Smaller is BetterThe Case for Supporting Regional Carriers and State SpecialistsIndependent Insurance Agents and Brokers of South Carolina

October 14, 2013

Joseph L. Petrelli, ACAS, MAAA, FCAPresident, Demotech, Inc.

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.

Mission Statement

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Demotech, Inc. is a financial analysis firm specializing in evaluating the financial stability of regional and specialty insurers. Since 1985, Demotech has served the insurance industry by assigning accurate, reliable and proven Financial Stability Ratings® (FSRs) for Property & Casualty insurers and Title underwriters. FSRs are a leading indicator of financial stability, providing an objective baseline of the future solvency of an insurer.

Demotech's philosophy is to review and evaluate insurers based on their area of focus and execution of their business model rather than solely on financial size. This philosophy was the catalyst for the Demotech Company Classification System to stratify and categorize insurers by broad operational categories.

An Introduction to Demotech, Inc.

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Joseph L. Petrelli, President

Sharon M. Romano Petrelli, Vice President

Barry J. Koestler II, Chief Ratings Officer

Robert M. Warren, Client Services Manager

Our Senior Analysis Team

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Mr. Petrelli began his insurance career in 1969. Since that date, he has acquired progressively responsible Property and Casualty (P&C) actuarial and financial analysis experience. He has extensive experience with loss and loss adjustment expense reserve evaluation, product development, and pricing for virtually all P&C and Title insurance products as well as expertise with loss cost filings, Financial Stability Ratings® (FSRs) and merger and acquisition valuations.

He has been actively engaged in the Title insurance industry since 1992. Prior to founding Demotech, Inc. he was employed by a large national P&C insurer, a regional property and casualty insurer and Insurance Services Office.

He is a Member in good standing of the Casualty Actuarial Society, American Academy of Actuaries and the Conference of Consulting Actuaries. Mr. Petrelli has a Bachelors of Actuarial Science from The College of Insurance at St. John’s University and an MBA from The Ohio State University.

Joseph L. Petrelli, ACAS, MAAA, FCAPresident

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Ms. Romano Petrelli began her insurance career in 1981. Since that date, she has acquired progressively responsible Property and Casualty insurance experience including loss cost filings, product development and pricing, Financial Stability Ratings® (FSRs) and Title insurance product development and pricing.

Ms. Romano Petrelli is a co-founder of Demotech, Inc. She is a licensed, albeit dormant, P&C insurance agent in Louisiana, Michigan, North Carolina, Ohio and Pennsylvania. She has served as a director of a Property and Casualty insurance company.

She has also earned the Associate in Insurance Accounting and Finance designation, among others. She is a graduate of Columbus State Community College. Ms. Romano Petrelli was a member of the Chartered Property Casualty Underwriters Society Board of Governors (CPCU). Ms. Romano Petrellis is a Chartered Property Casualty Underwriter (CPCU).

Sharon M. Romano Petrelli, CPCU, AIAF, CCP, ARCVice President

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Mr. Koestler began his insurance career in 1994. Since that date, he has acquired progressively responsible Property and Casualty actuarial and financial analysis experience. He has worked extensively on loss and loss adjustment expense reserve evaluations, product development, and pricing assignments for Property and Casualty as well as Title insurance. Mr. Koestler coordinates the development and assignment of Financial Stability Ratings®

(FSRs).

Mr. Koestler has received the Chartered Financial Analyst (CFA) designation. As a member of the CFA Institute, he is committed to maintaining the professional skills and ethics that contribute to stronger and more ethical global markets.

Mr. Koestler has a Bachelor of Science in Actuarial Science and Mathematics and a Bachelor of Science in Business Administration, Finance and Risk Management and Insurance, from The Ohio State University.

Barry J. Koestler II, CFAChief Ratings Officer

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Mr. Warren began his insurance career in 1977. Since that date, he has acquired experience through increasingly responsible positions in finance and accounting within the Property and Casualty insurance industry. Senior management experience includes operational and administrative management with a proven record of success in designing, developing and implementing successful strategies for profitable growth and balance sheet integrity.

