Security lending income 10,864 7,077 Security lending expense (8,808) (6,118) Security lending net appreciation 418 612 Total nonoperating revenue 58,545 105,551 Income before transfers 543,172 599,943

Transfers to other funds (10,000) (19,075) Change in net assets 533,172 580,868

Net assets, beginning of year 4,943,020 4,362,152 Net assets, end of year $5,476,192 $4,943,020

See accompanying notes.

30 Florida Hurricane Catastrophe Fund Statements of Cash Flows (In Thousands) Year Ended June 30 2004 2003 Operating activities Premium received $ 488,459 $ 498,151 Hurricane losses paid –72 Administrative and actuarial fees (2,219) (2,317) Other professional fees (810) (961) Personnel expenses (648) (617) Other operating expenses (149) (166) Net cash provided by operating activities 484,633 494,162

Investing activities Purchases of investments (65,142,090) (84,224,537) Sales and maturities of investments 64,618,062 83,684,629 Interest received 83,276 64,716 Investment advisor fees (879) (767) Security lending 2,011 879 Net cash used in investing activities (439,620) (475,080)

Financing from noncapital activities Transfers to other funds (10,000) (19,075)

Financing from capital activities Purchases of capital assets (11) (5)

Net increase in cash and cash equivalents 35,002 2 Cash and cash equivalents at beginning of year 3 1 Cash and cash equivalents at end of year $ 35,005 $ 3 See accompanying notes.

Florida Hurricane Catastrophe Fund Reconciliations of Operating Income to Net Cash Provided by Operating Activities (In Thousands) Year Ended June 30 2004 2003 Operating income $484,627 $494,392 Adjustments to reconcile operating income to net cash provided by operating activities: Increase in premiums receivable, net 118 (16) Decrease in premium refunds payable (214) (6) Decrease in unpaid hurricane losses – (229) Increase in accrued expenses 87 7 Depreciation 15 14 Net cash provided by operating activities $484,633 $494,162 See accompanying notes. 31 Florida Hurricane Catastrophe Fund Notes to Financial Statements June 30, 2004 1. Organization

Business

The Florida Hurricane Catastrophe Fund (the Fund), which was created in November 1993 during a special legislative session following Hurricane Andrew, provides catastrophic reinsurance coverage to all primary insurers of habitational structures with wind/hurricane coverage in the state of Florida. Premiums are calculated for each of the approximately 230 insurers using rates developed based on hurricane modeling of the trended data from the prior year. The modeling takes into consideration factors such as historical records of hurricane strength and landfall patterns, geographic location, type of business, construction, and coverage deductibles. The Fund is administered by the State Board of Administration of Florida (SBA), which has contracted administrative and actuarial services.

Basis of Presentation

The Fund is classified as an enterprise fund, which is a type of proprietary fund. The financial statements of proprietary funds are prepared using the economic resources measurement focus and the accrual basis of accounting. All assets and liabilities associated with the operations of this fund are included in the statement of net assets. The statement of revenues, expenses, and changes in net assets presents increases (revenues) and decreases (expenses) in net total assets. The statement of cash flows provides information about how the Fund finances and meets the cash flow needs of its activities.

The financial statements presented herein relate solely to the financial position and results of operations of the Fund and are not intended to present the financial position of the SBA or the results of its operations and cash flows. The Fund follows GASB pronouncements and only Financial Accounting Standards Board pronouncements issued before December 1, 1989 that do not conflict with or contradict GASB pronouncements.

Limited Liability of the Fund

The Fund’s obligation to participating insurers, in the event of a hurricane(s) that causes reimbursable losses, is limited to the claims-paying capacity of the fund. For the purpose of defining claims-paying capacity, the SBA shall use the unre- stricted net assets as of December 31 of the applicable contract year, to which is added: reported fund losses (including loss adjustment expense) for the then-current contract year, whether paid or unpaid by the Fund, as of December 31; any reinsur- ance purchased by the Fund; and the amount the SBA is able to raise through the issuance of revenue bonds up to the statutory annual aggregate fund limit, and from which is subtracted: any reinsurance recovered prior to, or recoverable as of, December 31; any obligations paid or expected to be paid with bonding proceeds or receipts from emergency assess- ments; amounts needed for administration for the then-current state of Florida fiscal year which have not been spent and which are not reflected on the statement of net assets; and the amount of mitigation funds appropriated for the then-current state of Florida fiscal year. If revenue bonds are issued under authorization of Section 215.555(6) of the Florida Statutes, the SBA shall direct the Florida Office of Insurance Regulation to levy an emergency assessment on each insurer writing prop- erty and casualty business in this state. The Fund, therefore, has no risk that it will be unable to meet its contractual obliga- tions to participating insurers because its obligation is limited to its ability to pay.

