FIGA Finance & Audit Committee Meeting Recap

The Florida Insurance Guaranty Association (“FIGA”) Finance and Audit Committee (“Committee”) met on Monday, June 11, 2007 to discuss general issues of the Committee.

The meeting agenda is enclosed for your review.

Following is a summary of the topics discussed:

Public Finance Working Group Update

The Raymond James representatives (FIGA’s financial and investment planners, investment bankers and asset managers) made a presentation. The representatives noted that FIGA is not “on track” to issue any bonds at this time; however, the organization is preparing itself in the event that bond issuance becomes necessary.

Pursuant to the Florida Insurance Guaranty Association Act (the “Act”), a municipality or county may issue bonds only if “severely” or “substantially affected by a hurricane.” However, Senate Bill 2498, signed into law by Governor Crist on June 11, 2007 and titled, “Relating to Hurricane Preparedness & Insurance,” amends this language so that any Florida municipality or county may issue bonds “to fund an assistance program…for the purpose of paying claimants’ or policyholders’ covered claims…”

Further, the amended Act permits the creation of a legal entity to exercise such powers. Such legal entity, or interlocal agency (“Agency”), will have the ability to assist FIGA by issuing bonds and expediting the payment of covered claims.

The Act requires a minimum of two (2) municipalities or counties to be members of the Agency, although after its creation, the Agency may add member cities and counties.

Although such Agency ideally would be comprised of cities or counties situated in different geographical locations, Panama City Beach and Callaway (both incorporated municipalities of Bay County, Florida) have been the only two (2) cities to express a willingness to join the Agency. Both cities have taken the Agency’s proposal to their respective boards and all of the major financing documents are being prepared and reviewed by FIGA’s entire Finance Team.

The cities should have a response by month-end and Raymond James is confident that these two (2) municipalities will approve the Agency’s proposal. If both city governments adopt the proposal to create/join the Agency, the city boards will meet to authorize bonds and approve form documents. Thereafter, the cities will submit a request to the Leon County Circuit Court for bond validation.

Although there is no immediate benefit on the front-end as regards Agency membership for Panama City Beach and Callaway, on the back-end, if the cities need to issue bonds, they will be reimbursed costs and attorney’s fees. However, at this time, there is no formal agreement between these cities, Raymond James and FIGA.

The Finance Team’s review of the financing documents will occur simultaneously with the validation proceeding and rating agency process. Additionally, disclosure counsel will be preparing the offering documents describing FIGA, the bonds and the assessment process.

Bond rating is completely independent of the two (2) cities involved. The rating agencies–Moody’s Investor Service, Standard & Poor’s and Fitch Ratings–will determine the creditworthiness of a bond and the cost of financing.

There is no minimum amount for bond issuance. However, it has been discussed that $750 million should be the maximum amount for bond validation.

The Florida Property and Casualty market is divided as follows:

30% – Citizens Property Insurance Corporation (“Citizens”)
30% – National Insurance Companies
30% – Florida Domestic Insurers
10% – Others

At present, FIGA is prepared to educate the rating agencies on the Florida market and this product.

A motion to approve the Agency plan as described and to authorize the Committee Chairperson to work with Raymond James in attracting more member municipalities and/or counties passed unanimously. Further, in the event that Panama City Beach and Callaway do not approve the Agency proposal, a motion to authorize the Chairperson to approve other municipalities and counties for membership also passed.

Audit Report

• FIGA reports its financials using a modified cash-basis accounting system.
• There were no major changes or differences in FIGA’s basic accounting policies for the year ending December 31, 2006.
• Raymond James recommendations based on the 2005-2006 fiscal year:

o Vendor Solicitation Process – although the procedures in place are operating effectively and are reasonable, Raymond James recommends that FIGA adopt more formal policies with respect to potential service providers

o Code of Conduct – thorough background investigations are being conducted for those employees who issue checks; more thorough investigations should be instituted with respect to third-party administrators and new employees.

Checklist Overview

The following is a checklist based upon a review of FIGA’s annual audited financial statements and personnel. These items were discussed in an effort to improve FIGA.

• Understanding Roles and Responsibilities

o Management’s communication and performance expectations of the Committee

o Direct access to the independent auditors

o Direct access to the corporate attorneys

o Preparation of minutes and Committee packages at least two (2) weeks prior to the next meeting

Tallahassee/Jacksonville Transition:

• The Director of Claims position has been filled.

• The new Director of Claims will begin his new position in Jacksonville, Florida on June 25, 2007 and will likely transfer to the Tallahassee, Florida office by January 1, 2008.

• He has worked for Travelers for 21 years and has been Director of FIGA’s Claims Committee for the past 8 years.

• Adequate personnel back-up

o Information Technology Network Administrator has until the end of June to decide whether to move to Tallahassee, Florida

o FIGA will out-source if necessary

• Employee Response to move:

o 50/50 – half of the personnel is pleased with the move and half is unsure whether to move with FIGA

o Some employees will be working remotely and will travel to Tallahassee on an as-needed basis

• Understanding the Business

o Challenges faced as a result of changes in administration

o Monitoring Citizens’ Task Force in order to be aware of challenges, timelines and payment of claims

o Improvement recommendations for internal audit controls

o Employee Fraud/Violations – Internal Audit is not aware of anything

o Adequate controls over special or complex transactions

o Legal and regulatory updates from the General Counsel

o Oversight of financial reporting process:

• Assessment of how auditors and managers respond
• Materiality threshold
• Use of standard guidelines
• Regular performance of quality control checks

o Challenging management and identifying areas of difficulty:

• Recording loss reserves
• Actuarial reviews
• Modified cash-basis accounting

o Oversight of financial reporting process:

• Reconciliation and adjustments of cash-basis accounting
• Auditing differences

o Oversight of audit function:

• Results of latest peer evaluation/review – last evaluation/review took place three (3) years ago and the next review will take place this summer
• Quality control procedures of independent auditors
• Planned scope of independent audit – at what point must FIGA notify its internal audit department of additional items to be reviewed? (next meeting will take place October 2007)
• Compensation of independent auditors to insure high quality audits
• Identification of control deficiencies – none this year

Investment Report

• As of March 31, 2007, FIGA had $340 million invested
• The invested monies are evenly split among investment vehicles
• The investments are above the benchmarks
• FIGA’s Investment Policy – if an investments falls below its benchmark for three (3) consecutive months, the Committee must be notified

Florida Department of Financial Services (“FDFS”) Operational Review

The FDFS is conducting a preliminary operational review of FIGA. FIGA’s Plan of Operation (“Plan”) consists of four (4) parts: (1) Operational, (2) Financial, (3) Claims and (4) Information Technology. To date, the DFS has only commented on FIGA’s Information Technology. The FDFS sent an individual certified in Information Technology auditing to FIGA’s offices in order to discuss its concerns with respect to the move to Tallahassee, and the following items were discussed:

• Server room windows
• Server room sprinklers
• Password procedures
• Server room code
• Back-up system

The operational review is ongoing and more information will be provided as the review progresses.

If you have any questions or comments regarding the above summary, please feel free to contact our office.