New Probity and Transparency Expectations, Developments and Regulations Relative to the Financial Stability Ratings ® P

1. New Probity and Transparency Expectations, Developments and Regulations Relative to the Financial Stability Ratings® Process Robert M. Warren, CPA, CPCU Demotech, Inc.

2. Demotech, Inc. • Incorporated in 1985, Demotech, Inc. is a financial analysis and actuarial services 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 Florida Office of Insurance Regulation (then DOI) to develop FSRs for Florida “take out” insurers to depopulate the residual market. • 2005 - Accepted by HUD for rating Professional Liability insurers of long term care facilities • 2009 - Received carve-back on insolvency provision from several insurance agents’ errors and omissions insurance carriers. • 2010 - Participant in independent Florida State University and Wharton School studies evaluating insurer financial ratings.

3. Serious About Solvency® - Our Perspective Demotech’s business model is to support financially stable insurers that are unrated or underrated by other services. We will not review or follow insurers once we have concluded they have mediocre financial stability. • Other rating agencies seem to focus on solvency; yet they seem to weigh the ability to accrue and enhance quarterly earnings heavily. • Demotech encourages carriers to focus on long-term solvency. Our perspective encourages carriers to increase loss and loss adjustment expense reserves to adequate as opposed to reasonable levels. • Earnings should be stabilized by booking adequate loss and LAE reserves, not manipulated by accruing loss and LAE reserves at an optimistic level.

4. Demotech, Inc. and Financial Stability Ratings® • Based on review of company financials, reinsurance program and other readily available information, rarely need supplemental information not prepared by carrier • Predominantly quantitative in nature • Created for companies to overcome barriers • Access to markets • Acceptance of policies by third parties • Credibility with insureds, agents, reinsurers, etc • Not regulating companies or setting company policies or practices

5. Financial Stability Rating® Considerations • Balance sheet fundamentals • Management – planning/strategy • Rate adequacy • Operating results

6. Demotech’s Primary Review is Based on Statutory Accounting Financial Statements as filed with the NAIC In addition to statutory accounting, our evaluation includes GAAP and Hybrid Accounting Methodologies Our scope of review and evaluation includes: • Independent Audit Report • Management Discussion and Analysis • Statement of Actuarial Opinion • SEC Filings as Appropriate • Other Required Regulatory Filings

7. Our Initial Review is Quantitative We do not Audit or Review from a Public Accounting Perspective, Demotech is not a Registered Public Accounting Firm. Our Review and Evaluation Process and Procedures are Dependent on the Integrity of Management’s Information and the Quality of the Financial Information Presented in the Financial Statements and Supporting Documents. It is Critical that Demotech Analysts Maintain a Comprehensive Understanding of Current Accounting and Financial Reporting Standards Including but not Limited to: • Corporate Governance • Regulatory Oversight • Enterprise Risk Management

8. Management’s Integrity and Pursuit of Best Practices Demotech is Dependent on Management’s Integrity and Pursuit of Best Practices Standards in the Presentation of Financial Statements and Related Financial Reports. Information that Triggers Further Analysis • Merger or Acquisition Activities • Structural Changes in Capital and Surplus • Intercompany Transactions • Changes in Senior Management, Board Members or Professional Service Providers Demotech supports the various federal, state and local legislative efforts that attempt to mandate management execute their duties and responsibilities with the utmost integrity utilizing a completely ethical and transparent approach in their financial reporting. We do not approach our financial reviews focused on discovering erroneous information whether through acts of omission or commission by management. While it is our expectation that management executes their duties and responsibilities with the utmost integrity utilizing a completely ethical and transparent approach in their financial reporting, we also realize it is incumbent upon us to be aware that may not always be the case.