Barry J. Koestler II, CFAChief Ratings Officer, Demotech, Inc.

October 27, 2011

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Based on review of company financials, reinsurance program and other readily available information

Predominantly quantitative in nature Created for companies to overcome barriers◦ Access to markets◦ Acceptance of policies◦ Credibility with insureds, agents, reinsurers, etc.

Not regulating companies or setting company policies or practices

Independent verification of financial stability Access to agents Access to markets and ancillary products Acceptability of policies Marketing to insureds, agents, reinsurers, etc.

From the 2011 A.M. Best Key Rating Guide◦ BCAR compares an insurer’s adjusted surplus relative to the required

capital necessary to support its operating and investment risks.◦ Companies deemed to have “adequate” balance sheet strength

normally generate a BCAR score of over 100% and will usually carry a Secure Best’s Credit Rating.

◦ The level of capital required to support a given rating level varies by company, depending on its operating performance and business profile.

Analysis of BCAR scores from year-end 2010.

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2011 AM Best Ratings and BCAR Scores

AM Best Rating FSC

Number of Companies

Average BCAR weighted by

Surplus High Low Average

A++ XV 50 253.8 425.4 185.8 283.3

XIV 2 360.2 360.2 360.2 360.2

XIII 6 489.4 489.4 489.4 489.4

XI 3 227.6 227.6 227.6 227.6

IX 3 366.7 366.7 366.7 366.7

  VIII 1 999.9 999.9 999.9 999.9

A+ XV 197 275.4 999.9 147.2 278.6

XIV 32 280.6 406.4 148.7 243.5

XIII 6 289.6 289.6 289.6 289.6

XII 26 264.6 405.0 192.4 246.8

XI 10 380.5 504.5 194.4 397.1

X 25 262.1 308.3 207.4 232.6

IX 21 296.1 484.3 146.0 305.0

VIII 17 430.3 652.3 257.3 382.8

VII 4 636.1 999.9 250.4 647.6

  VI 4 365.9 623.5 188.7 365.7

Data from 2011 AM Best Key Rating Guide

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2011 AM Best Ratings and BCAR Scores

AM Best Rating FSC

Number of Companies

Average BCAR weighted by

Surplus High Low AverageA XV 202 222.5 999.9 127.5 222.6

XIV 42 225.0 270.2 208.0 219.2XIII 53 291.0 420.6 180.8 275.3XII 39 290.0 454.5 192.1 255.9XI 33 347.8 999.9 181.6 332.0X 57 287.8 548.4 150.7 265.7IX 121 278.9 999.9 148.1 266.1VIII 120 323.2 999.9 143.9 310.6VII 43 374.4 809.3 140.4 368.6VI 28 417.7 945.5 169.8 417.9V 25 568.7 999.9 166.7 564.4IV 1 698.9 698.9 698.9 698.9

  III 1 999.9 999.9 999.9 999.9B++ XIII 3 311.0 311.0 311.0 311.0

XI 2 135.4 647.0 117.4 382.2IX 13 217.5 399.6 124.0 170.7VIII 12 248.1 999.9 124.0 360.2VII 11 285.6 999.9 117.1 353.3VI 26 225.2 383.5 131.6 224.5V 37 322.7 999.9 110.6 325.1IV 21 332.3 999.9 119.9 334.8III 10 706.4 999.9 158.5 672.1

  II 1 179.4 179.4 179.4 179.4

Data from 2011 AM Best Key Rating Guide

Similar BCARs appear in many different rating categories, implying that since factors other than financial results may greatly affect a company’s rating, there is a need to establish and carefully manage a company’s rating agency/AM Best relationship.

Smaller companies seem to receive lower AM Best ratings despite relatively higher BCAR results, so these companies may need to actively manage their rating agency relationship like larger companies.

A wide range of ratings containing all but identical BCAR scores means that even good financial results do not always speak for themselves.  There is a need for explanation and context to present financial results and manage a rating agency relationship.

David L. Kaufman, Executive Vice President, COO & DirectorThe Motorists Insurance Group

James J. Kennedy, President, CEO & DirectorThe Ohio Mutual Insurance Group

David E. Tschantz, VP - Claims, Corporate Counsel & DirectorWayne Insurance Group

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