California Earthquake Authority A public private partnership

1. California Earthquake AuthorityA public private partnership June 30, 2010 Glenn Pomeroy Chief Executive Officer Chris Nance Director of Communications and External Affairs

2. Federal Legislation

3. CEA Claim-Paying Capacity 2010 Financial Structure New Policies sold March: 5,497 April: 6,996 May: 1,545 Total Policies: 816,410 Participating Insurer Assessments $2.8B as of 6/24/10 $0.3B Revenue Bonds Reinsurance $3.1B CEA Capital $3.6B Total: $9.8B Claims-Paying Capacity: 1-in-545 Years

4. Problem Only 12% of residents with homeowners insurance have earthquake coverage. coverage. Uninsured Insured

5. Barriers to purchasing EQ insurance • High-priced premium • High-percentage deductible

6. More than 40% of CEA policyholder premiums spent on reinsurance 1997-2009: Total policyholder premiums $6 billion Reinsurance Costs $2.5 billion Spent on reinsurance $2.5 billion Capital $2.4 billion Reinsurance claims paid: $250,000 *Expenses $1.1 billion • *Major Expense Categories • Agent Commissions • Debt Financing • Participating Insurer Fees • CEA Operations

7. Vision • 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.

8. Solution Catastrophe Obligation Guarantee Act (COGA): • Enables CEA to reduce policyholder costs and deductibles • Allows growth of CEA by reducingdependence 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

9. FederalLegislation S.886: Catastrophe Obligation Guarantee Act Bill Nelson (FL), Dianne Feinstein, and Barbara Boxer (CA) Mary Landrieu (LA) Catastrophe Obligation Guarantee Act of 2009 H.R.4014: California: 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 Louisiana: Charlie Melancon H.R.2555: Homeowners’ Defense Act of 2009 – Title II Ron Klein (FL) and others Approved by House Financial Services Committee 4/27/2010

10. Today: Heavy dependence on reinsurance • Reinsurance: • 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 $10 Billion 2010 Participating Insurer Assessments $2.64 B Revenue Bonds $.3 B COGA Reinsurance $3.2 B $3.6 B CEA Capital Total $9.8 B

11. COGA: An efficient additional layer of protection • Greater financial strength • Significant expense reduction • Reduce heavy dependence reinsurance $10 Billion Post-Event Borrowing 1-300 Participating Insurer Assessments PI attachment point Participating Insurer Assessments Revenue Bonds COGA 1-235 Revenue Bonds Reinsurance Reinsurance CEA Capital CEA Capital

12. COGA allows future CEA growth • Double take up rate over 5 years • Enhance financial strength • Probability of need to borrow – less than 1% Post-Event Borrowing Post-Event Borrowing Participating Insurer Assessments Participating Insurer Assessments Revenue Bonds Participating Insurer Assessments Revenue Bonds COGA FUTURE Reinsurance Revenue Bonds Reinsurance Reinsurance CEA Capital CEA Capital CEA Capital

15. New IAL: Projected Roll-Off With COGA

16. Congressional Research Service March 12, 2010 “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

17. Marketing Incentive Considerations Training + Incentives = Sales

18. Recent earthquakes in California and around the world are prompting… • Inquiries about earthquake insurance from potential policyholders, and • Potential questions about low take-up percentages from policymakers • Chile M8.8 Indonesia M7.7 Mexico M7.2 • Haiti M7.0 Japan M7.0 China M6.9 • Spain M6.9 California M6.5 Taiwan M6.4 • Philippines M6.0 Solomon Islands M6.0 San Diego M5.7 18

19. Recent monthly (net) policyholder increases are greatest in CEA history… • March – 5,497 • April – 6,996 • May – 1,545 19

20. CEA branding research reveals marketing vulnerabilities… • 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 20 20

21. CEA branding research identifies powerful story to tell… • 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” 21

22. CEA marketing objective for consumers… • Communicate consumer offer / benefit: • Catastrophe product, • Financially solid, and • Participating insurer product service expertise 22

23. CEA marketing objective for participating insurers… • Provide marketing incentives: • Training, • Direct mail, and • Paid media 23

24. More policies sold by trained agents… • 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 24

25. CEA considering $1,000 marketing incentive (annually) for each trained agent… • 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 25

26. CEA committed to supporting all participating insurer agents… • CEA information materials, • Three flights of paid media, and • One flight of CEA policyholder outreach 26

27. CEA marketing incentive program represents $5 million commitment… • 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 27

28. CEA marketing incentive program results in no costs for participating insurers… • 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 28

29. CEA marketing incentive program good for consumers, CEA and participating insurers… • 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 29