FloridaFlorida HurricaneHurricane CatastropheCatastrophe FundFund

Hurricane Katrina

Hurricane Rita

Hurricane Wilma

Hurricane Dennis

Fiscal Year 2004-2005 Annual Report State Board of Administration of Florida The purpose of the Florida Hurricane Catastrophe Fund

is to improve the Hurricane Wilma, October 24, 2005 availability and affordability of property insurance in Florida by providing

reimbursements to insurers for a portion of their catastrophic

hurricane losses. Tropical Depression Alpha, October 24, 2005

On October 24, 2005, Hurricane Wilma is moving northeast at 25 mph with maximum sustained winds of 110 mph and gusts of 145 mph. Tropical depression Alpha is moving north at 23 mph with maximum sustained winds of 35 mph and gusts of 52 mph. EEXECUTIVEXECUTIVE MMESSAGEESSAGE

It is my pleasure to present the Florida Hurricane Catastrophe Fund (FHCF) annual report for fiscal year ending June 30, 2005. This report provides the financial status and operational activities of the FHCF during the past fiscal year.

The 2005 hurricane season was the most active on record with twenty-seven named storms and fourteen hurricanes. Meteorologists exhausted the list of twenty-one proper names and for the first time in history had to resort to the Greek alphabet for the remainder of the season. The 2005 hurricane season did not spare Florida, which experienced four hurricanes and two tropical storms. The FHCF again met the challenge 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 the 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 contact our office or visit our web site 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 catastrophic hurricane losses in order to provide ad- (FHCF) is a tax-exempt trust fund created by the Florida ditional insurance capacity for the state. Supporting Legislature during a special session in November 1993. the private sector’s role as the primary risk bearer, the Following Hurricane Andrew in August of 1992, the resi- FHCF operates as a public-private partnership. dential property in- surance market The FHCF cur- loomed in crisis. Nu- rently provides $15 merous problems de- billion of reinsurance veloped and the avail- capacity for the state ability of reinsurance of Florida. The cost of for hurricanes became FHCF coverage is sig- scarce and extremely nificantly less than expensive. Many in- the cost of private re- surers were forced to insurance due to the re-evaluate their ex- FHCF’s tax-exempt posure in Florida. status, low adminis- State action was trative costs, and lack deemed necessary to of a profit or risk-load. maintain a stable As a result, the FHCF property insurance has helped keep resi- market. dential property in- surance rates down, it S ection has helped stabilize 215.555, Florida Stat- the market, it has en- utes, created the abled more insurance FHCF with the pur- to be written in the pose of providing a state, and it has stable and ongoing helped keep business source of reimburse- out of the residual ment to insurers for market. a portion of their

1 The FHCF functions as a state adminis- vices to various governmental entities. The SBA is tered reinsurance program and is mandatory for composed of a three-member Board of Trustees, who residential property insurers writing covered poli- oversee the SBA’s charge to provide superior invest- cies in the state of Florida. Covered policies are ment and trust services in an effort to enhance and residential property in- protect Florida’s future. surance policies that The Trustees are Florida’s provide wind or hurri- Governor, Jeb Bush, as cane coverage on struc- Chairman; Chief Financial tures located in Florida, Officer, Tom Gallagher, as including coverage on Treasurer; and Attorney contents and coverage General, Charlie Crist, as for additional living ex- Secretary. penses. Certain collat- eral protection policies A nine member Advi- covering personal resi- sory Council was estab- dences are also consid- lished by the Legislature to ered covered policies if provide the SBA with ad- they meet the require- vice and information. The ments of Section membership consists of 215.555(2)(c), Florida three consumer representa- Statutes. Most com- tives, a representative of in- mercial property was surers, a representative of exempted from the insurance agents, a repre- FHCF during the 1995 sentative of reinsurers, and Legislative session. three technical experts — a meteorologist, an engineer, The FHCF is and an actuary. The man- under the direction and control of the State Board agement and day-to-day operations of the FHCF is of Administration of Florida (SBA). The SBA is the responsibility of the Senior FHCF Officer, Jack the constitutional entity of Florida state govern- Nicholson, who reports directly to the Executive Di- ment that provides a variety of investment ser- rector of the 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 assessments the 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 FHCF to inspect, examine, and Florida Statutes, is a violation of the Insurance verify the records of each insurer Code • Authorizes the investment and disbursement • Provides explicit authority to the SBA for other of moneys collected by the FHCF legal action • Authorizes the issuance of debt secured by • Provides for initial season claims paying assessments and premiums capacity up to a limit of $15 billion • Authorizes the collection of emergency • Establishes additional emergency assessment assessments to retire bonds authority to help fund capacity for subsequent • Requires insurers to participate at certain 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 20042004 -- 20052005 IINN RREVIEWEVIEW

2005 Hurricane Season

The 2005 Atlantic hurricane season was the most active and destructive on record shattering many Three hurricanes (Katrina, Rita, and Wilma) reached long-standing records.1 category 5 strength breaking the old record Twenty-seven named of two set in 1960 and tropical storms formed 1961. Not since 1851 breaking the old record have three category 5 of twenty-one set in storms been known to 1933. This exhausted the occur in one season.2 list of twenty-one proper names resulting in the The 2005 hurricane use of the Greek alpha- season was the most bet for the first time in damaging in history for history for the remainder landfalling storms in the of the season. United States. This was mostly due to Hurricane Fifteen of the storms be- Katrina which shattered came hurricanes break- the old record of insured ing the previous record damage set by Hurricane of twelve set in 1969. Andrew in 1992.1

Seven of the hurricanes The Atlantic hurri- became major hurri- cane season starts June 1 canes, category 3 or and ends November 30. higher on the Saffir- However, Hurricane Zeta Simpson Hurricane occurred on December 30 Scale, tying the single- after the end of the recog- season record for intense nized season. hurricanes set in 1950.

