June 2011

Demotech, Inc. will become the leading provider of innovative solutions to financial analysis issues by focusing our resources on niches presenting opportunity for corporate growth. 2

How We Review and Rate Title underwriters & Value Proposition of Title Insurance 3

 Since 1992 Demotech has been reviewing and rating Title underwriters.  We were the first company to review and rate the entire industry.  Demotech did so two years prior to the secondary mortgage marketplace requirement to have an independent third-party review.  In 1994, Financial Stability Ratings ® of S or better became acceptable, upon the issuance by Fannie Mae of its Announcement

 Financial Stability Ratings ® are reviewed every quarter. This schedule coincides with the availability of quarterly financial information.  Each company is reviewed as a stand-alone entity. Although we may reflect the existence of a well-defined corporate relationship within a group, each and every Title underwriter, regardless of size, is reviewed, analyzed and, when applicable, affirmed every 90 days. 5

 Along with the quarterly analysis and dialogue related to the financial analysis of each Title underwriter, we have frequent discussions related to critical Title industry issues, such as reinsurance, defalcations, alternative distribution methods and loss trends.  Evidence of the effectiveness of our review and analysis process, consider the following: from 1992 to date, no Title underwriter rated A or better has failed. 6

 Each quarter’s financial statement is analyzed to ensure that:  The investment portfolio remains liquid and of a high quality,  Loss and loss adjustment expense reserves remain consistent with the estimate underlying the opinion of the Company’s actuary,  Financial leverage remains within reasonable tolerance,  And other financial criteria continue to meet Demotech’s standards for an FSR of A, Exceptional or higher. 7

 Annually we review:  The latest available financial information,  Statement of actuarial opinion as regards loss and loss adjustment expense reserves  The year-end audit,  The composition of the investment portfolio,  Changes in personnel (if any),  Anticipated changes in the business plan,  Operating philosophy,  Reinsurance treaties or marketing philosophy,  As well as changes in pricing, rate levels or claim philosophy. 8

 Annually we review and/or discuss with the professional who authored the document(s):  The independent audit  Statement of actuarial opinion  Other regulatory requirements 9

Executive summary, page 1: Comparisons of Demotech ratings to other agencies show relative consistency in the factors that drive Demotech ratings compared to agencies such as A.M. Best, Moody’s, Standard and Poor’s, and Fitch. Executive summary, page 5: These results have important public policy implications for insurers, regulators and consumers as they work to better understand the ratings process. Of particular importance to most is the comparability of Demotech ratings to other agencies. Executive summary, page 5: Given that lenders often have requirements related to the use of rated insurers and some states require ratings to operate in a state, the results suggest that Demotech serves an important service within the ratings community and plays a very important role in the insurance market. 10

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Company DPWShare 1Lawyers Title Insurance Corporation $ 156,323, % 2Stewart Title Guaranty Company $ 154,506, % 3Chicago Title Insurance Company $ 132,464, % 4Alamo Title Insurance $ 94,220,2829.8% 5Commonwealth Land Title Insurance Company $ 91,137,4649.5% 6First American Title Insurance Company TX $ 83,433,0898.7% 7Fidelity National Title Insurance Company $ 72,791,7617.6% 8First American Title Insurance Company $ 41,919,9714.4% 9Title Resources Guaranty Company $ 39,825,1774.2% 10Old Republic National Title Insurance Company $ 32,024,2733.3% 11Ticor Title Insurance Company $ 16,924,9771.8% 12United General Title Insurance Company $ 12,382,7361.3% 13Title America Insurance Company $ 10,796,9931.1% 14Title Insurance Company of America $ 8,993,2720.9% 15Security Union Title Insurance Company $ 5,338,4050.6% 16Transnation Title Insurance Company $ 3,249,5850.3% 17Benefit Land Title Insurance Company (Commerce TIC) $ 2,393,9520.2% Texas Total: $ 958,726,698 12

Company DPWShare 1First American Title Insurance Company $ 1,413,493, % 2Chicago Title Insurance Company $ 1,019,054, % 3Lawyers Title Insurance Corporation $ 670,324,0239.2% 4Stewart Title Guaranty Company $ 655,790,4819.0% 5Commonwealth Land Title Insurance Company $ 634,562,5858.7% 6Fidelity National Title Insurance Company $ 426,824,2655.9% 7Old Republic National Title Insurance Company $ 418,269,3465.7% 8Fidelity National Title Insurance Company (NY) $ 314,529,9694.3% 9Ticor Title Insurance Company $ 191,295,3342.6% 10Attorneys' Title Insurance Fund (FL) $ 190,052,6602.6% 11Transnation Title Insurance Company $ 161,432,2082.2% 12United General Title Insurance Company $ 111,803,6931.5% 13American Pioneer Title Insurance Company $ 97,738,5821.3% 14Alamo Title Insurance $ 94,747,2821.3% 15First American Title Insurance Company NY $ 93,436,2871.3% All Other Underwriters $ 787,356, % Countrywide Total: $ 7,280,711,376 13