Mr. Warren also has relevant experience relative to corporate governance, business processing systems and implementation, financial analysis, and mergers. Other areas of expertise include asset and cash management, reinsurance, loss reserve evaluation, product development and pricing, budgeting and expense variance analysis.

Mr. Warren is a Chartered Property Casualty Underwriter and a non-practicing Certified Public Accountant (CPA). He holds a Bachelor of Science, Accounting and Business Administration, from Franklin University.

Robert M. Warren, CPA, CPCUClient Services Manager

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Demotech’s business model is to assist financially stable insurers that are unrated or underrated by other rating services. We will not review or follow insurers if we have concluded they have mediocre (or worse) financial stability.

Although other rating agencies purport to focus on solvency; they seem to weigh the ability to accrue and enhance quarterly earnings heavily, a shareholder rather than claimant or policyholder perspective.

Demotech actively encourages carriers to focus on long-term solvency. Our perspective prefers an adequate loss and loss adjustment expense reserve to a merely reasonable level.

Earnings should be supported by adequate loss and LAE reserves, not manipulated by accruing loss and LAE reserves at optimistic level.

Serious About Solvency® - Our Perspective

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Magnitude of surplus. Others believe bigger is better and this impacts their rating assignment process. (Kaminski, PhD, 1999)

Broad array of insurance products can protect the insurer from itself. Diversification as to geographical exposure is another hot button. Well-known names with an established brand. Access to capital because they are publicly traded companies.

In practice, size and diversity have had limited impact on solvency. Realistic premiums, liquid investments, adequate loss and loss adjustment expense reserves and the quality and quantity of reinsurance remain critical to carrier solvency.

Why Do Others Favor Larger Insurers?

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Focus on their niche, not diversified, do not seek authority to write several others lines of business or other geographical jurisdictions.

Not widely licensed because their business model is to be state or regional specialists.

Purchase conservative reinsurance treaties that protect their surplus, ceding potential profitability to retain the financial stability and consistency of underwriting standards required by their agents and insureds.

Others Dismiss Regional and Specialty Insurers Despite Distinct Competitive Advantages

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Maintain consistent underwriting discipline – even when the cost is temporary loss of marketshare to those insurers that underprice.

Publish transparent financial statements. Purchase high quality reinsurance as a surrogate for capital. Maintain stable relationships with agents, core customers and

reinsurers. Focus on niches because they understand them and thrive by serving

sectors where underwriting judgment and expertise make a difference.

Our View on Regional and Specialty Insurers

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Quality and Liquidity of Invested Assets Adequacy of Loss and Loss Adjustment Expense Reserves Quality of Reinsurance (who reinsures you?) Quantity of Reinsurance (what type of reinsurance did you purchase?) Adequacy of Rate Levels Ability to Serve Niche(s) – Business model, not size

Insurance Fundamentals

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Capital adequacy Quality and liquidity of invested assets Loss and loss adjustment expense reserves Premium to surplus and other financial leverage ratios Other underwriting expenses incurred Quality and quantity of reinsurance Adequacy of rate levels

Scale or size does not assist a poorly financed large carrier, i.e. Executive Life Insurance Company or other insolvencies of larger, national carriers.

Financial Considerations

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Demotech’s Company Classification System categorizes property/casualty insurers into one of 11 categories based on an analysis of objective financial data reported by the companies.

The 11 categories that comprise the Demotech system are:

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

Demotech’s Company Classification System™

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Active companies, not in regulatory supervision at 12/31/2012 Individual companies Companies reporting data to the NAIC using the P&C annual and quarterly statement

format No surplus lines companies No risk retention groups No reinsurance companies More than $1,000,000 of direct premium written in each of 2 to 34 states at 12/31/2012 Less than 90% of their direct premium written in any one state of 12/31/2012 Less than 90% of their direct premium written in any one line of business at

12/31/2012 $100,000,000 of surplus or more at 12/31/2012 Net premium written of at least $50,000,000 at 12/31/2012 Direct premium written of at least $25,000,000 at 12/31/2012

Super Regional™ Classification Criteria

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A Super Regional™ Property/Casualty Insurer is an individual company writing multiple lines of insurance in multiple states.