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 Impacting Florida

Hurricane Dennis re-intensified to a cat- dential property losses from Hurricane Dennis at $450 egory 4 hurricane over the eastern Gulf of Mexico af- million.3 ter making landfall in Cuba and then weakened to a category 3 hurricane before making landfall on July Hurricane Katrina will perhaps be recorded 10, 2005 over Santa Rosa Island between Navarre as the most devastating hurricane in the history of Beach and Pensacola Beach in the Florida Panhandle. the United States. Katrina made its first landfall as a Landfall was approximately in the category 1 hurricane near the same position as Hurricane Ivan in Miami-Dade/Broward County 2004. Considerable storm surge re- line on August 25, 2005 and lated damage occurred near St. moved southwestward across Marks, Florida, well east of the South Florida. Katrina also landfall location. Heavy rainfall brought heavy rains and sus- and flooding occurred across much tained tropical storm force of Florida.2 The Florida Office of winds to portions of the Insurance Regulation estimates to- Florida Keys before entering tal losses at $1.2 billion and 54,000 the Gulf of Mexico. Once in the claims. ISO’s Property Claims Ser- Gulf, Katrina strengthened sig- July 9: Hurricane Dennis vices estimates the personal resi- nificantly to a category 5 with

5 a peak wind intensity of 175 mph. and deadly hurricane that signifi- Katrina made its second landfall cantly impacted the Florida Keys. on August 29, 2005 in While the center of Hurricane Rita Plaquemines Parish, Louisiana as did not make landfall in the Florida a category 3 storm. Katrina pro- Keys, it reached category 2 inten- duced catastrophic damage and sity as the center passed approxi- August 28: Hurricane Katrina hundreds of casualties in the New mately 50 miles south of Key West Orleans area, along the Mississippi Gulf coast, and in on September 20, 2005. Rita produced storm surge of South Florida. Katrina was directly responsible for up to five feet in portions of the Keys and caused severe an estimated 1,200 deaths in the United States mak- flooding. After Rita entered the Gulf of Mexico, she in- ing it the deadliest U.S. hurricane since the Palm tensified from a category 2 to a category 5 in about 24 Beach/Lake Okeechobee hurricane of September hours with a peak wind intensity of 175 mph. Rita weak- 1928. ened to a category 3 and made landfall on September 24, 2005 just east of the Texas/Louisiana border between Katrina also caused an estimated $80 billion Sabine Pass and Johnson’s Bayou.2 ISO’s Property in damage making it the costliest U.S. hurricane on Claims Services estimated Florida’s total insured losses record.2 ISO’s Property Claims Services estimated from Rita at $23 million and 8,000 claims with personal Florida’s total insured losses at $468 million and residential property losses estimated at $9 million and 110,000 claims with personal residential property 3,000 claims.3 losses estimated at $325 million and 85,000 claims.3 Hurricane Wilma was the most intense At- Hurricane Rita was an intense, destructive, lantic hurricane on record while in the Caribbean on

September 21: Hurricane Rita October 24: Hurricane Wilma

6 October 19, 2005 with maximum sustained winds near Total FHCF loss payments for the 2005 sea- 185 mph and the lowest central pressure ever recorded son, as of December 31, 2005, were $248.3 million. The at 882 millibars. Wilma emerged as a category 2 hur- year-end proof of loss reports indicated that FHCF ricane over the Gulf of Mexico after making landfall losses were expected to be $2.5 billion, but the total on October 21, 2005 as a category 4 hurricane over the liability of the FHCF is not known at this time. Yucatan Peninsula. Wilma strengthened, turned northeastward, and accelerated toward the southern The unparalleled 2004 and 2005 hurricane Florida peninsula. On October 24, 2005, Wilma made seasons had a tremendous economic impact on the landfall near Cape Romano as a category 3 hurricane Florida insurance market. The four significant hurri- and moved across Florida in less than five hours. canes during the 2004 season – Charley, Frances, Ivan, Wilma moved into the Atlantic just North of Palm and Jeanne – created 1.66 million insurance claims Beach as a category 2 hurricane. Wilma caused 35 resulting in $20.9 billion dollars of insured losses in deaths in Florida and more than 6 million people lost the Florida market, based on data reported to the Of- power in the state.2 ISO’s Property Claims Services fice of Insurance Regulation’s disaster reporting data estimated Florida’s total insured losses from Wilma system. Insurers had losses of $11.3 billion, the rein- at $6.1 billion and 750,000 claims.3 However, some surance market had losses of $5.75 billion, and the modeled loss estimates exceed this figure for residen- FHCF had losses of $3.85 billion. Claim and loss sta- tial property losses. tistics are still in development and being reported for the four significant hurricanes during the 2005 sea- As of December 31, 2005, of the 205 FHCF son – Dennis, Katrina, Rita, and Wilma. These four participating insurers, 99 insurers were expected to storms are estimated to have generated 1.17 million trigger coverage and 10 insurers were expected to ex- insurance claims and at least $9.3 billion in insured haust their FHCF maximum limits of coverage for the losses in Florida.4 2005 hurricane season. Insurers are required to ab- sorb a retention, which acts like a deductible, prior to 1. “Summary of 2005 Atlantic Tropical Cyclone Activity and Verification of Author’s triggering FHCF coverage. An individual insurer’s Seasonal and Monthly Forecasts”, 18 November 2005, William M. Gray and Philip J. Klotzbach with special assistance from William Thorson, Department of Atmo- retention (deductible) is determined by multiplying spheric Science, Colorado State University its reimbursement premium by a multiple which is 2. National Hurricane Center, Tropical Prediction Center, 2005 Tropical Cyclone Monthly Summary, www.nhc.noaa.gov/archive/2005/tws calculated by dividing the $4.5 billion industry reten- 3. “Key Facts from Florida’s Nightmarish 2004 & 2005 Hurricane Seasons”, Florida Insurance Council, December 5, 2005 tion by the FHCF’s aggregate reimbursement pre- 4. Task Force on Long-Term Solutions for Florida’s Hurricane Insurance Market mium assuming all insurers select 90% coverage. Office of Insurance Regulation Draft Report as of February 15, 2006

7 Operational Activities

In addition to activities related to the hurri- • Invitation to Negotiate for Loss Reimbursement cane season, other major FHCF activities for the past Examination Services fiscal year included: • A Strategic Planning Summit • A Participating Insurers Workshop • Six meetings of the FHCF Advisory Council • Examiner Training Conferences • Monitoring and responding to proposed legislation • Staff support to the Florida Commission on • Development of the 2005 premium formula Hurricane Loss Projection Methodology (FCHLPM) • Publication of bonding capacity estimates in • Updating and maintaining the FHCF and FCHLPM May and October web sites • Adoption of six rules • 177 Contract Year 2004 company exams of • Updating of bond documents exposure data were conducted representing 99.71% of FHCF premium

