Demotech’s Approach…

The major features of the review and analysis process underlying Demotech’s rating assignment process are focused upon the fundamentals necessary to sustain balance sheet integrity.

These factors include:

1. Liquidity - as measured by the readily realizable value of invested assets.

2. Asset quality - The integrity of balance sheet assets is critically important.

3. Loss and loss adjustment expense reserve adequacy.

4. Quality and quantity of realizable reinsurance.

5. Pricing integrity.

Demotech, Inc. explicitly considers the regulatory environment( s) and line(s) of insurance written by a carrier prior to assigning a Preliminary Financial Stability Rating®. By doing so, Demotech evaluates State Specialists and/or Coverage Specialists based upon their "strength of schedule" in addition to balance sheet integrity or profitability. In its review and analysis process, a single state carrier focused on a difficult line of insurance in a regulatory environment that requires prior approval of rates or forms may be considered financially stable based upon its expertise and rigorous commitment to the integrity of its balance sheet and high quality reinsurance despite sporadic profitability related to a difficult line of insurance or regulatory rush. Conversely, an insurer writing popular personal lines of business in jurisdictions that permit rates and forms to be filed and used will be expected to have balance sheet integrity and a reinsurance program consistent with its needs and exposure.

Joseph L. Petrelli
President

The Demotech Company Classification System: New York State Specialist P&C Carriers Identified – June 30, 2010 Update

In 2007, Demotech, Inc. created an industry-wide, objective classification system for property and casualty insurance companies. The Demotech Company Classification System categorizes all property and casualty insurers into one of eleven categories based on Demotech’s analysis of the data reported by the companies to the National Association of Insurance Commissioners.

The eleven categories in the Demotech Company Classification System are Nationals, Near Nationals, Super Regionals, Regionals, State Specialists, Coverage Specialists, Strategic Subsidiaries, Risk Retention Groups, Surplus Lines Carriers, Reinsurers and companies with less than $1 million in direct premium written.

To be categorized as a State Specialist, a carrier must be an individual, active company reporting data to the NAIC using the P&C annual statement format at 12/31/2009. It must write at least $1,000,000 at 12/31/2009 with 90 percent or more in one state. Further, it cannot be a surplus lines company, risk retention group or reinsurance company.

State Specialists focus on their particular state and develop expertise in that market. This expertise allows State Specialists to effectively compete against more widely licensed insurers by knowing their state better than those competitors.

In New York, there were 72 companies identified as State Specialists based on 12/31/2009 data. For the year ending 2009, New York State Specials accounted for approximately $3.4 billion in direct premium written. For the period ending 6/30/2010, New York State Specialists have increased direct premium written as compared to 6/30/2009 by 2.4 percent to over $1.6 billion. In total, 843 companies were categorized as State Specialists for 2010. This is more than thirty percent of the nearly 2,800 companies reporting 12/31/2009 data. This group wrote approximately 14.4 percent of the industry’s direct premium written in 2009.