Company DPWMarket Share 1Stewart Title Guaranty Company $ 210,600, % 2First American Title Insurance Company $ 203,663, % 3Fidelity National Title Insurance Company $ 175,649, % 4Chicago Title Insurance Company $ 138,958, % 5Title Resources Guaranty Company $ 80,125,6057.5% 6Old Republic National Title Insurance Company $ 74,110,6317.0% 7Alamo Title Insurance $ 50,297,0084.7% 8Commonwealth Land Title Insurance Company $ 45,792,3864.3% 9Alliant National Title Insurance Company $ 33,981,0283.2% 10National Title Insurance of New York, Inc. $ 17,889,5691.7% 11North American Title Insurance Company $ 11,670,3201.1% 12Westcor Land Title Insurance Company $ 9,107,0660.9% 13Commerce Title Insurance Company $ 4,847,3520.5% 14WFG National Title Insurance Company $ 2,784,1230.3% 15Sierra Title Insurance Guaranty Company $ 2,496,1290.2% 16National Investors Title Insurance Company $ 2,144,9080.2% 17Southern Title Insurance Corporation $ 197,3200.0% Texas Total: $ 1,064,315, years plus 11%

Company DPWShare 1First American Title Insurance Company $ 2,369,361, % 2Chicago Title Insurance Company $ 1,641,750, % 3Fidelity National Title Insurance Company $ 1,403,221, % 4Stewart Title Guaranty Company $ 1,177,860, % 5Old Republic National Title Insurance Company $ 1,026,516, % 6Commonwealth Land Title Insurance Company $ 535,986,1475.7% 7National Title Insurance of New York, Inc. $ 295,497,7973.1% 8Title Resources Guaranty Company $ 134,064,2891.4% 9Westcor Land Title Insurance Company $ 127,489,0161.3% 10Stewart Title Insurance Company $ 124,694,0251.3% 11North American Title Insurance Company $ 74,415,4250.8% 12Investors Title Insurance Company $ 56,665,3390.6% 13Connecticut Attorneys Title Insurance Company $ 52,391,0040.6% 14Alamo Title Insurance $ 50,297,0080.5% 15Alliant National Title Insurance Company $ 49,970,6620.5% All Other Underwriters $ 334,968,2073.5% Countrywide Total: $ 9,455,149, %

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While Title insurance coverage looks backward from a certain date, P&C insurance coverage looks forward, utilizing a finite future period, to provide coverage. The timeframe of coverage provided and cost containment activities are fundamental differences between Title and P&C insurance. The distinctions have not been properly reflected in financial reporting nor statistical reporting requirements. A focus on the number of matters identified, addressed or otherwise resolved is necessary to put the Title insurance loss and loss adjustment expense ratio and operating ratio in perspective prior to a comparison to P&C insurance.

Subject to the exclusions from coverage, the exceptions from coverage contained in Schedule B and the conditions and stipulations, the Title insurance company, as of the Date of Policy shown in Schedule A, against loss or damage… Coverage is Retrospective. We reviewed the available information, made corrections and revisions, as well as summarized our major findings in Schedules A and B.

In Consideration of the Provisions and Stipulations herein, the Property and Casualty Insurance Company, for the term of this date at 12:01 a.m. to one year later at 12:01 a.m., does insure… Coverage is Prospective. We won’t pay for anything that happened before or after the policy period.

Title is Retrospective Incident must have occurred prior to policy effective date to be considered covered P & C is Prospective Incident must occur within policy period to be considered covered Date of Policy

 Loss adjustment expenses include allocated loss adjustment expenses and unallocated loss adjustment expenses, also called defense and cost containment or other adjusting expense.  Allocated loss adjustment expenses are those expenses, such as attorneys’ fees and other legal costs, that are incurred in connection with specific claims.  Unallocated loss adjustment expenses are all other claim adjustment expenses, such as salaries, utilities and rent apportioned to support the claim adjustment function, although not readily assignable to a specific claim. Postage, cost of claims checks, envelops claim checks are mailed in …

 For a P&C insurer: an expense directly allocated to a particular claim or incident.  Addressing specific defects and everything in Schedules A and B?