8 Legislation

During a December, 2004 Special Legislative tention (deductible) was reset to $4.5 billion for the 2005 Session, a program was created to reimburse policy- contract year rather than increasing with exposure holders of residential prop- growth. The bill also erty insurance for multiple changed the retention re- deductibles applied by in- quirements an insurer must surers for two or more hur- meet for each covered ricanes after the policy- event. Under the new law, holder had absorbed one an insurer is required to full hurricane deductible. meet its full retention for The program was adminis- the two largest covered tered by the Florida Depart- events. Upon the occur- ment of Financial Services rence of additional covered and would be funded with events, the retention drops up to $150 million out of the down to one-third of the Florida Hurricane Catastro- full retention for each sub- phe Fund (FHCF). At the sequent covered event. conclusion of the program, Old and New Capitol Buildings, Tallahassee, Florida These legislative changes to only $44,646,142.96 had the FHCF should help ad- been transferred by the FHCF for this purpose. The dress participating insurers’ concerns when dealing FHCF is allowed to increase its premiums to recover with multiple hurricanes during a contract year and this cost over a five-year period beginning June 1, lessen the impact of incurring multiple retentions prior 2006. to becoming eligible for reimbursement.

During the 2005 Legislative Session, the FHCF CS/SB 1486 also impacted the Florida Commis- played an active role in analyzing proposed legisla- sion on Hurricane Loss Projection Methodology tion. CS/SB 1486 became law on June 1, 2005 signifi- (FCHLPM), which is staffed by the FHCF. The bill cantly impacting the FHCF and resulting in emer- amended the FCHLPM’s governing statute, Section gency rulemaking. As a result of the bill, the amount 627.0628, Florida Statutes, to provide that the Office of used to calculate the insurance industry aggregate re- Insurance Regulation and the Consumer Advocate

9 must have access to all of the assumptions and fac- HB 1939 was signed into law on June 17, 2005 tors that were used in developing the actuarial meth- and exempted from the open meetings law portions ods, principles, standards, models, or output ranges of a FCHLPM meeting during which trade secrets are before those methods, principles, standards, models, disclosed. The bill also exempted trade secrets pro- or output ranges found by the FCHLPM to be accu- vided to the FCHLPM from the public records law. rate and reliable may be used by an insurer in a rate This bill had a significant impact on the FCHLPM’s filing. The bill also states that the Office of Insurance processes and procedures which were revised in Sep- Regulation and the Consumer Advocate are not pre- tember 2005 to conform with the new law. Since the cluded from disclosing this information in a rate pro- FHCF staffs the FCHLPM, it also added to FHCF re- ceeding. sponsibilities.

10 History of Legislative Changes

1995 • Tax-exempt status granted to the FHCF • The increase in assessment authority additionally • Retention and Payout Multiples created allowed subsequent season capacity to expand to • Three coverage options – 45%, 75%, and 90% $15 billion • Non-residential commercial property insurance • Insurance industry aggregate retention was reset to excluded $4.5 billion and designed to grow with exposure • Exposure reporting date moved to September 1 growth for exposures existing as of June 30 • Emergency assessment authority increased to 6% for • Loss reimbursement preferences provided to debt service on storms occurring in one contract year limited apportionment companies with a 10% aggregate limit for all years 1996 • Emergency assessment base expanded to include • FHCF Finance Corporation created surplus lines with provision for the insurer to collect • Provisions established for issuance of tax-exempt debt the assessments from policyholders as premiums are 1998 paid • Advances provided to limited apportionment • Emergency assessments may be used for debt service companies and residual market mechanisms coverage and may also be used to refinance debt 1999 • Medical malpractice insurers excluded from • Subsequent Season Capacity created emergency assessments for any covered event • Initial Season Capacity temporarily limited to occurring prior to June 1, 2007 $11 billion • Exemption exposure limit increased to $10 million • Emergency assessments set at 4% for debt service on • Selection of reinsurers broadened storms occurring in one contract year and a 6% • Added rulemaking authority to allow for interest aggregate limit applied for emergency assessments charges on late remittances for all years • Added rulemaking authority to allow for the • Limited insurers’ payout except for FRPCJUA and exclusion of certain deductible buy-back and FWUA (now known as Citizens Property Insurance commercial residential excess policies Corporation) • Mitigation appropriations based on the most recent • Obtained authority to examine insurers’ records fiscal year-end audited financial statements related to covered policies and losses • Allocation of excess recoveries between Citizens 2002 Property Insurance Corporation accounts clarified • Added coverage for Additional Living Expense (ALE) • Flexibility provided for ALE coverage • Added coverage for certain Collateral Protection • Audit requirement language changed to reference Insurance Policies “examination” in lieu of “audit” • Provision established for inclusion of a rapid cash 2005 buildup factor • Insurance industry aggregate retention reset to 2004 $4.5 billion and set to grow with exposure growth • Capacity was expanded by increasing emergency • Full retention required for the insurer’s two largest assessment authority sufficient to create $15 billion of covered events and then only one-third of the full capacity and capacity to grow with exposure growth retention required for each subsequent covered event

11 Rulemaking

Specific policies and provisions of the FHCF are 19-8.013, F.A.C. outlined in the rules of the SBA. The rulemaking process Issuance of Revenue Bonds includes workshops, hearings, approval by the FHCF Advi- 19-8.028, F.A.C. sory Council, and adoption by Reimbursement Premium the SBA Trustees. All of the Formula – Adoption of the meetings are open to the pub- 2005-2006 Contract Year lic, and input from participat- Rates ing insurers and all interested parties is encouraged. 19-8.029, F.A.C. Insurer Reporting Require- The rules are con- ments – Adoption of the tinually updated in order to 2005-2006 Data Reporting accommodate new proce- Requirements of Insurer dures and forms necessary Exposure (Data Call) for the administration of the FHCF. This past fiscal year, 19-8.030, F.A.C. the SBA repealed Rule 19- Insurer Responsibilities – 8.031, F.A.C., Hurricane Miti- Establishes certain dead- gation and adopted the fol- lines and other require- lowing rules: ments for insurers required to participate in the FHCF 19-8.010, F.A.C. Reimbursement Contract – Adoption of the 2005-2006 Emergency Rules Reimbursement Contract In response to the 2005 Legislation, Emergency Rule 19ER05-1 (Reimbursement Contract) was promulgated 19-8.012, F.A.C. and became effective on June 1, 2005, incorporating Procedures to Determine Ineligibility and Exemption Addendum No. 1 to the FHCF Reimbursement Con- from Participation in the FHCF tract.