32 If bonds are issued on behalf of the Fund, the state of Florida assumes no liability for the repayment of the bonds. Addition- ally, the state of Florida has no legal responsibility to make any contribution to the Fund should its obligations exceed available resources.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Although estimates are considered to be fairly stated at the time the estimates are made, actual results could differ from those estimates.

2. Significant Accounting Policies

Measurement Focus

As mentioned in Note 1, the Fund uses the economic resources measurement focus and the accrual basis of accounting. Under the accrual basis of accounting, premium revenues are recognized when billed. Expenses are recorded at the time they are incurred.

Investments

The Fund invests all funds in relatively low-risk, highly liquid fixed-maturity securities. These investments are recorded at fair value, and the fair values are primarily obtained from independent quoted market prices. No investments were recorded at amortized cost as of June 30, 2004 and 2003. The Fund considers all investments with maturity dates of less than one year to be short-term investments. Investments with maturity dates in excess of one year are included in long-term investments. Investment advisory services are provided by the SBA.

Security Lending

The Fund, under authorization of Section 215.47(16) of the Florida Statutes, engages in security lending. In a security lending program, a lender (i.e., the Fund) loans various securities to a borrower for collateral with a simultaneous agreement to return the collateral for the same securities in the future. The market value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the market value of the loaned securities fluctuates. Initial collateral on cash or U.S. government securities is required at a rate of at least 100% of the market value of a loaned security. The obligation recorded as a current liability represents the obligation to return the collateral received. Interest earned on short- term investments purchased with the cash collateral held is recognized as revenue. Lending agent costs and borrower rebate fees are recognized as expenses when incurred.

Premiums Receivable

Premiums receivable represent amounts from previous billings that have not yet been collected and are net of any allow- ances management has established to anticipate uncollectible billings.

33 Capital Assets

Capital assets, primarily electronic data processing equipment, are stated at cost, less accumulated depreciation. Deprecia- tion is recorded on a straight-line basis over the estimated useful lives, ranging from three to seven years.

Premium Refunds Payable

Premium refunds payable represent amounts due to participating insurers where provisional or estimated premium pay- ments are in excess of amounts actually owed based upon the current exposure data. Also included are premium amounts received from companies pending exemption. These amounts are returned once an exemption is granted.

Compensated Absences

Compensated absences represent the Fund’s obligation to accrue a liability for employees’ rights to receive compensation for future absences, such as vacation and sick leave. The Fund allows vested employees to carry forward any unpaid leave indefinitely. The short-term portion of this liability, $43,000 in 2004 and $27,000 in 2003, is included in accrued expenses on the statements of net assets. The remaining liability is included as compensated absences with long-term liabilities on the statements of net assets.

Current Contract Year Premium Revenue

Premium revenue is recognized when billed. Coverage is provided to the participating insurers on a contract-year basis, which runs from June 1 to May 31. Premiums are billed in three installments with provisional payments due August 1 and October 1 and a final payment due December 1.

Prior Contract Year Adjustments

Participating insurers remit premium to the Fund based upon current policyholder exposure information. When insurers provide updated or corrected exposure information, the Fund may bill and receive additional premium relating to a prior contract year; the Fund may also be required to refund amounts to insurers relating to a prior contract year.

Operating Revenues and Expenses

Operating revenues are those revenues that are generated directly from the primary activity of the proprietary fund. For the Fund, these revenues are primarily the premiums charged to all participating insurers. Operating expenses include incurred losses and necessary costs incurred to provide and administer catastrophic reinsurance to its participants.

Net Interest on Premium Adjustments

Participating insurers have the option of paying the billed provisional premium or estimating premium for the August and October installments. If the provisional or estimated payments were too high, interest is returned to the insurer on the overpayment. Likewise, if estimated premiums were underpaid, interest is charged to the insurer with the November installment. For the contract year ended May 31, 2004, the interest rate was 1.65% for overpayments of premium and 4.65% for underestimated payments. For the contract year ended May 31, 2003, the interest rate was 2.16% for overpayments of premium and 5.16% for underestimated payments.

