NRRA 2008 Annual Conference September 24, 2008 If NRRA is campaigning for progress regarding financial ratings, we are your best alternative.

The First Incorporated in 1985, Demotech, Inc. is a financial analysis and actuarial services firm serving the P&C and Title insurance industries. In 1989, we became the first company to review and rate independent regional insurance companies.

Financial Stability Ratings ® We secured approval from Fannie Mae, Freddie Mac and HUD of our Financial Stability Ratings ® of A or better. Since 1989, Demotech has eliminated property insurance cut-throughs, leveled the playing field for specialty insurers and identified financially stable insurers – of all sizes.

HUD On February 1, 2005, HUD accepted our Financial Stability Ratings ® of A or better. ‘Responsible insurance company.’ Access to HUD’s Section 223(f) and Section 232 programs (non-recourse loans).

Demotech, Inc.’s Perspective Focus on Solvency. Demotech, Inc. is Serious About Solvency™. Other rating agencies do not focus on solvency, but their constituencies think that they do. How can we encourage carriers to focus on long- term solvency rather than quarterly earnings?

Symptoms of Insolvency Inadequate Loss and LAE Reserves. Rapid Growth. Inadequate Rates.

Why Assist Financially Stable Specialty Carriers? Unfairly disadvantaged in the marketplace. Cut-through endorsements required by mortgage lenders. Some agents’ E&O coverage excludes insolvency if business is placed with a company unrated or rated less than B+ by the A.M. Best Company. Umbrella insurance requirements.

Overview Of Specialty Carriers There are 1,500+ regional and specialty insurers. They stabilize marketplaces. Some have over a century of service. These carriers have long-standing relationships with policyholders and agents. Overwhelming majority are financially sound. Serve a specific constituency.

Why Do Others Favor Larger Insurers? Magnitude of surplus. Offer broad array of insurance products. Diversified as to geographical exposure. Often have well-known brand names. Access to capital. Good theories, but in practice size and diversity have had limited impact on financial success or risk of insolvency.

There Can Be Many Champions Heavyweightunlimited Cruiserweight200 lbs Light Heavyweight175 lbs Super middleweight168 lbs Middleweight160 lbs Welterweight147 lbs Lightweight135 lbs Featherweight126 lbs Bantamweight118 lbs Flyweight112 lbs

Nationals Near Nationals Super Regionals Regionals State Specialists Coverage Specialists Risk Retention Groups (Coverage Specialists by Statute) Strategic Subsidiaries Surplus Lines Carriers Reinsurers Demotech Company Classification System Introduced in 2007

Why Do We Believe Specialty Insurers Are Under-Rated? Focus on their niche to serve their constituency. May not be widely licensed in numerous states. Do not seek authority to write other lines of business. Purchase extremely conservative reinsurance treaties, thereby forsaking profitability for the stability and consistency required by constituents.

Demotech’s View on Specialty Companies Maintain consistent underwriting – even at the cost of losing marketshare. Financial statements tend to be transparent. Heavy purchasers of high quality reinsurance treaties. Stable relationships with agents and core customers. Neither agent nor insurer will cut and run from a specialty market because they understand and thrive on it.

Summary Insurance agents, brokers and consumers should feel comfortable using specialty carriers. Loss reserves are reasonable (adequate). Reinsurance programs are sound and so are reinsurers. Customer service and underwriting remain more important than meeting an analyst’s projections of quarterly earnings. Focus on the niche that they understand and are familiar servicing.

Conclusion A new idea is first condemned as ridiculous and then dismissed as trivial, until finally, it becomes what everybody knows. - William James

Months of Survival Subsequent to Rating Assignment Source: Demotech, Inc.’s Serious About Solvency dated August 2005; page 4, Exhibit 3.

Months of Survival Subsequent to Rating Assignment Source: Demotech, Inc.’s Serious About Solvency dated August 2005; page 4, Exhibit 3.

Months of Survival Subsequent to Rating Assignment Source: Demotech, Inc.’s Serious About Solvency dated August 2005; page 4, Exhibit 3.