university of houston bauer college of business january 27, 2005 presentation by: robert b. hixon t...
TRANSCRIPT
University of HoustonBauer College of Business
January 27, 2005
presentation by:
Robert B. Hixon
THE WORTHAM GROUP
Insurance & Risk Management
THE WORTHAM GROUP
Take-Away Concepts
Agent vs. Broker – Is there a difference?
Salesmen or Professional Service provider?
Where does your allegiance reside?
Contractual Issues with the Insured and the Insurer
Compensation Issues Commission Fee PSA’s, MSA’s and the new Underwriter Service Fee
Response to Request for Proposal
THE WORTHAM GROUP
Insurance & Risk Management
Sample Broker Presentation
THE WORTHAM GROUP
Discussion Items
The Wortham DifferenceInsurance Market UpdateAvailable ServicesTeam Selection & SupportCasualty and Energy Claim Handling ServicesInternational CapabilitiesCost of Risk and Retention AnalysisEnergy, Liability and Casualty Insurance Renewal StrategiesEmployment Practices LiabilityAlternative Programs Broker Relationship & CompensationClosing Comments
The Wortham Difference
THE WORTHAM GROUP
The Wortham Difference
Largest independent insurance broker in Texas Our clients include many of Texas’ largest public
companies and entities Largest market-share of any one broker in a major
U.S. city Founded in 1915, current 425 employees
Stable and experienced team
Over $1 billion in client premiums annually
THE WORTHAM GROUP
The Wortham Structure
A partnership owned by 69 individual partners with average tenure with the Firm of 20 years
Approximately half of our partners are technical staff
Highly departmentalized with specialization by coverage
Dedicated to independence in finding the best solutions for our clients
Excellent reputation with carriers worldwide
High quality service with low overhead
THE WORTHAM GROUP
Mission Statement
Service – to handle our client’s insurance business as if it was ours
Quality Coverages – to develop coverages and risk management tools that allow clients to better compete in their business
Price – to forge relationships between carriers and our clients that will add value and be long term
THE WORTHAM GROUP
Representative Clients
THE WORTHAM GROUP
Adams Resource & Energy, Inc.American National Power
Anadarko PetroleumAnderson Oil, Ltd.
Apache CorporationCity of Austin (Austin Energy)
Bridas EnergyBrownsville Public Utility Board
BT Operating CompanyChevron Phillips Chemical Co. LLC
CICO Oil & GasCogen America
ConocoPhillips CompanyCopano Operations, Inc.
Delta Power Company, LLCDorchester Hugoton
Dynegy Inc.Edge Petroleum Corporation
Global OctanesHNG Storage
Key Energy Services, Inc.Lewis Energy
LCRAMosbacher Energy Company
Nabors Industries, Inc.National Fuel Gas / Seneca Resources
Ocean Energy, Inc.Parker Drilling CompanyPioneer Drilling Company
Plains ResourcesPeoples Energy Production
Quicksilver ResourcesRange Resources
Seitel, Inc. / DDD Energy, Inc.Spinnaker Exploration Company
Tetra TechnologiesTexas Petrochemical
The George R. Brown PartnershipVerus Energy
Representative Energy Clients
THE WORTHAM GROUP
Representative Marine Clients
32 supply boats 5 tankers
28 harbor tugs
1 derrick barge9 vessels
10 vessels
2 seismic vessels
1 derrick barge
THE WORTHAM GROUP
Non-Energy Profile Clients
Insurance Market Update
THE WORTHAM GROUP
Standard & Poor’s Ratings Comparisons
Insurers Pre 9/11/2001 07/07/2003
ACE A+ A+ AIG AAA AAA Allianz AAA AA- Axa AA AA- Generali AA AA XL AA AA Zurich AA+ A+ Reinsurers
Berkshire Hathaway AAA AAA GE Frankona Re AAA AA- Munich Re AAA AA- Scor A+ BBB+ Swiss Re AAA AA+
Source: Standard & Poor’s
Notes: (1) Munich has now been downgraded to A+(2) CNA ‘s senior debt was recently down graded by Fitch to BBB-
THE WORTHAM GROUP
Lloyd’s of LondonPure Year Profit/Loss, 1985-2002 (£m)
-3500
-3000
-2500
-2000
-1500
-1000
-500
0
500
1000
1500
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02
2000-2002 Annual &
3 Year Accounted
Results
THE WORTHAM GROUP
Capacity Utilization (£bn)
* Estimates from Business Plans
THE WORTHAM GROUPSource: Lloyd’s Syndicate
Quarterly Returns For First Quarter 2003
