State Board of Administration Workshop re Insurance Capital Build-up Incentive Program 6/07/06

The State Board of Administration (“SBA”) held a workshop on June 6, 2006, to discuss the Insurance Capital Build-Up Incentive Program established pursuant to Senate Bill 1980. The bill created a $250 million capital build-up incentive program intended to provide funding in the form of surplus notes to residential property insurers under specified conditions. In order to qualify for dollar for dollar matching funds of up to $25 million, an insurer must be an authorized Florida insurer and apply to the SBA no later than July 1, 2006. The SBA has set up a June 15, 2006 deadline for early applications which will be given first priority to this funding. Fifty percent (50%) funding may be available for applications filed from July 2, 2006 to June 1, 2007, if there are funds remaining after review of the initial applications. The surplus note will be repayable to the state at the 10-year Treasury Bond interest rate for a 20-year term adjusted quarterly. For the first three years, the insurer will only be required to pay interest; however, if approved by the Insurance Commissioner, the insurer may pay principal as well. All payments made under the surplus note must be approved by the Insurance Commissioner.

Under the program, an insurer�s existing surplus, new capital contribution and the surplus note must total at least $50 million, and the insurer must commit to meeting a minimum writing ratio of net written premium to surplus of at least 2:1 for the term of the surplus note. All monies that are not loaned by June 1, 2007, will revert to General Revenue.

The Office of Insurance Regulation (“OIR”) is charged with determining on a quarterly basis whether an insurer under the program is meeting the minimum writing ratio. In the event an insurer does not maintain the minimum writing ratio, the SBA may take action in the form of increasing the interest rate of the surplus note, accelerating repayments or shortening the term of the surplus note, all of which are subject to the Insurance Commissioner�s approval. OIR will exercise continued financial oversight to determine whether insurers are operating prudently.

The SBA has developed an application and review process to evaluate insurers applying for the program. The application will require, among other things, basic information about the insurer, the amount requested, a business plan, a reinsurance plan, interrogatories and information on agreements or commitments that may affect the financial strength or business plan of the insurer.

The SBA has developed rules to implement the program containing a time frame and procedures for the consideration of applications, as well as definitions of terms used in the statute and the surplus note. The rules include the following time frames for approving applications:

June 1, 2006 � June 15, 2006: Applications received during this time period will be given priority.

June 15, 2006 � July 1, 2006: If funds remain, applications received during this time period will be reviewed and evaluated.

July 2, 2006 � May 31, 2007: If funds remain, the SBA will evaluate these applications; however, new capital contributed by the insurer must be twice the amount of the state funding requested.

The SBA will only consider complete applications and, once an insurer has submitted an application, any unauthorized contact with the SBA on behalf of the insurer relating to the application could disqualify the applicant. The SBA expects the review process and determination of an application to take up to 10 days. Upon approval under the program, the insurer will be required to notify the SBA after the new capital has been deposited appropriately, at which time the SBA will execute the surplus note. The SBA will not reserve funds in the program for an insurer, even if the insurer�s application has been approved, and will only issue the note if funds remain and upon notification that the approved insurer has deposited its committed capital. All documentation received by the SBA pertaining to the application will be subject to the public records law.

The SBA is required by law to consult with OIR during its review of insurer applications under the program. The SBA will use several criteria when evaluating each company, including the financial strength of the company, the proposed business plan, the effect the surplus note will have on competition, the ability of the insurer to expeditiously meet the minimum writing requirement and the risk of default to the state. The SBA has some flexibility to consider supplemental agreements in the event an insurer cannot satisfy certain requirements of the program. The SBA has drafted a form surplus note, the terms of which may be customized for insurers.

During the workshop, industry representatives specifically expressed concern regarding the requirement that an insurer, under the program, reach the minimum writing ratio of net written premium to surplus of at least 2:1 within 60 days of receiving the proceeds of the surplus note and submit quarterly filings to confirm compliance. Industry representatives emphasized that it would be challenging for insurers to meet this requirement and would impose burdens on many insurers to try to commit to such criteria. Jack Nicholson emphasized that the SBA has flexibility to work with an insurer, if the insurer can provide adequate security to the SBA that there is little financial risk to the state of default under the program.

Another industry concern involves the definition of net written premium. Mr. Nicholson explained that the statute is not clear regarding the definition, and the SBA consulted with OIR and reviewed the Insurance Code in order to produce the current definition. A rule change would be required to amend the definition.

Mr. Nicholson encouraged all interested insurers to apply under the program. He stated that the SBA is aware that there are concerns with the program, and that the SBA is willing to work with insurers. No insurer has yet to submit an application to the SBA under the program.

Attached you will find copies of the workshop�s agenda, presentation, the portion of Senate Bill 1980 pertaining to the Insurance Capital Build-Up Incentive Program, Rule 19ER06-3 regarding the program, the program�s Application and a draft surplus note.

Should you have any questions or concerns, please do not hesitate to contact this office.

Regards,

Fred E. Karlinsky