34 Hurricane Losses

Losses include amounts paid during the fiscal year for hurricane losses from the current and prior contract years that ex- ceeded the participating insurers’ individual company retention levels. In addition, a provision for future payments on hurricanes that occurred prior to the end of the fiscal year is included in losses. There were no hurricane losses for the year ended June 30, 2004. Hurricane losses for the year ended June 30, 2003, were $(301,000), comprised of a $229,000 decrease in unpaid hurricane losses (resulting from participants reporting a reduction in outstanding losses) and a recovery of $72,000 (resulting from participants reporting a reduction in paid losses).

Operating Transfers

Pursuant to Section 215.555(7)(c) of the Florida Statutes, the Florida Legislature will appropriate from the Fund an amount no less than $10,000,000 and no more than 35% of the investment income from the prior fiscal year, providing that the actuarial soundness of the Fund is not jeopardized, for the purpose of providing funding for governments, agencies, and educational institutions to support programs intended to improve hurricane preparedness or reduce potential losses in the event of a hurricane. For these purposes, in fiscal year 2003–2004 and 2002–2003, $10,000,000 and $19,075,000, respectively, was appropriated from the Fund, and $22,400 was available from prior years. The remaining $22,400 available for transfer in fiscal year 2003–2004 has been restricted in the June 30, 2004, ending net assets for future transfer.

Income Taxes

The Fund is exempt from federal and state income taxes. This tax-exempt status was affirmed by a private letter ruling obtained from the Internal Revenue Service in November 1994.

3. Investments

The Fund is authorized to invest in accordance with Section 215.47 of the Florida Statutes, which includes, but is not limited to, certificates of deposit, commercial paper, U.S. government agency notes, U.S. Treasury bills, repurchase agreements, and variable rate notes that enhance the Fund’s investment income while maintaining liquidity.

As of June 30, 2004 and 2003, the Fund’s deposits are entirely insured or collateralized with securities held by the Fund or by its agent in the SBA’s name. The Fund’s investments are classified by level of risk assumed by the Fund at year-end. Custo- dial credit risk is defined as the risk that the Fund may not recover securities held by another party. The level of custodial credit risk assumed by the Fund is categorized as follows: Category A includes investments that are insured or registered or securities held by the Fund or its agent in the Fund’s name. Category B includes uninsured and unregistered investments for which securities are held by the counterparty’s trust department or agent in the Fund’s name. Category C includes unin- sured and unregistered investments for which securities are held by the counterparty or by its trust department or agent, but not in the Fund’s name.

35 The risk category and fair value of the Fund’s investments were as follows (in thousands):

Risk Category Fair A B C Value June 30, 2004 Certificates of deposit $ 274,951 $ – $ – $ 274,951 U.S. government and federally guaranteed obligations 99,180 – – 99,180 Federal agencies 89,406 – – 89,406 Commercial paper 2,276,465 84,378 – 2,360,843 Repurchase agreements ––11 Bonds and notes 1,520,864 185,134 – 1,705,998 Total classifiable investments $4,260,866 $269,512 $ 1 4,530,379

Investments held by others under security lending agreements: U.S. obligations 99,008 Federal agencies 838,120 Invested security lending cash collateral: Security lending short-term collateral investment pool 954,050 Total unclassifiable investments 1,891,178 Total investments $6,421,557

Risk Category Fair A B C Value June 30, 2003 Federal agencies $ 908,948 $ – $ – $ 908,948 Commercial paper 1,618,925 – – 1,618,925 Repurchase agreements – – 10 10 Bonds and notes 1,405,454 167,770 – 1,573,224 Total classifiable investments $3,933,327 $167,770 $10 4,101,107

Investments held by others under security lending agreements: U.S. obligations 829,573 Invested security lending cash collateral: Security lending short-term collateral investment pool 860,094 Total unclassifiable investments 1,689,667 Total investments $5,790,774

36 The risk category and fair value of the Fund’s investments were as follows (in thousands):

June 30 2004 2003 Short-term investments Investments: Certificates of deposit $ 224,951 $ – Commercial paper 2,360,843 1,618,925 U.S. government and federally guaranteed obligations 198,188 50,672 Repurchase agreements 1 10 Corporate bonds and notes, fixed rate 28,370 205,904 Corporate bonds and notes, variable rate 665,567 410,737 Total short-term investments $3,477,920 $2,286,248

