Coastal Insurance Underwriters

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Coastal Insurance Underwriters

  1. 1. Financial Stability Ratings ® and Florida’s Property Insurance Market Demotech, Inc. February 4, 2010
  2. 2. <ul><li>Incorporated in 1985, Demotech, Inc. is a financial analysis and actuarial services firm that provides Financial Stability Ratings ® (FSRs) to the Property & Casualty and Title insurance industry. </li></ul><ul><li>Demotech was the first company to have its rating process formally reviewed and accepted by: </li></ul><ul><ul><li>Fannie Mae (1989) </li></ul></ul><ul><ul><li>Freddie Mac (1990) </li></ul></ul><ul><ul><li>HUD (1994 & 2005) </li></ul></ul><ul><li>1996 </li></ul><ul><ul><li>Worked with Florida Department of Insurance to develop FSRs for Florida “take out” insurers to depopulate the residual market. </li></ul></ul><ul><li>2005 </li></ul><ul><ul><li>Accepted by HUD for rating Professional Liability insurers of long term care facilities. </li></ul></ul>
  3. 3. <ul><li>In 1996, when the State of Florida, the Florida Department of Insurance (now OIR), and the secondary mortgage marketplace needed a rating solution, they contacted Demotech, Inc. </li></ul><ul><li>We developed a procedure to review and rate start-up insurance companies. </li></ul><ul><li>Our procedure met the needs of the State of Florida, insurance agents, insurance companies, consumers and was acceptable to the secondary mortgage marketplace. </li></ul>
  4. 4. <ul><li>Biographical information on principals and key employees </li></ul><ul><li>Summaries of the duties of key personnel </li></ul><ul><li>Business plan </li></ul><ul><li>Pro forma financial statements </li></ul><ul><li>Catastrophe modeling analysis </li></ul><ul><li>Underwriting guidelines </li></ul><ul><li>Initial rate, rule and form filings </li></ul><ul><li>Investment guidelines </li></ul><ul><li>Claims department procedures and practices </li></ul><ul><li>Management and administrative agreements </li></ul><ul><li>Reinsurance information </li></ul><ul><li>Marketing and sales materials </li></ul><ul><li>Producer contracts </li></ul><ul><li>Any other information necessary to familiarize Demotech with the company and its operations </li></ul>
  5. 5. <ul><li>Capital adequacy </li></ul><ul><li>Quality and liquidity of invested assets </li></ul><ul><li>Loss and loss adjustment expense reserves  </li></ul><ul><li>Unearned premiums </li></ul><ul><li>Premium to surplus leverage ratios </li></ul><ul><li>Other underwriting expenses incurred </li></ul><ul><li>Quality and quantity of reinsurance </li></ul><ul><li>Adequacy of rate levels </li></ul>
  6. 6. <ul><li>Demotech data call </li></ul><ul><ul><li>Exhibit A </li></ul></ul><ul><ul><li>Illustrative tower graph </li></ul></ul><ul><li>Aggregate retentions and impact of multiple events </li></ul><ul><li>Provision for reinstatement of reinsurance coverage </li></ul><ul><li>Probable maximum loss </li></ul><ul><li>Catastrophe modeling </li></ul><ul><ul><li>Parameters/switches </li></ul></ul><ul><ul><li>Particular model utilized </li></ul></ul><ul><li>Florida Hurricane Catastrophe Fund (FHCF) </li></ul><ul><ul><li>Company liquidity relating to FHCF funding </li></ul></ul><ul><ul><li>Company decisions regarding TICL </li></ul></ul><ul><li>Financial stability of reinsurer </li></ul><ul><li>Changes or modifications to book of business </li></ul>
  7. 7. <ul><li>Lack of focus on marketing, underwriting and claims practices </li></ul><ul><li>Reinsurance purchasing decisions </li></ul><ul><li>Pricing decisions </li></ul><ul><li>Emphasis on earning projections or market share </li></ul><ul><li>Inadequate loss reserves in order to meet earning projections (at least on paper) </li></ul><ul><li>Entrance into new markets/product lines </li></ul><ul><li>Inefficient information technology systems </li></ul>
  8. 8. Source: An Examination of Insurer Financial Strength Ratings Southern Risk and Insurance Conference - November 2009 Demotech AM Best S&P Moody's Fitch 2001 93 467 136 6 12 2002 114 425 136 3 20 2003 108 419 121 22 21 2004 125 422 115 7 26 2005 129 414 100 4 19 2006 168 256 42 8 2007 179 347 16 14 2008 200 327 46 33 Total 1,116 3,077 712 42 153
  9. 9. <ul><ul><li>Is there agreement in terms of insurers considered to be secure? </li></ul></ul>Source: An Examination of Insurer Financial Strength Ratings Southern Risk and Insurance Conference - November 2009 Firms Rated Secure by Demotech Not Secure Secure % Agree Best 69 344 83 % S&P 10 92 90 % Moody's 4 30 88 % Fitch 1 31 97 %
  10. 10. <ul><li>Demotech does appear to rate a group of insurers that is different from those generally rated by other rating agencies. </li></ul><ul><li>Controlling for differences in the sample of firms each agency rates, there is some consistency between factors impacting Demotech ratings and other agencies (especially AM Best). </li></ul><ul><li>Source: An Examination of Insurer Financial Strength Ratings </li></ul><ul><li>Southern Risk and Insurance Conference - November 2009 </li></ul>
  11. 11. Source: A.M. Best Co.'s Impairment Rate and Rating Transition Study dated May 1, 2009; complement of page 4, Exhibit 2. Demotech, Inc.’s Serious About Solvency updated for data as of 12/31/2008 .
  12. 12. Source: A.M. Best Co.'s Impairment Rate and Rating Transition Study dated May 1, 2009; complement of page 4, Exhibit 2. Demotech, Inc.’s Serious About Solvency updated for data as of 12/31/2008 .
  13. 13. Source: A.M. Best Co.'s Impairment Rate and Rating Transition Study dated May 1, 2009; complement of page 4, Exhibit 2. Demotech, Inc.’s Serious About Solvency updated for data as of 12/31/2008 .
  14. 14. <ul><li>We have been part of the solution to the Florida property insurance situation since 1996 </li></ul><ul><li>Demotech’s track record on long-term solvency – Florida and countrywide – is enviable </li></ul><ul><li>We plan to be a part of the solution for years to come </li></ul>

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