 For a P&C insurer: an expense pertaining to handling claims that cannot be specifically attributable to a specific claim.  Your entire preliminary investigation? Looking for situations that need to be cured is unallocated loss adjustment expense. Once found, the time and effort should be allocated loss adjustment expense. ◦ Rent and utilities ◦ Postage and envelopes ◦ Benefits and salaries ◦ Allocation of executive time

 Order Entry ◦ Verify property address ◦ Verify owner(s) ◦ Legal Description  Run the Chain ◦ Run names and nicknames ◦ Determining encumbrances or possible encumbrances ◦ Back ground – determining and indication of legal incompetence – conservator, bankruptcy, etc. ◦ Impairments in chain of Title ◦ Determine adverse claims ◦ Interest which affects tenancy ◦ Property tax

 Examination ◦ Legal Description ◦ Conveyances ◦ Execution ◦ Notarization ◦ Evidence of fraud, forgery, competence, etc.

 Matters Affecting ◦ Covenants and restrictions ◦ Easements ◦ Rights of first refusal ◦ Judgment of lien ◦ Market requirement to cure ◦ Indemnities ◦ Review prior transaction ◦ Application of statute of limitations

 Matters Affecting (cont.) ◦ Update for last minute items ◦ Fallout ◦ Review tax certificate ◦ Reconcile difference with tax discrepancies ◦ Check for outstanding tax sales ◦ Review survey for adverse matters ◦ Verify legal access ◦ Mineral reservations ◦ Geographic posting

 File Work Up ◦ Verify sellers names on contract match vesting ◦ In a refinance, verify borrowers names match vesting ◦ Ensure all Title requirements are addressed on the settlement statement ◦ Comply with terms of real estate contract ◦ Comply with requirements in lender’s closing instructions ◦ Verify borrowers names on loan document match contract

 Closing ◦ Ensure all documents are executed properly ◦ Correctly notarize all appropriate documents ◦ Comply with lender’s funding requirements ◦ Ensure no disbursements are made without all funds being received  Post-closing ◦ Disburse all funds per HUD-1 ◦ Return lender’s package ◦ Record documents in correct order

Once you found a situation that needed to be resolved, no matter how simple or routine, the time and effort on that specific situation would be allocated loss adjustment expense.  Property tax allocation between buyer and seller.  Determining payoffs of liens, each separately.  Alimony, child support.  Patriot Act.  Verification of address, metes and bounds.

 “Allocated loss adjustment expense” or “ALAE” means expenses paid to defend and litigate a claim. These expenses may be internal or external, and include: ◦ Attorney’s fees paid to defend claims; ◦ The cost of engaging experts; ◦ Litigation management expenses; ◦ Fees or salaries for private investigators, hearing representatives or fraud investigators; ◦ Surveillance expenses; ◦ Court costs; ◦ Stenographic expenses; ◦ Fees associated with witnesses and summonses; ◦ The costs to obtain copies of documents.

 Missed lien by a Title professional.  Taxi driver in a fender bender.  No police report, no photos, no witnesses.

Demotech reviewed and analyzed a sample of 114 Title insurance files. The source of data was HUD-1s, commitments and the observations of a licensed Title insurance agent who is also a real estate attorney. Based upon a random sample of 114 files, the Title agents discovery, review and analysis process uncovered 585 matters that needed to be addressed or cured prior to being able to transfer a marketable title. Left unresolved, any of these 585 matters could have resulted in the transfer of a defective title to real property and, therefore, could have resulted in a claim under the Title insurance policy. 36

Based upon our review of the sample, we concluded that 70% of the Title insurance cost on HUD-1s would meet the P&C definitions of allocated or unallocated loss adjustment expense. The estimated loss adjustment expense of 70% does NOT include the losses expected to be paid by the Title underwriter. In Louisiana, the Title insurance loss ratio would represent an additional 8% of Title insurance premium. To estimate the expenses that were considered loss adjustment expenses, we apportioned the costs associated with Section 1100 of the HUD-1, Title insurance expenses, according to the following allocation process: 37

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Lieutenant Governor’s Task Force in Florida

Given the retrospective nature of a Title insurance policy, appreciable loss adjustment expense – unallocated and allocated – must be expended PRIOR to policy issuance. This effort identifies and resolves claims that would otherwise occur absent the analysis. Unfortunately, current financial reporting requirements are based upon the prospective nature of P&C policies, thereby overstating the Title expense ratio and understating the Title loss adjustment expense ratio applicable to Title insurance.

Title insurance coverage is retrospective from the policy’s effective date and remains in force throughout the term of a loan or the ownership of real property. Policies are issued when the Title insurance professional has addressed the issues associated with the marketability of title, i.e. matters have been identified, addressed or resolved. In contrast, P&C insurance coverage is prospective, utilizing a finite future period with a definitive expiration date, to provide coverage for covered incidents that arise during the term of the policy. Events occurring prior to the effective date or subsequent to that date are excluded. The coverage timeframe differential in conjunction with a misunderstanding of Title insurance cost containment activities are not reflected in reporting requirements – financial or statistical. As a result, the value proposition of Title insurance is not properly presented or captured by regulatory authorities.