12 FHCF Participating Insurers Workshop

The FHCF hosted its Fifth Annual Participat- • A panel discussion on proposed legislation for the ing Insurers Workshop on May 19 and 20, 2005. The 2005 Legislative Session primary focus of the • Changes to the up- workshop is to edu- coming contract cate participating in- year’s Reimburse- surers on FHCF re- ment Contract and quirements, insurer re- Insurer Reporting sponsibilities, and any Requirements (Data changes to the previ- Call) ous year’s require- • An in-depth review ments and responsi- of the 2004 Hurri- bilities. The workshop cane Season and its also provides an av- impact on the FHCF enue for the FHCF to • A panel discussion receive additional on the 2004 Hurri- comments on its rules cane Season from an and documents. insurance company FHCF staff also focuses on activities of the FHCF and perspective the insurance industry. • An overview of the FHCF bonding process and assessments This year’s workshop opened with guest • The FHCF loss reimbursement examination speaker Lisa Miller, Chief of Staff to the Honorable program and review process Tom Gallagher, Chief Financial Officer, Florida De- • Ratemaking and the use of models partment of Financial Services. Other topics included • Tips for reporting exposure and loss data accurately were: An interactive session was provided on loss • Key legislative changes impacting the FHCF reimbursement reporting to the FHCF with actual sce- and insurers narios from the 2004 events.

13 Examination Programs

The SBA routinely conducts examinations of Previously conducted examinations have re- exposure data submitted by participating companies. vealed several common errors. These include, but are The examinations are limited in scope and are intended not limited to: to verify that participating companies are properly re- porting their exposure. In addition, the examinations • Incorrectly reporting ZIP Codes and construction are used to review a participating insurer’s compliance characteristics (e.g., reporting the mailing ZIP with FHCF data reporting requirements. Code rather than the property location ZIP Code), • Omitting coverages or endorsements to property Every participating company is required to coverage, report its exposure data annually and to generate an • Reporting policies or coverages not to be reported examination file that supports the reported data. (e.g., builders risk, wind exclusion, business interruption), The SBA provides notification to a company • Failure to report percentage deductibles. at least 60 days prior to commencement of an exami- nation. The notification includes detailed instructions The following table reflects the adjustments to the company on the required records needed for made to insurers’ premium as a result of the examina- the examination. All information that supports a tions of exposure data and subsequent resubmissions company’s exposure is subject to examination. to correct errors.

14 FHCF Examination Adjustments As of 12-31-05 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 $2,195,258.73 ($4,315,339.68) ($2,120,080.96) 2004 $482,955.78 ($1,141,013.12) ($658,057.34) 2005 $0 ($17,684,922.12) ($17,684,922.12)

The SBA only conducts loss reimbursement FHCF will provide at least 60 days notice in advance examinations as reimbursements from the FHCF oc- of a scheduled examination and this notification will cur. With the recent events resulting in reimburse- contain detailed instructions on how the company can ments to participating companies, the SBA has further prepare for the examination. The FHCF began exami- developed the loss reimbursement examination pro- nations of companies reporting claims as a result of gram. Prior to the 2004 hurricane season, the FHCF the 2004 events in October, 2005. conducted 18 examinations of companies reporting losses for Hurricane Erin and Hurricane Opal in 1995. Companies are required to retain detailed Given the number of insurers expected to seek reim- records of all reported exposures and losses until the bursements from the FHCF for the 2004 and 2005 hur- FHCF has completed an examination of these specific ricane seasons, the number of exams to be conducted records. Retention of records is imperative since an by the SBA has increased significantly. examination may result in a resubmission of exposure data or an update to loss reports, which could result in These exams are limited in scope and are in- an adjustment to a company’s FHCF premium or loss tended to verify the accuracy of reported losses. The recovery. 15 FHCF Loss Reimbursement In 2004 the FHCF Finance Corporation obtained an upgrade in its credit rating from Moody’s, Standard and Poor’s, and Fitch. Moody’s upgraded the FHCF Prior to 2004, only two hurricanes had resulted credit rating from A1 to Aa3, Standard and Poor’s up- in reimbursement to participating insurers; however, the graded the FHCF credit rating from A+ to AA-, and Fitch 2004 and 2005 hurricane seasons brought numerous loss upgraded its credit rating from A+ to AA. recoveries from the FHCF. For companies submitting complete requests and having no outstanding FHCF is- he FHCF Finance Corporation has validated sues, disbursements were made within 2-7 business days. T the issuance of up to $10 billion of revenue bonds with the Florida Supreme Court. The FHCF Finance Corpo- A recap of FHCF reimbursements to partici- ration also has a United States Internal Revenue Service pating insurers as of year end follows: private letter ruling regarding the ability to issue tax-ex- As of Number of Total Total empt debt. The initial ruling was granted on March 27, 12-31-05 Companies Recovery Expected (In millions) with FHCF Paid (Excess to be 1998 for five years until June 30, 2003. The ruling was Recoveries of Retention) Paid renewed on June 13, 2003 for an additional five years, 1995 Erin, Opal 9 $13 $13 expiring on June 30, 2008. 2004 Charley, Frances Ivan, Jeanne 132 $3,386 $3,850* The FHCF has prepared preliminary bond 2005 documents and has a team of professionals in place to Dennis, Katrina Rita, Wilma 24 $248 $2,586** facilitate a series of bonding transactions should the cash Note: - Total of 137 insurers are expected to seek loss reimbursement from the FHCF for 2004 available to pay claims be exhausted. The FHCF has been - Total of 99 insurers are expected to seek loss reimbursement from the FHCF for 2005 * including reserves ** excluding reserves able to pay all reimbursements out of the FHCF’s cash balance and bonding has not been required to date. As Bonding Program loss data is updated and reported quarterly, the FHCF will monitor the situation for adverse loss development Revenue bonds are required to be issued if the trends that could trigger bonding. FHCF’s cash balance is anticipated to be insufficient to reimburse losses. There are two ways in which rev- The funding source for the repayment of rev- enue bonds can be issued. One is in conjunction with enue bonds issued is through emergency assessments counties or municipalities and the other is through the on all property and casualty lines of business in the state, FHCF Finance Corporation. The FHCF Finance Cor- including surplus lines, but excluding worker’s compen- poration was created in the statute to allow the FHCF sation premiums and temporarily excluding medical greater flexibility in planning. malpractice premiums until June 1, 2007. 16 Estimated FHCF Claims Paying Capacity ($ 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 2005 12.1/14.3 11.9/14.2 3.1 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 2004-2005 fiscal year. reduce such losses, assist the public in determining the ap- propriateness of particular Public upgrades to structures or Contributions in the financing of such up- grades, or to protect local When the Internal infrastructure from poten- Revenue Service (IRS) issued tial damage from a hurri- a private letter ruling grant- cane. Moneys shall first be ing tax-exempt status to the available for appropriation FHCF, it contained a require- under this paragraph in ment that a certain amount of fiscal year 1997-1998. the funds in the FHCF be de- Moneys in excess of the voted to hurricane mitigation $10 million specified in purposes. The purposes this paragraph shall not be are specified in Section available for appropriation 215.555(7)(c), Florida Stat- under this paragraph if the utes: State Board of Administra- tion finds that an appro- Each fiscal year, the Legislature priation of investment in- shall appropriate from the in- come from the fund would vestment income of the Florida jeopardize the actuarial Hurricane Catastrophe Fund an soundness of the fund. amount no less than $10 million and no more than 35 per- cent of the investment income from the prior fiscal year for Beginning in 1999, the Florida Legislature cre- the purpose of providing funding for local governments, ated Section 215.559, Florida Statutes, which annually state agencies, public and private educational institutions, appropriates $10 million from the FHCF to the Depart- and nonprofit organizations to support programs intended ment of Community Affairs for the Hurricane Loss to improve hurricane preparedness, reduce potential losses Mitigation Program.