Risk retention groups, surplus lines insurers and reinsurers are not eligible for the Super Regional category because they are assigned to other classifications that are more consistent with their business models.

Super Regional™ Property/Casualty Insurer

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By definition of each

Surplus Lines, Risk Retention Group, Reinsurer

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12/31/2012 DPW < $1,000,000

Not a member of a group

Carriers with less than $1,000,000 in direct premium written are often exempted from regulatory requirements, such as a statement of actuarial opinion.

Given the existence of regulatory reporting exemptions and the limited dollar volume written, Demotech assigned these carriers to a classification defined by their limited dollar volume because there is likely a rationale for remaining this size.

Direct Premium Written <$1,000,000

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12/31/2012 DPW > $1,000,000

< = 90% of 12/31/2012 DPW in one line of business

State Specialist

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12/31/2012 DPW >= $1,000,000

> = 90% of 12/31/2012 DPW in one line of business

Coverage Specialist

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More than $1 million of direct premium written in each of at least 45 states at 12/31/2012

$250,000,000 of surplus or more at 12/31/2012

Net premium written of at least $250,000,000 at 12/31/2012

Direct premium written of at least $250,000,000 at 12/31/2012

No lines of business > = 90% of 12/31/2012

National

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More than $1 million of direct premium written in each of at least 35 states at 12/31/2012

$100,000,000 of surplus or more at 12/31/2012

Net premium written of at least $50,000,000 at 12/31/2012

Direct premium written of at least $100,000,000 at 12/31/2012

No lines of business > = 90% of 12/31/2012

Does not qualify as a National

Near National

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Not in any other category

Part of a group

DPW/PHS > = 9 or < = .25 or NPW/PHS > = 9 or < = .25

Strategic Subsidiary

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Not in any other category

Regionals

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Months of Survival Subsequent to Rating AssignmentRecent Fifteen Year Period

Demotech, Inc.’s Serious About Solvency, updated.

12 24 36 48 60 72 84 96 108 120 132 144 156 168 18084.00%

86.00%

88.00%

90.00%

92.00%

94.00%

96.00%

98.00%

100.00%

Demotech, Inc. A"Demotech, Inc. A"

Months

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Demotech, Inc.’s Serious About Solvency, updated.

12 24 36 48 60 72 84 96 108 120 132 144 156 168 18084.00%

86.00%

88.00%

90.00%

92.00%

94.00%

96.00%

98.00%

100.00%

Demotech, Inc. A'

Months

Months of Survival Subsequent to Rating AssignmentRecent Fifteen Year Period

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Months of Survival Subsequent to Rating Assignment Recent Fifteen Year Period

Demotech, Inc.’s Serious About Solvency, updated.

12 24 36 48 60 72 84 96 108 120 132 144 156 168 18084.00%

86.00%

88.00%

90.00%

92.00%

94.00%

96.00%

98.00%

100.00%

Demotech, Inc. ADemotech, Inc. A

Months

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Excerpts from an independent study reviewing nine years of ratings issued by A.M. Best, Standard & Poors, Moody’s Investors Services, Fitch and Demotech, Inc.

Demotech serves the need of another unique group of insurers, namely those that are geographically focused.

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.

There is general consistency in the firms that each agency would categorize as financially secure.

Florida State University Excerpts from A Comprehensive Examination of

Insurer Financial Strength Ratings

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Regional Carriers and State Specialists have an option to the ratings monopoly. Demotech, Inc. continues to secure umbrella insurance markets, acceptance by insurance agents E&O carriers, premium finance companies, third party evaluation services and other stakeholders.

Like many of the companies represented here, we compete against giants in the industry. We, like you, are able to do so because we continue to do an excellent job of outperforming those that are larger and better known than we are.

Options to the Ratings Monopoly

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