California Earthquake Authority A public private partnership

June 30, 2010

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Glenn PomeroyChief Executive Officer

Chris NanceDirector of Communications and External Affairs

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2010 Financial Structure

Claims-Paying Capacity: 1-in-545 Years 3

Total: $9.8B

ReinsuranceReinsurance

$3.6B CEA CapitalCEA Capital

$0.3B

$3.1B

$2.8B

Revenue BondsRevenue Bonds

Participating Insurer

AssessmentsParticipating Insurer

Assessments

New Policies sold March: 5,497 April: 6,996 May: 1,545

Total Policies: 816,410as of 6/24/10

Only 12% of residents with homeowners insurance have earthquake coverage. coverage.

InsuredUninsured

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• High-priced premium

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• High-percentage deductible

Spent on reinsurance$2.5 billion

Capital $2.4 billion

*Expenses $1.1 billion

Reinsurance claims paid:

$250,000

1997-2009: Total policyholder premiums $6 billion

Reinsurance Costs$2.5 billion

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*Major Expense Categories• Agent Commissions• Debt Financing• Participating Insurer Fees• CEA Operations

• Reduce proportion of overall expenses made up by reinsurance costs.

• Pass on savings by reducing CEA premiums and deductibles, to prompt increase in take up rates.

• Increase the number of Californians protected by earthquake insurance.

• Maintain CEA’s financial strength.• Reduce the cost to the federal government and

taxpayers in the event of a major earthquake.

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Catastrophe Obligation Guarantee Act (COGA):

• Enables CEA to reduce policyholder costs and deductibles• Allows growth of CEA by reducing dependence on

reinsurance• Commits federal guarantee for post-event borrowing in

the private-debt market• Retains CEA’s financial strength• Reduces costs of recovery for federal government

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Louisiana: Charlie Melancon

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S.886:

H.R.2555:

H.R.4014:

Catastrophe Obligation Guarantee Act Bill Nelson (FL), Dianne Feinstein, and Barbara Boxer (CA)

Homeowners’ Defense Act of 2009 – Title II

Catastrophe Obligation Guarantee Act of 2009California: Loretta Sanchez, John Campbell, Judy Chu, Jim Costa, Sam Farr, John Garamendi, Zoe Lofgren, Grace Napolitano, Linda Sanchez, and Adam Schiff, Lois Capps, Laura Richardson, Lucille Roybal-Allard, Jackie Speier, Michael Thompson, Lynn Woolsey,Barbara Lee, Bob Filner, Michael Honda, Susan Davis, Howard Berman, Brad Sherman

Ron Klein (FL) and others

Mary Landrieu (LA)

Approved by House Financial Services Committee 4/27/2010

Reinsurance:

COGA

$10 Billion

$2.64 B

$.3 B

$3.2 B

$3.6 B

ParticipatingInsurer

Assessments

Revenue Bonds

Reinsurance

CEA Capital

• Constitutes 2/3 of CEA expenses• Requires 40% of policyholder premium• Provides 1/3 of claims paying capacity•1/3 of reinsurance layer provided by one reinsurer

Total $9.8 B

2010

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COGA

$10 Billion

ParticipatingInsurer

Assessments

Revenue Bonds

Reinsurance

CEA Capital

ParticipatingInsurer

Assessments

Revenue Bonds

Reinsurance

CEA Capital

Post-EventBorrowing

• Greater financial strength• Significant expense reduction• Reduce heavy dependence reinsurance

1-300

1-235

PI attachment point

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• Double take up rate over 5 years• Enhance financial strength• Probability of need to borrow – less than 1%

COGA FUTURE

ParticipatingInsurer

Assessments

Revenue Bonds

Reinsurance

CEA Capital

ParticipatingInsurer

Assessments

Revenue Bonds

Reinsurance

CEA Capital

Post-EventBorrowing

ParticipatingInsurer

AssessmentsRevenue Bonds

Reinsurance

CEA Capital

Post-EventBorrowing

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“The penetration of earthquake insurance has been low, and the government, through disaster relief assistance, continues to serve as the predominant bearer of earthquake catastrophe risk.” – page 8

March 12, 2010

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Training + Incentives = Sales

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Inquiries about earthquake insurance from potential policyholders, and

Potential questions about low take-up percentages from policymakers

Chile M8.8 Indonesia M7.7 Mexico M7.2Haiti M7.0 Japan M7.0 China M6.9Spain M6.9 California M6.5 Taiwan M6.4Philippines M6.0 Solomon Islands M6.0 San Diego M5.7

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•March – 5,497•April – 6,996•May – 1,545

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Consumers:•Unaware of the CEA and its role – no relationship•Question how the CEA would administer claims

Agents / Producers:•Not motivated to sell CEA policies•Limited relationships with the CEA

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Position: •The CEA and its network of leading insurance providers give you, your family and community the security you can count on to recover from a major earthquake

Tagline: •The CEA offers you the “Strength to Rebuild”

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Communicate consumer offer / benefit:•Catastrophe product,•Financially solid, and•Participating insurer product service expertise

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Provide marketing incentives:•Training,•Direct mail, and•Paid media

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•Statistical analysis will confirm training value•Future CEA marketing incentives available only for CEA-trained agents•Greater efficiencies from training sessions scheduled by participating insurers•2011 marketing incentives capped at 5,000 agents

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•Three flights of direct mail, paid media•Each flight offers trained agent 200 postage-paid

direct-mail cards•First flight offered with no obligation•Second / third flight requires sale of three CEA

polices before incentives available

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•CEA information materials,•Three flights of paid media, and•One flight of CEA policyholder outreach

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•Produces potential 15,000 new policyholders•Represents potential $10 million increase in annual gross revenue•Annual retention rate greater than 80 percent•New policyholder acquisition costs at 14 percent of average premium•Policyholder retention costs at .5 percent of average premium

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•One week of the CEA’s investment income covers additional potential exposure – $5.6 million

•Net income (after expenses) promotes upward movement of industry assessment layer

•Creates more than $1 million in commission income for agents

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•Consumers learn about CEA offer – get “Strength to Rebuild”•CEA increases the take-up percentage for earthquake insurance•Participating insurers reduce number of homeowner policyholders with earthquake damage who may claim to be uninformed of earthquake risk

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