Risk Code: ETEnergy, Search and Production Vessels and Offshore Property, including War (excluding War Only Risks)
0
20
40
60
80
100
120
140
160
180
200
220
2n
d
4th
6th
8th
10
th
12
th
14
th
16
th
18
th
20
th
Quarter
1998
Year of Account
Loss Ratio %
2000
1999
200120022003
THE WORTHAM GROUP
Risk Code: EWEnergy Operators Extra Expenses and Well Control
020406080
100120140160180200220240260280
1st
2nd
3rd 4th
5th
6th
7th
8th
9th
10th
11th
12th
13th
14th
15th
16th
17th
18th
19th
20th
21st
Quarter
1998
Year of Account
Loss Ratio %
19992000200120022003
Source: Lloyd’s Syndicate Quarterly Returns
For First Quarter 2003
THE WORTHAM GROUP
Premium Rating Index
THE WORTHAM GROUP
Insurance Market -2003
Additional capacity entered the market following 2001 losses to take advantage of favorable underwriting conditions Lloyd’s capacity at all time record high of £14.4 billion Significant new capacity in Bermuda
Attractive programs are oversubscribed
Still have potential for 2003 catastrophes
Available Services
THE WORTHAM GROUP
Service DifferentiationRisk Management Support
Partner in risk management problem solvingProvide presence when required Administrative consultation Underwriter meetings TPA/claims support meetings
Trigger technical supportSubmitting frequent “open items” listsAdvise as insurance market conditions change
THE WORTHAM GROUP
Critical Wortham Services
Risk Management Information Systems (RMIS) supportInternet portalElectronic certificatesContract reviewRetention analysisExposure surveyLoss control / safety supportAlternative risk products
THE WORTHAM GROUP
Wortham ServicesRisk Management Information System Support
Wortham can offer assistance in the design and/or maintenance of a Risk Management Information System which will: Record past/future loss data Track historical exposure data Provide accurate data on a timely basis Create needed reports for all management levels and disciplines Forecast “cost of risk” as a percent of revenue Support actuarial studies Perform administrative functions such as issue Certificates of
Insurance
THE WORTHAM GROUP
Internet Portal
Web portals are becoming a popular means of sharing information from many different sources into one convenient place: Publish on-line manuals Reference materials Include forms, video clips, sound and links Review/request certificates at anytime Review/request invoices at anytime Share files of any kind Collaborate on claims and safety issues
http://portal.jwortham.com/worksitehttp://portal.jwortham.com/worksite
THE WORTHAM GROUP
The Value of Wortham RMIS to Corporation’s Risk Management
Enhance quality of information and archiving
Provides additional insight into loss trends; becoming tool for reduction of retained losses
Leverages further your insurance negotiations to your advantage
Creates flexibility for consideration of budgeting and allocation alternatives
Many additional applications
Significant support incorporated into basic brokerage model
THE WORTHAM GROUP
On-line Certificates of Insurance
Web-based Certificate of Insurance coordination
system
24 hours a day, 7 days a week
Issue certificates directly from desk computers
Look up prior certificates issued
http://www.jwortham.com/demohttp://www.jwortham.com/demo
Certificate issuance service is subject to insurance carrier approval.
Contract & Certificate Review Support
Drilling EngineeringProject
Management
WorthamContract Review
Coordinator
CasualtyTechnician
RiskManagement
Support
PropertyTechnician
CLIENT
Team Selection & Support
THE WORTHAM GROUP
Goals in Team Selection
Experience in industry, very significant accounts and specialization requirements
Availability to deliver Wortham’s standard of service
Depth to provide appropriate and timely solutions to Noble Corporation’s risk management needs
THE WORTHAM GROUP
Service Team
Primary account service team members chosen to meet Your needs
Access to Wortham’s 425+ member team of experts
Continuity – the average tenure of our partners and professionals is over 20 years
THE WORTHAM GROUP
Your Wortham Team
PartnerAccount Executive
PartnerRisk Mgmt.
