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P & C T R E N D S
Tech and Loss Control
Top Non-Producer Gains
Study reveals trends in agency staffing

If an IT manager and a Director of Risk Management and Loss Control are on your agency’s payroll, you’re in step with non-producer employment trends.

According to the "2005-2006 Non-Producer Compensation & Benefits Survey," conducted every two years by Business Management Group (BMG) and The Hartford, agency principals are taking a closer look at how they allocate non-producer position dollars.

"You’ll find that most agencies measure their productivity by revenue per employee and that number is going up, which means to me there are less people in the agency," says study author Suzy Hammett. "Due to the increased use of automation and Best Practices procedures, they are reallocating the resources they have in non-producer staff."

One area where the shift is apparent is in technology. Larger agencies more frequently employ an IT manager, with 71% of agencies with revenues exceeding $10 million reporting data for this position. Many agencies are addressing quality control and potential E&O exposure by conducting audits to ensure staff members are correctly inputting data and following procedures. Firms with revenues in excess of $10 million generally have a network administrator and quality control/training specialist to oversee automation and system issues. The network administrator position appeared in 55% of the agencies and the quality control/trainer position appeared in 27% of the agencies with revenues in excess of $5 million.

"You’ll find more agencies adding IT manager positions; they realize that for the agency to go forward in the future they need someone who can manage not only the agency management system, but also imaging and other areas," Hammett says. "A lot of agencies are implementing imaging and, again, you just can’t go in and put a scanner on someone’s desk. You need to understand the workflow and have someone steer that project." Hammett notes that as agencies increase their technology capability, they become more efficient, and then can reduce their overall staffing level.

More agencies are reporting having director of risk management and loss control and claims specialist positions in this year’s study than in the past years. Agencies are adding these positions to gain competitive advantage and provide value-added services to their larger clients. Of the survey participants with revenues in excess of $5 million, the director of risk management position appears in 53% of the agencies, the claims specialist position appears in 69% of the agencies and the loss control specialist appears in 56% of the agencies.

In terms of compensation increase, the mean average significantly increased for the positions of sales manager, marketing manager, IT/automation manager, commercial lines manager and employee benefits/life manager, compared to the 2003 study. Regions with the highest percentage increase for those positions included the Northeast, Mid-Atlantic, Southwest and Pacific regions, where mean averages increased from 29% to 54%. Most agencies surveyed indicate their planned compensation increases for 2005 will be between 3.7% and 4.4%. T O P

P R O D U C E R C O M P E N S A T I O N I S S U E U P D A T E
AIG Restates Earnings, Faces Civil Lawsuit

After postponing three times, American International Group, Inc. finally filed its Form 10-K with the Securities and Exchange Commission Tuesday, May 31. The filing comes on the heels of a lawsuit filed by New York Attorney General Eliot Spitzer and the New York State Insurance Department against the company and two former top executives last week.

AIG restated shareholders’ equity as $80.61 billion, a $2.26 billion, or 2.7%, reduction from the $82.87 billion it claimed in its Feb. 9 earnings release. The company restated its 2004 net income as $9.73 billion, an 11.9% reduction from the $11.05 billion it previously claimed. The 400-page filing also reveals that its income for five years through 2004 was overstated by $3.924 billion, or 10%, according to Reuters.

According to The New York Times, "The annual report restates a breathtaking range of major numbers, including reserves, net income and shareholder equity."

"I think that issuing the 10-K is an important step in the company’s efforts to put the problem behind them," Jay Gelb, a Lehman Brothers analyst, told the NYT.

"We are embarking on a new era for AIG that will be marked by changes in the way we operate—including greater responsiveness and transparency...," AIG President and CEO Martin J. Sullivan said in a press release.

Just before filing its Form 10-K, AIG was hit by a civil lawsuit that accuses the company of manipulating its books to deceive regulators and the investing public. The lawsuit also targets former CEO Maurice "Hank" Greenberg and former CFO Howard I. Smith, alleging that the two men "engaged in numerous fraudulent business transactions that exaggerated the strength of the company’s core underwriting business to prop up its stock price," according to a press release from Spitzer’s office.