18 2005 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 $7,177,600

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 $10,000,000 $10,022,400 $10,000,000 $0 $10,000,000

2006 $22,400

Total Funds provided to the State of Florida from the FHCF $119,052,909

19 CCONSUMER IINFORMATION

Following Hurricane Andrew, residential 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 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 meet their responsibilities to Florida residential policyhold- 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 participat- state. It is estimated that coverage purchased through ing insurers, 2) investment earnings, and 3) emer- the FHCF costs insurers between one-fourth to one- gency assessments on all Florida property and casu- third what it would cost in the private reinsurance alty business (including surplus lines, but excluding market. medical malpractice until June 1, 2007, and workers’ compensation). Emergency assessments have never There are several reasons for these cost sav- been levied, but may be necessary in the future if the ings, which include the following: available cash balance of the fund becomes insuffi- cient to reimburse losses to insurers. 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 web site at www.sbafla.com/fhcf. Most of the documents, including the FHCF’s most recent annual The FHCF does not include a factor for profits in report, are published on the web site along with a its rates, neither does it pay reinsurance brokerage current listing of FHCF participating insurers. If you commissions. have additional questions, please feel free to contact the FHCF staff.

20 FHCF AT-A-GLANCE

Fiscal Year 2004-2005 (as of 12-31-05)

Created: November, 1993

No. of Participating Insurers: 205

Premium Billed: $735.6 million

Exposure: $1.53 trillion

Projected Fund Balance: $3.07 billion

Mitigation Funding for 2005: $10 million

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

Bonding Capacity: Initial Season $11.95 billion Subsequent Season $14.20 billion

Emergency Assessments (available): $1,881 million (6%) Initial Season (required) $775.8 million (2.47%) Subsequent Season (required) $935.7 million (2.99%)

Assessment Base: $31.3 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: 90% 6.2876 75% 7.5452 45% 12.5753

Payout Multiple: 20.3915

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

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

2005 Exposure 2004 Exposure Concentration by County Concentration by County ($ billions) ($ billions) Total % of Total Total % of Total County Exposure* Exposure County Exposure* Exposure Palm Beach $150.2 9.84% Palm Beach $126.3 9.74% Broward 138.6 9.08 Miami-Dade 115.3 8.89 Miami-Dade 134.6 8.81 Broward 113.3 8.74 Orange 91.9 6.02 Orange 79.1 6.10 Hillsborough 87.3 5.72 Hillsborough 74.0 5.71 Pinellas 77.8 5.10 Pinellas 69.1 5.33 Lee 67.3 4.41 Lee 55.7 4.30 Duval 63.1 4.13 Duval 54.4 4.20 Collier 51.5 3.37 Collier 44.6 3.44 Brevard 48.5 3.18 Brevard 41.2 3.17 Other 616.1 40.34 Other 523.6 40.38 Total $1,526.9 100.00% Total $1,296.6 100.00%

79% of the FHCF exposure is located in Florida’s thirty-five coastal counties, making Florida particularly vulnerable.

*Updated as of 12/31/05 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 49 20.8% 1.00% 1 0.4% 0.000% 186 78.8% 99.00%

2005/06 31 15.1% 0.50% 0 0.0% 0.000% 174 84.9% 99.50%

23 Statistical Summary as of 12/31/05 ($ 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 50.5 49 04/05b 0.619 8.9 6.1 15.0 24.24 1,242.8 187 05/06 0.736 11.9 3.1 15.0 20.39 1,526.9 205

(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 05/06 12.57530 7.54520 6.28760

24 2005 TROPICAL CYCLONES IN THE ATLANTIC BASIN TS Arlene H Ophelia TS Bret H Philippe Number of Insurers Having Losses in 2005 H Cindy H Rita H Dennis H Stan H Emily TS Tammy TS Franklin H Vince TS Gert H Wilma TS Harvey TS Alpha H Irene H Beta TS Jose TS Gamma H Katrina TS Delta TS Lee H Epsilon H Maria TS Zeta H Nate 31431 33 35 88 Over $100 million $25 million No $5 million Less Than TS Tropical Storm $500 million to $500 million to $100 million Losses to $25 million $5 million $7.893 Billion incurred ultimate loss reported as of 12/31/05 H Hurricane Storms making landfall in Florida The FHCF was required to pay losses for the 2005 hurricane season.