Services
PartnerRMIS
Loss Control
PartnerAlternative Risk
PartnerProf. Indemnity
PartnerCrime/Bond
Manager
PartnerMarine
PartnerMarine
PartnerCasualty
InternationalCasualty
PartnerCasualty Claims
PartnerEnergy
PartnerEnergy
Joyce GilbertAssistant
Casualty and Energy Claim Handling Services
THE WORTHAM GROUP
Casualty Claims Commitment
Directed by Wortham Claims Manager
10-person Casualty Claims Department with over 130 years of combined claim experience
Resources from across the country as needed
Wortham’s continued assurance of quality control
THE WORTHAM GROUP
Casualty Claim Services
Assistance in selecting claim service providers
Monitoring of insurance company or independent claims services
Review of claims prior to statistical filings
Monitoring of “questionable” claims and active involvement in “large” claim settlements
Resolution of coverage questions/disputes
Assistance in locating qualified defense counsel
Claim/reserve audits as needed
Periodic status reports with action recommendations
Self-insured program design and implementation
Structured settlement and portfolio transfer consulting services, as requested
THE WORTHAM GROUP
Wortham’s Energy and Property Departments have successfully collected over $250,000,000 in claims, which have resulted from upstream oil and gas operations during the past five years.
Our technicians handle all physical damage and control of well claims personally. Wortham believes that the client’s interest is best served when the individual that negotiated the terms of coverage pays an integral role in the collection of a claim. We believe this approach provides a better service to the client.
Energy, Well Control and Property Claims
International Capabilities
THE WORTHAM GROUP
WorthamNet
Business partnerships with 179 successful brokerages in 134 countries worldwide
In-country knowledge and expertise
Wortham quality, service and standards of coverage
THE WORTHAM GROUP
Wortham Assurex Global Partner
Made up of nearly 70 of the largest independent P&C agencies in the U.S. and Canada
Third largest brokerage organization in the U.S. and one of the largest globally
Over $14 billion in annual premium
Over 300 offices around the world
Employs over 12,000 professionals worldwide
THE WORTHAM GROUP
Your Wortham International Correspondents
Noble Locations JLW Network Allow Non-Admitted
Barbados Lynch Insurance Brokers Must be approvedBrazil Adams & Porter Sociedade de Corretagem NoCanada, Alberta Trilagy Insurance & Financial Services, Inc. No (40% tax)Canada, Newfoundland Anthony Insurance, Inc. YesCayman Islands Crusader International Management (Cayman) Ltd. YesDenmark Dahlberg Assurance Brokers Ltd. YesGermany Leve & Nill GmbH YesNigeria Femi Johnson & Company Ltd. NoNorway Aon Grieg AS YesQatar Arab Commercial Enterprises Qatar, Ltd. YesScotland Willis Corroon Scotland Limited YesThe Netherlands Meeus Assurantien YesUnited Arab Emirates HSBC Insurance Brokers NoVenezuela Asegure, S.A. No
Cost of Risk and Retention Analysis
THE WORTHAM GROUP
TOTAL COST ($)OF INSURANCE
AND LOSSESASSUMED
What is the OptimumLevel to
Retain Risk?
$0
Do we pay lossesfrom funds available?
How predictable and what is the
estimated cost of losses retained ?
What is the cost to transfer losses?
FACTORS
Aggregate Insurance Premiums
Plus Retained Losses from Insurance
Programs
Cost of Risk =
Premiums + Retained Losses
THE WORTHAM GROUP
Risk Retention Factors
Materiality of extraordinary losses
Frequency and severity of expected losses
Cost and availability of insurance excess of various retention levels
Company’s degree of risk aversion
THE WORTHAM GROUP
Cash Flow After % Change in Loss Extraordinary Loss Cash Flow
$5,000,000 $229,000,000 2.1%
$10,000,000 $ 224,000,000 4.3%
$15,000,000 $ 219,000,000 6.4 %
$25,000,000 $ 209,000,000 10.7%
$50,000,000 $ 184,000,000 21.4 %
Risk Retention Materiality – Cash Flow
2003 Estimated Cash Flow from operations -$234,000,000(annualized first six months)
THE WORTHAM GROUP
Loss Net Income After % Change in Change inDecrease Extraordinary Loss Net Income E.P.S.
