Assessing the Strength of Insurers: A Complex Combination of Science and Art Joseph L. Petrelli President & Co-Founder Demotech, Inc.

Reality is the leading cause of stress amongst those in touch with it. ~ Albert Einstein 2

Incorporated in 1985, Demotech, Inc. is a financial analysis firm that provides Financial Stability Ratings ® (FSRs) to the P&C and Title insurance industry. Demotech was the first company to have its rating process formally reviewed and accepted by: Fannie Mae (1989) Freddie Mac (1990) HUD (1994 & 2005) 1996 – Worked with the State of Florida Office of Insurance Regulation to develop an FSR assignment process for Florida take out insurers to depopulate the residual market – Approved by HUD for rating Professional Liability insurers for long term care facilities. 3

We were the first company to have its rating process reviewed and accepted by Fannie Mae, Freddie Mac and HUD. Each entity performed its own due diligence. We passed three separate reviews and received approval of our Financial Stability Ratings ® of A, Exceptional or better. 4

In 1996, when the State of Florida, Department of Insurance (now Office of Insurance Regulation), and the secondary mortgage marketplace needed a rating solution, they contacted Demotech, Inc. Today we review and rate 60% of the Homeowners insurance marketplace and have declined to rate insurers comprising 38% of the Homeowners insurance marketplace. 5

On February 1, 2005, HUD accepted our Financial Stability Ratings ® of A or better. Responsible insurance company. Access to HUDs Section 223(f) and Section 232 programs which make no recourse loans available to owners or operators of long term care or nursing facilities. 6

The ultimate security is your understanding of reality. ~ H. Stanley Judd 7

Surplus size. Offer broad array of insurance products. Diversified as to geography. Often have well-known brand names. Access to capital markets. Good theories, however, in practice, size and diversity have had limited impact on the risk of an insolvency. 8

Larger, publicly traded companies set the bar for presenting their case. They have departments focused solely on responding to rating agencies. These departments are staffed by actuaries, CFAs, CPAs, MBAs, CPCUs, etc. They are focused on branding and presenting their employer to the rating agendas in the best possible light. 9

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1. Nationals 2. Near Nationals 3. Super Regionals 4. Regionals 5. State Specialists 6. Coverage Specialists 7. Strategic Subsidiaries 8. Risk Retention Groups 9. Surplus Lines Carriers 10. Reinsurers 11. Companies with less than $1 million in direct premium written 11 *Based on an analysis of data reported by the companies to the NAIC

Focus on their niche to serve their constituency. May not be widely licensed but know their jurisdiction(s) or constituency. Do not seek authority to write other lines, because they know what they do not know! Purchase extremely conservative reinsurance treaties often forsaking short-term profitability for stability, consistency, and survival. 12

They are unfairly disadvantaged in the marketplace. We eliminate cut-through endorsements required by lenders as well as forced placements of insurance for consumers. Some insurance agents E&O coverage excludes insolvency if business is placed with a company unrated or rated less than A, A- or B+ by the A.M. Best Company. We can assist with umbrella insurance requirements. Demotech has been serving specialty carriers longer than anyone else. Our goal is to level the playing field for financially stable insurers. 13

Many founded in the 19 th Century, before the Civil War. Have less infrastructure and can respond more quickly. Less conflict and better communication between agents, departments and management. Have greater corporate memory. Although less likely to report consistent profitability due to relatively high reinsurance costs and expense ratios, extremely well reserved. 14

*20 or fewer state licenses and $100 million or less in admitted assets – 7% of DPW 15

*20 or fewer state licenses and $100 million or less in admitted assets – 48% by count 16

Maintain consistent underwriting approach and process – even if the result is a loss of marketshare. Financial statements are transparent. Heavy purchasers of high quality reinsurance. Relatively high expense ratios due to lower net premium, disciplined underwriting and reinsurance to protect surplus. Typically specialize in a niche that is in a specific jurisdiction. 17

Participate in and are usually covered by guaranty funds. (PA medical malpractice assessments!!) Tend to earn stable relationships with agents and core customers. Avoid ruinous pricing wars. Company does not cut and run from the specialty market(s) they serve because they understand it and thrive on it. 18

Performance is your reality. Forget everything else. ~ Harold Geneen 19

Source: A.M. Best Co.'s Impairment Rate and Rating Transition Study dated May 1, 2009; complement of page 4, Exhibit 2. Demotech, Inc.s Serious About Solvency updated for data as of 12/31/

Source: A.M. Best Co.'s Impairment Rate and Rating Transition Study dated May 1, 2009; complement of page 4, Exhibit 2. Demotech, Inc.s Serious About Solvency updated for data as of 12/31/

Source: A.M. Best Co.'s Impairment Rate and Rating Transition Study dated May 1, 2009; complement of page 4, Exhibit 2. Demotech, Inc.s Serious About Solvency updated for data as of 12/31/

A new idea is first condemned as ridiculous, And then dismissed as trivial, Until finally it becomes what everybody knows. ~William James 23

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