25 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. Top 10 Most Expensive U.S. Catastrophes Insured Loss (in $ millions) Dollars In 2005 Rank Date Peril When Incurred Dollars 1 Aug. 2005 Hurricane Katrina $38,100 $38,100 2 Aug. 1992 Hurricane Andrew 15,500 21,579 3 Sep. 2001 World Trade Center, Pentagon terrorist attacks 18,800 20,716 4 Jan. 1994 Northride, CA earthquake 12,500 16,475 5 Oct. 2005 Hurricane Wilma 8,400 8,400 6 Aug. 2004 Hurricane Charley 7,475 7,729 7 Sep. 2004 Hurricane Ivan 7,110 7,352 8 Sep. 1989 Hurricane Hugo 4,195 6,608 9 Sep. 2005 Hurricane Rita 5,000 5,000 10 Sep. 2004 Hurricane Frances 4,751 4,751

(1) Property coverage only. As of November 2005. Source: ISO; Insurance Information Institute.

26 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 II 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 Marcie Vernon, CPM State of Florida Senior Attorney Audit Program Analyst The Capitol Ph: (850) 413-1341 Ph: (850) 413-1345 Tallahassee, FL 32399-0300 e-mail: [email protected] e-mail: [email protected]

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

(as of 12/31/05) 27 FHCF Advisory Council Members

John Auer, CPCU (Vice Chair) Leslie Hudson Robert M. Peduto American Strategic Insurance Corp. WESH-TV GE Insurance Solutions St. Petersburg, FL Winter Park, FL Overland Park, KS

Leslie Chapman-Henderson William H. Huffcut Michael J. Svaldi FLASH, Inc. Tallahassee, FL Miami, FL Tallahassee, FL Larry Johnson, FCAS, MAAA Joseph Varon, P.E. (Chair) Jim W. Henderson, CPA, CPCU Allstate Insurance Company Quick Tie Products, Inc. Brown & Brown, Inc. Northbrook, IL Jacksonville, FL Daytona Beach, FL

FHCF Service Providers

Financial Services: Exposure Loss Examination Services: Raymond James & Associates Examination 880 Carillon Parkway Services: St. Petersburg, FL 33716 Examination Resources, LLC Ph: (727) 567-1288 Atlanta, GA Timothy J. Butler, CFE, ARe, CPM President Regulatory Insurance Consulting Financial Auditing Administrative Services, Inc. Services: Services: Tallahassee, FL Kevin Machia, CFE Ernst & Young LLP Paragon Strategic Solutions Inc. Montgomery, VT Minneapolis, MN 3600 American Boulevard West Suite 700 Wendell McDavid, AIE Minneapolis, MN 55431 Ellenwood, GA Ph: (800) 689-3863 James E. Salter, CPA, CFE President BD Regulatory Services, LLC Actuarial Consulting Williston, VT Services: Harold S. Tattershall, AIE San Antonio, TX Paragon Strategic Solutions Inc. 3600 American Boulevard West Suite 700 Minneapolis, MN 55431 Ph: (800) 689-3863

28 AUDITED FINANCIAL STATEMENTS

Financial Statements and Other Financial Information Florida Hurricane Catastrophe Fund Years ended June 30, 2005 and 2004

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, 2005 and 2004. 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. We were not engaged to perform an audit of the Florida Hurricane Catastrophe Fund’s internal control over financial reporting. Our audits included consideration of internal control over financial report- ing as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Florida Hurricane Catastrophe Fund’s internal control over financial reporting. Ac- cordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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, 2005 and 2004, 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 1, 2005, 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.

Minneapolis, Minnesota September 1, 2005, except for Note 10, as to which the date is October 31, 2005

A Member Practice of Ernst & Young Global 29 Florida Hurricane Catastrophe Fund Statements of Net Assets (In Thousands) June 30 2005 2004 Assets Current assets: Cash and cash equivalents $ 1 $ 35,005 Short-term investments 2,488,541 3,477,920 Security lending receivable 1,361 1,245 Security lending collateral 716,963 954,050 Accrued interest 7,009 8,383 Loss reimbursement advances receivable 20,485 – Excess loss payments receivable 704 – Premiums receivable, net 67 2 Total current assets 3,235,131 4,476,605

Long-term assets: Long-term investments 819,180 1,989,587 Capital assets, net of accumulated depreciation of $94 and $85 for June 30, 2005 and 2004, respectively 10 15 Total long-term assets 819,190 1,989,602 Total assets $4,054,321 $6,466,207

Liabilities and net assets Current liabilities: Hurricane losses: Unpaid hurricane losses $ 925,827 $ – Losses payable 22,619 – Obligation under security lending agreement 699,292 951,017 Premium refunds payable 19 – Accrued expenses 1,712 1,134 Pending investment purchases – 34,998 Security lending pending investment purchases 17,696 2,781 Total current liabilities 1,667,165 989,930

Long-term liabilities: Compensated absences, net of current portion 92 85 Total long-term liabilities 92 85 Total liabilities 1,667,257 990,015

Net assets: Unrestricted 2,288,307 5,476,155 Invested in capital assets, net of related debt 10 15 Restricted by legislature 98,725 – Restricted for hurricane mitigation 22 22 Total net assets 2,387,064 5,476,192 Total liabilities and net assets $4,054,321 $6,466,207

See accompanying notes.

30 Florida Hurricane Catastrophe Fund Statements of Revenues, Expenses, and Changes in Net Assets (In Thousands) Year Ended June 30 2005 2004 Operating revenues: Current contract year premium revenue $ 617,208 $ 488,465 Prior contract year adjustment: Premium billed 2,020 1,729 Premium refunded (2,276) (1,612) Premium interest 137 (27) Net premium revenue 617,089 488,555

Net interest on loss disbursements and adjustments 1,118 – Total operating revenues 618,207 488,555

Operating expenses: Hurricane losses 3,750,000 – Administrative and actuarial fees 2,409 2,305 Other professional fees 915 789 Personnel expenses 684 659 Depreciation 9 15 Other 144 160 Total operating expenses 3,754,161 3,928

Operating (loss) income (3,135,954) 484,627

Nonoperating revenue (expense): Investment income 107,689 56,953 Investment advisor fees (685) (882) Security lending income 20,744 10,864 Security lending expense (19,076) (8,808) Security lending net appreciation (571) 418 Total nonoperating revenue 108,101 58,545 (Loss) income before transfers (3,027,853) 543,172

Transfers to other funds (61,275) (10,000) Change in net assets (3,089,128) 533,172

Net assets, beginning of year 5,476,192 4,943,020 Net assets, end of year $2,387,064 $5,476,192

See accompanying notes.

