Florida Chamber of Commerce Solvency Matters to Consumers! Are Florida’s Private Residential Property Insurers Solvent? Sharon M. Romano, CPCU, AIAF, ARC, CCP Vice President Demotech, Inc. February 24, 2009 Grand Floridian Resort at Walt Disney World Orlando, FL

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.

Insurance Fundamentals Quality and Liquidity of Invested Assets Adequacy of Loss and Loss Adjustment Expense Reserves  Quality of Reinsurance Adequacy of Rate Levels Ability to Serve Niche(s)

Florida Domiciled P&C Insurers – Data Reviewed Biographical information on principals and key employees Summaries of the duties of key personnel Business plan Pro forma financial statements Catastrophe modeling analysis Underwriting guidelines Initial rate, rule and form filings Claims department procedures and practices

Florida Domiciled P&C Insurers – Data Reviewed (cont.) Investment guidelines Management and administrative agreements Reinsurance information Marketing and sales materials Producer contracts Any other information necessary to familiarize Demotech with the company and its operations

Why Do Others Favor Larger Insurers? Magnitude of surplus Broad array of insurance products Diversified geographical exposure Well-known brand names Access to capital However, in practice, size and diversification may have limited impact on the risk of insolvency.

Practices That Lead To Trouble Lack of focus on marketing, underwriting and claims practices Pricing decisions Emphasis on earning projections Emphasis on market share Inadequate loss reserves in order to meet earning projections (at least on paper) Entrance into new markets/product lines Inefficient Information Technology systems

Summary We have been part of the solution to the property insurance situation since 1996 Demotech’s track record on long-term solvency – Florida and countrywide – is enviable We hope to be a part of the solution for years to come