$5,000,000 $161,000,000 -3.0% $0.04$10,000,000 $156,000,000 -6.0% $0.08$15,000,000 $151,000,000 -9.0% $0.11$25,000,000 $141,000,000 -15.1% $0.19$50,000,000 $116,000,000 -30.1% $0.38
Risk Retention Materiality –Net Income
$166,000,000 2003 Net Income (annualized first 6 months)132,932,000 Outstanding shares of common stock
$1.25 Earnings per share
THE WORTHAM GROUP
Retention Capacity
Based on industry standards established by International Risk Management Institute (IRMI) in millions:
Method Basis Low High MedianWorking Capital* $173 $3.5 $26.0 $14.82-15%
Total Assets* $3,098 $31.0 $154.9 $92.91-5%
Earnings* $166 $5.0 $13.3 $9.13-8%
Operating Margin* $227 $1.1 $2.8 $5.5½-2%
* As of June 30, 2003 or annualized first 6 months of 2003
Marine, Liability and Casualty Insurance Renewal Strategies
THE WORTHAM GROUP
Wortham’s Objectives Relatingto the Corporation
Understand Your culture, operating philosophies, goals – corporate and risk management – ongoing
Recognize past underwriting relationships
Recommend changes when appropriate – keeping realistic creativity at forefront
THE WORTHAM GROUP
Wortham’s Objectives Relatingto the Corporation
Work hand-in-hand with you to reduce cost of risk, seeking maximum cost efficient transfer of risk given market conditions
Constantly look for ways to enhance risk management support service
Fully realize the Wortham mission statement for you
Involve you in the marketing process
THE WORTHAM GROUP
Marine Package and Excess LiabilityMarketing Approach and Goals
Utilize your culture, operating philosophies, corporate goals and approach to risk management as a positive marketing tool.Leverage Wortham's independence by seeking new marketing approaches from a number of sources.Develop coverage options and alternative structures that support your corporate goals without jeopardizing the possibility of completing any of the options or alternative structures.Enhance the effectiveness of your insurance program by exploiting the market whenever possible.
THE WORTHAM GROUP
Marine Package and Excess LiabilityMarketing Approach and Goals
Examine the overall historical profitability of the of your account
Exploit past relationships and historical goodwill
Emphasize the effects of your safety and loss prevention initiatives throughout all all phases of the marketing process
THE WORTHAM GROUP
Marine PackageLloyd’s and Bermuda Brokers Used
JLT Risk Solutions Miller Insurance Group
Agnew Higgins Pickering Limited Benfield Greig
First City Glenrand Simpson
Health Lambert Newman Martin & Buchan, Ltd.
Willis
Bermuda BrokersHSBC International
JLT Limited Park International
We are Independent
THE WORTHAM GROUP
Marine Package and Excess Liability Market Issues
The hard market cycle has leveled off. Certain segments of the market are showing signs of softening.Underwriters are beginning to write risks based on their merits rather than simply imposing a broad market approach.Attractive programs are oversubscribedIf the market does not experience a major catastrophe, some Underwriters may find it difficult to reach their premium targets for the year.