Among the allegations against AIG and top management, as outlined by Spitzer’s office, are that they:

· "Engaged in sham transactions with a reinsurance company to create the appearance of insurance reserves where none existed. These deals were personally conceived and negotiated by Greenberg;

· Hid underwriting losses from an auto warranty unit by transferring the losses to an off-shore entity that it secretly controlled;

· Papered over losses in a Brazilian subsidiary by linking the losses to a Taiwanese subsidiary;

· Created false underwriting income derived from the purchase of life insurance policies; and

· Repeatedly deceived state regulators about AIG’s ties to off-shore entities."

"The irony of this case is that AIG was a well-run and profitable company that didn’t need to cheat," Spitzer said in the release.

Greenberg and Smith previously have contended that they did nothing wrong, and their lawyers both said they will fight the allegations.

"For Mr. Greenberg, this is not just business, it’s personal, it goes to the heart of his legacy and reputation," Robert A. Mintz, head of the white collar crime practice at McCarter & English, told the NYT.

In other Greenberg news, Ohio Attorney General Jim Petro is trying to stop Greenberg’s April 12 transfer of 41 million AIG shares to his wife—which Petro values at $2.6 billion. According to BestWire, the "gift," transferred just before the former CEO departed the company, violates New York’s Fraudulent Conveyance Statute.

Another former insurance CEO is making headlines. Robert B. Lockhart, former president and CEO of Hilb Rogal & Hobbs, resigned from the company last Wednesday. According to the Associated Press, his resignation is "in connection with an investigation into contract steering." Another employee was fired and a third placed on leave.

According to the AP article, "Company Chairman Martin L. Vaughan III told employees that the company’s Hartford office may have illegally given or received money as part of deals to place three clients with insurance companies."

The company’s stock fell 9% to $34.75 a share by Friday. "The industry, from an investor’s perspective, is just saturated with this stuff at this point," Adam Klauber, and insurance industry analyst at Cochran, Caronia Securities, told the AP.

And in subpoena news, MetLife, Inc. received a subpoena from the Connecticut Attorney General’s Office seeking information on finite reinsurance transactions. Additionally, Everest Re Group Ltd.’s U.S. subsidiary, Liberty Corner, received a subpoena from the SEC seeking information on loss mitigation insurance products. T O P

How do independent agencies stack up against the likes of a Berkshire Hathaway or a Marsh & McLennan Company? I received that and similar questions after a recent IN&V article that highlighted industry returns from insurance companies to their shareholders. To see how the typical independent agency compares, let’s look at several big publicly traded insurance firms and some standard financial measures based on 2004 results.

Below are five well known publicly traded insurers and agency/brokers, picked because they are near the top of the Fortune 500, concentrate mostly on p-c insurance and have not had a great deal of Spitzer-related publicity that would dramatically affect their recent stock price. I did select Marsh & McLennan and Aon as examples partly because of recent Spitzer-related news impacting their firms, and partly due to their high degree of non-P-C insurance activities.

Insurance Industry Stalwarts	Earnings Per Employee	Price to Sales#	Earnings Multiple (P/E)##
St. Paul Travelers	$42,465	1.03	44.2
Chubb Corp	$140,678	1.22	9.92
Arthur J. Gallagher & Co	$9,256	1.73	34.4
Brown & Brown Inc	$34,220	4.49	22.87
Hilb Rogal and Hobbs Co	$22,946	1.86	14.67

Source: www.finance.yahoo.com; # - 12/04 Closing Stock Price divided by Trailing 12 months revenue; ## - Price/Earnings on Trailing 12 months basis on 5/31/05

What can you tell about your agency by a comparison to the above? "Earnings per Employee" is a great place to start: The higher the earnings per employee, the better. You should make this quick calculation for your agency. Remember, this is the measure of after-tax profits (earnings) divided by your full-time equivalent employees. If your agency is a non-tax-paying sole proprietor or partnership, take your pre-tax figure and multiply it by 65% before dividing by FTEs. You should also add back any compensation or expenses you and other agency owners incur that the agency would not incur if you or others owners were not receiving them.