Long-term investments Investments: Certificates of deposit $ 50,000 $ – Federal agencies 927,527 1,687,849 Corporate bonds and notes, fixed rate – 46,494 Corporate bonds and notes, variable rate 1,012,060 910,089 Total long-term investments $1,989,587 $2,644,432

Security lending short-term collateral investment pool $ 954,050 $ 860,094

4. Security Lending

The Fund has a contract with Deutsche Bank through March 3, 2003, and Dresdner Bank beginning December 4, 2002 (collec- tively referred to as the Banks), to act as a lending agent in the performance of security lending transactions. Under the security lending program, the Banks deliver various U.S. Treasury securities of the Fund to authorized brokers in return for collateral in the form of cash or U.S. government securities. Borrowers under the transactions must be approved by the Banks’ credit department and the Banks are required to indemnify the Fund if the borrower fails to return the underlying securities or fails to pay income distributions on them. The Fund is contractually limited from pledging or selling collateral represented by U.S. Treasury securities except in the event of borrower default. No violations of legal or contractual provi- sions occurred, and no losses were incurred due to borrower or lending agent defaults in 2004.

The collateral held represents 101% in 2004 and 102% in 2003 of the market value of the securities lent. The Banks monitor daily the market value of the securities lent and request additional collateral if the collateral for any loan is less than 100% of the market value of the underlying securities for that loan. The Fund had no credit risk exposure to borrowers at June 30, 2004 or 2003, because the amounts the Fund owes the borrowers exceed the amounts the borrowers owe the Fund.

The collateral held as assets are recorded in the balance sheet at fair value in accordance with Statement No. 31. Obligations under the program are recorded as liabilities based on the cash value of the collateral received. Details of the lending trans- actions for the Fund at June␣ 30, 2004 and 2003, are as follows (in thousands):

37 Fair Value Cash Fair Value of Underlying Collateral of Collateral Securities on Loan Securities Lent Held Investment Pool

2004 U.S. obligations $937,128 $951,017 $954,050 2003 U.S. obligations 829,573 847,344 860,094

As of June 30, 2004 and 2003, the Fund held $951,017,288 and $847,343,750, respectively, of cash collateral from the Banks. The cash was reinvested in various short-term instruments as authorized by the security lending agreement. Maturities of investments made with cash collateral generally are not matched to maturities of the securities loans, due to securities loan agreements being open-ended with no fixed expiration date.

5. Capital Assets

A summary of the Fund’s capital assets and the related accumulated depreciation for the years ended June 30, 2004 and 2003, is as follows (in thousands): Accumulated Equipment Depreciation Net Balance as of June 30, 2002 $122 $ (95) $27 Additions 16 (14) 2 Sales or disposals – – – Balance as of June 30, 2003 138 (109) 29 Additions 1 (15) (14) Sales or disposals (39) 39 – Balance as of June 30, 2004 $100 $ (85) $15

6. Compensated Absences

Compensated absences were as follows (in thousands):

Balance as of June 30, 2002 $112 Increases 58 Decreases (51) Balance as of June 30, 2003 119* Increases 63 Decreases (54) Balance as of June 30, 2004 $128*

*Includes long-term and short-term balances, of which $43 and $27 is estimated due within one year of June 30, 2004 and 2003, respectively.

38 7. Premium Revenues

Fiscal year premiums, net of prior contract year adjustments, as reported in the operating statements, relate to contract years as follows (in thousands): Year Ended June 30 2004 2003 Contract year 2003 $488,329 $ – Contract year 2002 (28) 498,298 Contract year 2001 291 314 Contract year 2000 (37) (435) Contract year 1999 – (1) Contract year 1998 – (1) Contract year 1997 – (1) Contract year 1996 – (1) $488,555 $498,173

8. Related Parties

The Fund paid the SBA approximately $957,000 and $913,000 in the fiscal years ended June␣ 30, 2004 and 2003, respectively, for investment advisory services.

9. Subsequent Events

The state of Florida was hit by four hurricanes during August and September of 2004. These hurricanes were category 4 Hurricane Charley on August 13, category 2 Hurricane Frances on September 4, category 3 Hurricane Ivan on September 16, and category 3 Hurricane Jeanne on September 25.