THE WORTHAM GROUP
General Comments – Package and Liability Program Structure
Large Multi-line Package Structure
Primary/Excess Package Structure
Examine the Package structure to determine if an “All Lines” approach or placing certain lines separately would be a more effective use of the market
Exploit market resources to achieve the most comprehensive and cost effective program
Explore the possibility of reducing the cost of risk through the use of an aggregate stop feature
THE WORTHAM GROUP
Maritime Employers’ Liability (P&I) Renewal Strategy
Difficult class of business
Key to success will be our ability to generate creative competition
Markets to be approached Origin (AEGIS/Steamship Venture)
WFT Incorporated
Osprey – London
Limit Syndicate Facility
THE WORTHAM GROUP
Primary Casualty Key Markets and their Issues
Key markets are ACE, AIG, Liberty Mutual and Zurich
All underwriters have reduction in investment income and concern over long tail issues such as asbestos
Primary casualty underwriters are focused on issues of collateral and catastrophic exposures, especially terrorism
THE WORTHAM GROUP
Primary CasualtyRisk Financing Strategy
Risk transfer above selected retentions only a portion of cost of risk
Loss analysis and forecasting to assist with Negotiation of risk transfer cost Retention analysis Reducing collateral requirements Internal budgeting and allocation alternatives Consider revising inception to minimize
reinsurance treaty impact
THE WORTHAM GROUP
Primary CasualtyLoss Forecasting Strategy
Price Waterhouse Cooper (PWC) loss forecasting software calculates insured’s own individual loss development factors
Factors used to develop prior year losses to ultimate; forecast expected losses for renewal
PWC software can only be used if triangles are available
Insurers use their own factors
Wortham can use commercial insurer factors or work with you to develop your own
THE WORTHAM GROUP
International Insurances -Controlled Master Program
Non-admitted and admitted policies are placed with the same carrier
Admitted policies are reinsured 100% by one international insurance company
ACE, AIG, Zurich or Chubb
Local/Admitted Placements inVarious Foreign Countries
Non-Admitted Excess –Difference in Conditions Program
Various Excess Placements
THE WORTHAM GROUP
Controlled Master Program - Benefits
Underwriting controlled by one underwriter, one broker and your risk management department
Premium savings over “one-off” placements
Standard and consistent level of coverage
Avoidance of coverage duplication
Avoidance of gaps in coverage
Simplified claims handling
Enhanced communications
Alternative Programs
THE WORTHAM GROUP
“Outside the Box” Ideas
Risk Financing Programs Captive and finite risk programs could be considered for
retention management purposes
Potential tax planning opportunities
Retention Adjustment Structures Structures allow for adjustment of retention based on current
economic / business indices – rig count, for instance
Provides for lower retentions and greater risk transfer when business is soft
THE WORTHAM GROUP
“Outside the Box” Ideas
Loss Portfolio Transfer (LPT) Reduction of balance sheet reserves
Reduction of required collateral
Environmental Cost Caps Funding vehicle plus risk transfer for overruns
Reduction of balance sheet reserves
Potential tax planning opportunities
Broker Relationship & Compensation
THE WORTHAM GROUP
Service Agreement andWortham Compensation
Broker Service Agreement Detailed written agreement not essential Prefer simple letter agreement
Compensation Annual fee in the form of negotiated commission No contingent commission, no wholesale commission, no
hourly charges, no reconciliation Base compensation for annual services Incentive compensation to promote even greater value added Quarterly payment option suggested Incentive payable within 90 days of conclusion of annual period
THE WORTHAM GROUP
Negotiated Commission Proposal
In addition to standard brokerage service, our fee contemplates:
Claims Support & Consultation Including Coordination of Excess insurers Claim audit participation National account instruction oversight
Electronic Certificates including Noble issuance of standard certificates
Exposure survey – annual prepared with recommendations
Assumption of prior year open items only extends to duration of Wortham service period
THE WORTHAM GROUP
Negotiated CommissionProposed
Other Essential Aspects:
Loss Portfolio Transfer fees separate
Any placements made not in current program to earn standard commission
Includes any due diligence on acquisitions or divestitures
Negotiated commission is payable quarterly
THE WORTHAM GROUP
3 Year Negotiated Commission
Year 1 Year 2 Year 3Total
Base
(In 000’s)
THE WORTHAM GROUP
Suggested Bonus Criteria
Some suggested criteria for objective scoring:
Timely policy / other documentation delivery
Communication quality / timeliness of open items
Delivery of certificates / contract review support
Delivery of renewals within parameters established as part of the renewal process
General support on other open risk management issues
Closing Comments
THE WORTHAM GROUP
We invite you to contact ourClient Reference List
Intentionally left blank
THE WORTHAM GROUP
Why Wortham?
Wortham has the depth of staff and technical expertise to add value to your Risk Management initiatives.
Independence model provides widest window to alternatives
Wortham has a substantial amount of experience negotiating international programs
We will build on your existing relationships while introducing competition
Wortham’s hands-on approach to energy claims means the same people who negotiated the wording will adjust the claims
THE WORTHAM GROUP
Why Wortham?
Our partnership business model is dedicated to providing very broad, high quality, meaningful service to our customers with long-term view
Our strategy is to lower your overall cost of risk
You would be an important energy related account for Wortham and would be handled with a sense of urgency
We invite you to check our reputation with clients, underwriters and service providers
THANK YOUfor this opportunity