In terms of averages, I was happy to learn that hot off the presses is the Big "I" " 2004 Best Practices Study," conducted with Reagan Consulting. The study contains a wealth of agency management statistics. A quick check for agencies in the $500,000 to $1,250,000 revenue category shows average pro forma revenues per employee of $123,508, which implies earnings per employee of about $23,843. Not too bad; my cash is leaning toward the average Best Practices agency.

What about the other figures? "Price to Sales" (also known as "times commissions" in our industry) and "Earnings or Price/Earnings" multiples can provide some interesting insights. To make an informative sample comparison to the typical agency, we need a little mathematics and two assumptions. First, we will continue the 35% effective tax rate assumption. Second, we need to assume what is known in the parlance of finance as the cost of capital. Without getting into a lot of details, cost of capital is the percent someone providing your agency funds generally would charge in the marketplace for your use of those funds. In general, that percentage should be between 10% to 20% plus inflation. We’ll use 15%.

With our two assumptions, the mathematics are shown below. Look at four typical agency situations: Agency A is average-to-low profitability with average-to-low growth prospects. Agency B is high profitability but low growth prospects. Agency C is low profitability but high growth. Agency D is high profitability and high growth.

Agency Value	Agency A	Agency B	Agency C	Agency D
Revenues	$1,000	$1,000	$1,000	$1,000
Percent Return on Revenue	10%	25%	5%	25%
Pre-Tax Profit	$100.	$250	$50	$250
Taxes (35%)	$35.00	$87.50	$17.50	$87.50
After-tax Profit	$65.00	$162.50	$32.50	$162.50
Growth Rate	5.0%	3.0%	10.0%	10.0%
Cost of Capital	15.00%	15.00%	15.00%	15.00%
Estimate of Agency Value	$650	$1,354	$650	$3,250
Times Commission Multiple	0.7	1.4	0.7	3.3
Equivalent P/E Ratio	10.0	8.3	20.0	20.0

You can see how the agencies stack up under our two assumptions and by varying the return on revenues (profitability) and growth assumptions. As might be expected, Agency A has the lowest "Times Commissions" multiple but our high growth/high profit Agency D is right up there with the publicly traded firms at 3.3 times revenues.

None of the agencies do quite as well in comparison to the publicly traded companies on P/E ratios. Three of five of the publicly traded firms have P/Es above 20, two are above 30 and one is above 40! Your son or daughter studying finance in college might ask, "What’s up with that?"

IN&V readers of have heard this before: "It’s about the growth…" Analyst estimates of five-year growth prospects for the five publicly traded firms above range from a low of 9% to a high of nearly 55%. Heady growth predications like those will get your agency a P/E multiple like the publicly traded firms.

So how do independent agencies stack up? Would you prefer to invest in your own agency or a publicly traded insurance firm? Of course, that decision all depends on what agency and what you foresee in the publicly traded firm’s future. As for me, given a choice between a typical Big ‘I" member that looked like B, C or D and the typical publicly traded option, I’d choose my own agency every time.

Price/earnings ratio, using earnings for the four most recently completed quarters.

Paul Buse ( paul.buse@iiaba.net) is a licensed agent and president of Big "I" Advantage, IIABA’s for-profit subsidiary.

A proposed $140 billion asbestos bill passed the Senate Judiciary Committee on a 13-5 vote last week and now heads to the floor of the Senate, but potential hurdles remain in passing the legislation. Majority Republicans reportedly will seek additional changes in the bill, and the Democratic leadership is expected to oppose the legislation.