31 Florida Hurricane Catastrophe Fund Statements of Cash Flows (In Thousands) Year Ended June 30 2005 2004 Operating activities Premium received $ 617,043 $ 488,459 Hurricane losses paid (2,479,869) – Administrative and actuarial fees (2,293) (2,219) Loss reimbursement advances and related interest (341,756) – Other professional fees (848) (810) Personnel expenses (677) (648) Other operating expenses (137) (149) Net cash (used in) provided by operating activities (2,208,537) 484,633

Investing activities Purchases of investments (102,453,214) (65,142,090) Sales and maturities of investments 104,585,517 64,618,062 Interest received 101,523 83,276 Investment advisor fees (718) (879) Security lending 1,705 2,011 Net cash provided by (used in) investing activities 2,234,813 (439,620)

Financing from noncapital activities Transfers to other funds (61,275) (10,000)

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

Net (decrease) increase in cash and cash equivalents (35,004) 35,002 Cash and cash equivalents at beginning of year 35,005 3 Cash and cash equivalents at end of year $ 1 $ 35,005

See accompanying notes.

32 Florida Hurricane Catastrophe Fund Reconciliations of Operating Income to Net Cash Provided by Operating Activities (In Thousands) Year Ended June 30 2005 2004 Operating (loss) income $(3,135,954) $484,627 Adjustments to reconcile operating (loss) income to net cash (used in) provided by operating activities: (Increase) decrease in premiums receivable, net (65) 118 Increase (decrease) in premium refunds payable 19 (214) Increase in unpaid hurricane losses 925,827 – Increase in losses payable 22,619 – Increase in loss reimbursement advances receivable (20,485) – Increase in excess loss payments receivable (704) – Increase in accrued expenses 197 87 Depreciation 9 15 Net cash (used in) provided by operating activities $(2,208,537) $484,633

See accompanying notes.

Florida Hurricane Catastrophe Fund Notes to Financial Statements June 30, 2005 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 authorized primary insurers of habitational structures with wind/hurricane coverage in the state of Florida. Premiums are calculated for each of the ap- proximately 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, coverage selected, and deductions. The Fund is administered by the State Board of Administration of Florida (SBA), which has contracted for 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.

33 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 Governmental Accounting Standards Board (GASB) pronouncements and only Financial Accounting Standards Board pro- nouncements 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 assessments; 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 property and casualty business in this state. The Fund, therefore, has no risk that it will be unable to meet its contractual obligations to participating insurers because its obligation is limited to its ability to pay.

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

34 value, and the fair values are primarily obtained from independent quoted market prices. No investments were recorded at amortized cost as of June 30, 2005 and 2004. 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. Invest- ment 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.

Loss Reimbursement Advances Receivable

Certain companies may qualify for advances from the Fund, which are in essence loans based on a company’s potential recoveries from the Fund (e.g., based on incurred losses rather than paid losses). Loss reimbursement advances receivable represent amounts currently outstanding on these advances, including accrued interest.

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, $42,000 in 2005 and $43,000 in 2004, 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.

35 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 the Fund’s 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 December in- stallment. For the contract years ended May 31, 2005 and 2004, the interest rate was 1.65% for overpayments of premium and 4.65% for underestimated payments.

Hurricane Losses

Hurricane losses represent the estimated ultimate cost of all reported and unreported claims incurred during the year that exceed the participating insurers’ individual company retention levels. The reserves for unpaid claims are estimated prima- rily by management’s review of reported loss information obtained from the participating insurers. Although considerable variability is inherent in such estimates, management believes that the reserves for hurricane losses are adequate. The esti- mates are continually reviewed and adjusted as experience develops or new information becomes known, and such adjust- ments are included in current operations.

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 2004–2005 and 2003–2004, $10,000,000 and $10,000,000, respectively, was appropriated from the Fund, and $22,400 was available from prior years. The remaining $22,400 available for transfer in fiscal year 2004–2005 has been restricted in the June 30, 2005, net assets for future transfer.

36 Pursuant to Chapter 2004-480 of House Bill Number 9A, the Legislature appropriated $150,000,000 for the Hurricane Mul- tiple Deductible Reimbursements Program for reimbursements to residential property insurance policyholders for the ex- pense of multiple hurricane deductibles. Of this appropriation, $51,275,300 had been paid and $98,724,700 remained re- stricted as of June 30, 2005.

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, 2005, the Fund held the following investments (in thousands):

Fair Value Weighted Average Investment Type Maturity (Days) Certificates of deposit $ 99,998 23 Commercial paper 1,651,756 11 Corporate bonds and notes 859,109 35 U.S. agencies callable 347,990 82 U.S. agencies callable stepped 348,868 364 Total fair value 3,307,721 Portfolio weighted average maturity 62 Securities lending short-term collateral investment pool 716,963 26 $4,024,684

Interest Rate Risk

Liquidity being a primary concern, the investment policy objective is to invest in highly liquid, relatively short-term invest- ment strategies which are reviewed on an annual basis to ensure the appropriateness of the strategic goal. The Fund utilizes the weighted average maturity method to limit exposure to interest rate risk. In accordance with the policy, no individual security shall have a final maturity date longer than five years and the weighted average maturity of the portfolio shall not exceed 365 days. For purposes of this calculation, the maturity date is assumed to be the next reset date rather than the stated maturity.

At June 30, 2005, the Fund held $348,868,706 in callable stepped notes issued by the Federal Home Loan Bank System. A step- up note grants the issuer the option to call the note on certain specified dates. At the call date, should the issuer not call the note, the coupon rate of the note increases (steps up) by an amount specified at inception.

37 Credit Risk

Funds are invested 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. The investment policy further states that all securities must be investment grade at the time of purchase. For short-term ratings, this has been defined as the highest applicable rating by at least one nationally recognized statistical rating organization. For long-term ratings, this has been defined as BBB or better by at least two nationally recognized statistical rating organizations. The schedule below provides the credit quality ratings by Standard and Poor’s and Moody’s Investor Services at June 30, 2005 (in thousands).