It is currently estimated that the Fund’s liability for losses in excess of participating insurers’ retention is $1.957 billion. This estimate is based on interim loss reports, which are nonbinding, and is subject to change as participating insurers continue to provide updated loss reports and more information becomes available. The Fund anticipates that it has sufficient unre- stricted net assets to cover this liability.

39 OTHER FINANCIAL INFORMATION

Report of Independent Auditors on Other Financial Information

The Trustees of the State Board of Administration of Florida Florida Hurricane Catastrophe Fund

Our audit was conducted for the purpose of forming an opinion on the financial statements taken as a whole. The accompa- nying supplemental revenues, expenses, and claim development information of the Florida Hurricane Catastrophe Fund (the Fund) is presented for purposes of additional analysis and is not a required part of the Fund’s financial statements. Such information has been subjected to the auditing procedures applied in our audit of the Fund’s financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the Fund’s financial statements taken as a whole.

September 7, 2004

40 Florida Hurricane Catastrophe Fund Supplemental Revenues, Expenses, and Claim Development Information

The table below illustrates how the Fund’s earned revenues and investment income compare to related costs of loss and other expenses assumed by the Fund as of the end of each year since inception of the Fund (in thousands).

Fiscal Year Ended June 30 2004 2003 2002 2001 2000 1999 Net earned required contribution and investment revenues $556,790 $610,680 $613,940 $665,390 $618,968 $388,668 Unallocated expenses 13,618 11,038 19,008 10,184 5,682 11,399 Estimated incurred claims and expenses, end of year 13,134 13,134 13,435 13,435 13,105 13,495 Paid (cumulative) as of: End of policy year 752 752 752 752 752 752 One year later 9,413 9,413 9,413 9,413 9,413 9,413 Two years later 12,056 12,056 12,056 12,056 12,056 12,056 Three years later 12,318 12,318 12,318 12,318 12,318 12,318 Four years later 12,967 12,967 12,967 12,967 12,967 – Five years later 13,206 13,206 13,206 13,206 – – Six years later 13,206 13,206 13,206 – – – Seven years later 13,134 13,134 – – – – Eight years later 13,134 –– – ––

Reestimated incurred claims and expenses: End of policy year 8,801 8,801 8,801 8,801 8,801 8,801 One year later 11,117 11,117 11,117 11,117 11,117 11,117 Two years later 13,336 13,336 13,336 13,336 13,336 13,336 Three years later 13,495 13,495 13,495 13,495 13,495 13,495 Four years later 13,105 13,105 13,105 13,105 13,105 – Five years later 13,435 13,435 13,435 13,435 – – Six years later 13,435 13,435 13,435 – – – Seven years later 13,134 13,134 – – – – Eight years later 13,134 –– – –– (Decrease) increase in estimated incurred claims and expenses from end of policy year – (301) – 329 (390) 158

41 Report on Compliance and on Internal Control Over Financial Reporting Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards

The Trustees of the State Board of Administration of Florida Florida Hurricane Catastrophe Fund

We have audited the financial statements of the Florida Hurricane Catastrophe Fund (the Fund) as of and for the years ended June 30, 2004 and 2003, and have issued our report thereon dated September 7, 2004. We conducted our audit in accordance with auditing standards generally accepted in the United States and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States.

Compliance

As part of obtaining reasonable assurance about whether the Fund’s financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grants, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance that are required to be reported under Government Auditing Standards.

Internal Control Over Financial Reporting

In planning and performing our audit, we considered the Fund’s internal control over financial reporting in order to deter- mine our auditing procedures for the purpose of expressing our opinion on the financial statements and not to provide assurance on the internal control over financial reporting. Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control over financial reporting that might be material weaknesses. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the internal control over financial reporting and its operation that we consider to be material weaknesses.

This report is intended solely for the information and use of the Florida Auditor General and the management of the State Board of Administration of Florida and is not intended to be and should not be used by anyone other than these specified parties.

September 7, 2004

42 Hurricane Ivan

Tropical Storm Jeanne

PHOTO CREDITS: FEMA, NOAA, Kinetic Analysis Corporation FLORIDA HURRICANE CATASTROPHE FUND STATE BOARD OF ADMINISTRATION OF FLORIDA HERMITAGE CENTRE, SUITE 100 1801 HERMITAGE BOULEVARD TALLAHASSEE, FL 32308 850.413.1349 FAX 850.413.1344 www.sbafla.com/fhcf