Congress Daily reports that Senate Majority Leader Bill Frist (R-Tenn.) is thought to be very interested in taking the bill up, but there is no timetable for a vote on the issue. Judiciary Chairman Arlen Specter (R-Pa.), the legislation’s sponsor, believes that it needs to come to the floor before the Senate gets "bogged down" in appropriations bills.

Sens. Jon Kyl (R-Ariz.) and John Cornyn (R-Texas) have called for significant changes to provisions about what steps to take if the proposed asbestos trust fund became insolvent.

The Big "I," while generally supporting reform of the system and the trust-fund concept if properly crafted, has concerns about potential "leakage" back into the tort system. The association is pushing for the trust fund to provide finality for these cases without leaving the door open for some cases to end up back in court.

In addition to concerns expressed by some conservative legislators about the trust fund, liberal officials and interest groups are offering strong opposition. The AFL-CIO and trial lawyers have raised objections to the legislation.

The legislation would halt all asbestos lawsuits and instead create a federally administered trust fund to compensate victims of asbestos-related diseases. It would set award amounts based on the severity of illness and set medical criteria to determine who is eligible. T O P

Cliston Brown (cliston.brown@iiaba.net) is Big "I" director of public affairs/media relations.

In the event of partial losses, the limit of insurance is usually adequate to include the cost of debris removal. However, in some cases, the limit might not be adequate or the commercial property form's debris removal sublimit might restrict coverage. That begs the question, "How much debris removal coverage do clients need?"

There is no hard and fast rule about how much debris removal coverage is necessary. I know this is a tiresome response, but every insured is, in fact, unique. The amount of coverage needed depends on the type of building (including size, materials, contents, etc.), nature of operations, location and so forth. I recall one loss in particular where the direct damage was in the range of a quarter of a million dollars; however, due to the remote nature and location of the facility, the debris removal expenses approached a million dollars.

If the policy isn’t a blanket agreement or insures a single structure, a debris removal limits decision is in order on every policy. Many policies provide $2,500, $5,000 or $10,000 or more debris removal limits in addition to the policy limit.

Fire debris in particular, and many other types of debris in general, must be deposited in a landfill. Demolition, haulage and landfill tipping fees can be significant. The 25% allowance in the property policy is usually adequate for partial losses or under a blanket policy where the policy limit isn’t reached. In the event of a total loss, the situation is entirely different. The $10,000 or so additional limit for debris removal can leave the insured with an enormous bill that will come out of the insured’s resources.

There are times when the 25% allowance is inadequate as well, such as property insured under a Functional Replacement Cost form, an unusually stout structure with increased demolition expenses and heavy industrial facilities. Another example is a building in downtown urban areas. Demolition may be pushed into nighttime or weekend work schedules. Heavy traffic and proximity to other buildings may materially increase the cost. In some cities, organized crime allegedly controls demolition and hauling; there is no negotiation over price. I have seen urban demolition and debris removal run 40% of the damage. This can quickly become a six- or seven-figure sum that is uninsured.

One risk manager uses the following formula developed by himself and an architect:

• For every 6,000 sq. ft. of solid brick construction, it takes $70,000 to haul it away.

• For every 6,000 sq. ft. of steel construction, it takes $60,000 to haul it away.

• For every 6,000 sq. ft. of frame construction, it takes $50,000 to haul it away.

Another risk manager reports that he had the contents of a chemical storage shed (an old containerized cargo shipping container) catch on fire on one of their ranches several years ago. Because of the contents of one bag of a pesticide (one pound), they had to place the entire remains of the shed/shipping container, the contents and excavate the soil eight feet down and surrounding the area, then ship it to Texas or Louisiana in sealed, impervious dumpsters. When it got there, they burned it again and put it in a landfill. The cost was more than $75,000; 25% of loss for debris removal (or $10,000 limits) would not have begun to touch this. Check what is stored in your closets or garages before you decide that $10,000 is enough.

Bill Wilson ( bill.wilson@iiaba.net) is Big "I" director of the Virtual University.