Investment Type Fair Value S&P Moody Certificates of deposit $ 99,998 A Not rated Commercial paper 33,155 A-1 Not rated Commercial paper 1,589,230 A-1 P-1 Commercial paper 29,371 Not rated P-1 Corporate bonds and notes 35,000 AAA Aaa Corporate bonds and notes 49,975 AA Not rated Corporate bonds and notes 35,000 A-1 Aaa Corporate bonds and notes 345,020 A Aa Corporate bonds and notes 240,260 A A Corporate bonds and notes 153,854 A Not rated U. S. agencies 696,858 AAA Aaa Total fair value 3,307,721

Securities lending short-term collateral investment pool 716,963 Not rated Not rated $4,024,684

Concentration of Credit Risk

Securities of a single issuer shall not represent more than 5% of portfolio amortized cost (excluding U.S. Treasuries and Agencies) if less than one year to final maturity. If greater than one year to final maturity, single issuer exposure will be limited to 3% of portfolio amortized cost. At June 30, 2005, the Fund held $609,495,957 in U.S. Agencies issued by the Federal Home Loan Bank System which represents 18.4% of total investments.

Custodial Credit Risk

Custodial credit risk is defined as the risk that the Fund may not recover securities held by another party. The Fund does not have a formal investment policy for custodial credit risk. At June 30, 2005, all investments held were either insured or registered and held by the Fund or its agent in the Fund’s name.

Foreign Currency Risk

No exposure to foreign currency risk existed at June 30, 2005.

38 Securities Lending Transactions

The Fund, under authorization of Section 215.47(16) of the Florida Statutes, engages in security lending transactions. Cash collateral invested in the lending agent’s short-term investment pool at June 30, 2005 had a weighted average maturity of 26 days. There was no credit risk exposure to borrowers at year-end. The investment pool is not rated.

The fair value of the Fund’s investments and security lending collateral is as follows (in thousands):

June 30 2005 2004 Short-term investments Investments: Certificates of deposit $ 99,998 $ 224,951 Commercial paper 1,651,755 2,360,843 U.S. government and federally guaranteed obligations – 198,188 Federal agencies 447,929 – Repurchase agreements – 1 Corporate bonds and notes, fixed rate – 28,370 Corporate bonds and notes, variable rate 288,859 665,567 Total short-term investments $2,488,541 $3,477,920

Long-term investments Investments: Certificates of deposit $ – $ 50,000 Federal agencies 248,930 927,527 Corporate bonds and notes, variable rate 570,250 1,012,060 Total long-term investments $ 819,180 $1,989,587

Security lending short-term collateral investment pool $ 716,963 $ 954,050

4. Security Lending

The Fund has a contract with Dresdner Bank to act as a lending agent in the performance of security lending transactions. Under the security lending program, Dresdner Bank delivers various 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 Dresdner Bank’s credit department, and Dresdner Bank is 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 loaned securities except in the event of borrower default. No violations of legal or contractual provisions occurred, and no losses were incurred due to borrower or lending agent defaults in 2005.

The collateral held represents 102% in 2005 and 101% in 2004 of the market value of the securities lent. Dresdner Bank monitors daily the market value of the securities lent and requests 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, 2005 or 2004, because the amounts the Fund owes the borrowers exceed the amounts the borrowers owe the Fund.

39 The collateral held as assets is 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, 2005 and 2004, are as follows (in thousands):

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

2005 U.S. obligations $686,840 $699,292 $716,963 2004 U.S. obligations 937,128 951,017 954,050

As of June 30, 2005 and 2004, the Fund held $699,291,575 and $951,017,288, respectively, of cash collateral from Dresdner Bank. The cash was reinvested in various short-term instruments as authorized by the security lending agreement. Maturi- ties 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, 2005 and 2004, is as follows (in thousands): Accumulated Equipment Depreciation Net 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 Additions 4 (9) (5) Sales or disposals (1) 1 – Balance as of June 30, 2005 $103 $(93) $10

6. Hurricane Losses

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. Hurricane losses incurred for the year ended June 30, 2005, were $3.75 billion. Hurricane losses paid during the year ended June 30, 2005, were $2.82, billion resulting in remaining reimbursable losses of $926 million at June 30, 2005. There were no hurricane losses for the year ended June 30, 2004.

40 7. Compensated Absences

Compensated absences were as follows (in thousands):

Balance as of June 30, 2003 $119 Increases 63 Decreases (54) Balance as of June 30, 2004 128* Increases 59 Decreases (53) Balance as of June 30, 2005 $134*

* Includes long-term and short-term balances, of which $42 and $43 is estimated due within one year of June 30, 2005 and 2004, respectively.

8. Premium Revenues

Fiscal year premiums, net of prior contract year adjustments, as reported in the statements of revenue, expenses, and changes in net assets, relate to contract years as follows (in thousands): Year Ended June 30 2005 2004 Contract year 2004 $617,262 $ – Contract year 2003 (236) 488,329 Contract year 2002 63 (28) Contract year 2001 – 291 Contract year 2000 – (37) $617,089 $488,555

9. Related Parties

The Fund paid the SBA approximately $760,000 and $957,000 in the fiscal years ended June␣ 30, 2005 and 2004, respectively, for investment advisory services.

10. Subsequent Events

The state of Florida was hit by four hurricanes during July through October 2005. These hurricanes, at the time they im- pacted Florida, were: category 3 Hurricane Dennis on July␣ 10, category 1 Hurricane Katrina on August 25, category 1 Hurri- cane Rita on September 20, and category 3 Hurricane Wilma on October 24. The participating insurers are required to submit a Proof of Loss Report for each storm by December 31, 2005. The Fund’s liability for losses will not be known until that time. Preliminary modeling results indicate that the Fund should have sufficient unrestricted net assets to cover this liability.

41 OTHER FINANCIAL INFORMATION

Report on Internal Control Over Financial Reporting and on Compliance and Other Matters 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, 2005 and 2004, and have issued our report thereon dated September 1, 2005. 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.

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 an opinion 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 reportable condition in which the design or operation of one or more of the internal control compo- nents does not reduce to a relatively low level the risk that misstatements caused by error or fraud 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.

Compliance and Other Matters

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 or other matters that are required to be reported under Government Auditing Standards.

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.

Minneapolis, Minnesota September 1, 2005

42 Hurricane Dennis, July 8, 2005

PHOTO CREDITS: FEMA, NASA, NOAA 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