1 October 24, 2006 Benchmarking For Excellence

2 Presented by: Charles Gall Director, Benchmarking Services Ward Group

3 Agenda About Ward Group What Makes a Top Performer Billing and Collections Measurements Benchmarking Defined Questions

4 About Ward Group Ward Group is an operational consulting firm specializing in the insurance industry and... The leading provider of industry benchmarking and best practices services, using trusted "apples-to-apples" benchmarking methodology to help insurance companies better understand their company operations compared to industry peers. We offer benchmarking programs for total company operations, IT operations and claims operations. Separate programs are available for life, health and annuity companies and property-casualty companies and... Operational Consulting service including process reengineering, productivity improvement, cost reduction, distribution system analysis and cost allocation.

5 Benchmarking Defined

6 The search for those best practices that will lead to superior performance of a company.

7 Search may occur across a wide spectrum of industries.

8 Important to Integrate Best Practices and Financial Comparisons

9 One without the other is not benchmarking. Comparing numbers without understanding the underlying business practices (in detail) of the other companies quickly leads one to the dead end question, “Now what do we do?”.

10 Comparing business practices among companies without financial comparisons may lead one to implement a business practice that does not lead to superior performance. Must have both elements.

11 What is a Best Practice?

12 Business Practice Lead to Superior Performance? Financial Quality Service Best Practice NO YES (Prove it.) It’s just a business practice.

13 Benchmarking Framework

14 Establish Benchmarking Framework Develop Apples-to-Apples Comparisons Study Company Operating Practices and Philosophies Review and Interpret the Results Identify Best Practices Step 1 Benchmarking Process Continuously Monitor the Results Step 2 Step 3 Step 4 Step 5 Step 6

Property-Casualty Benchmarking Framework 15 XYZ Company Other Benchmarking Participants

16 What makes a Top Performer?

17 URBAN LEGENDS Stock companies are stronger than mutual companies Independent agents cannot compete with direct writers Mix of business determines success National companies are stronger than regional companies Size matters

18 THE TRUTH Insurers can be profitable regardless of business mix, distribution channel, size, or geography.

19 Industry Observations

20 Benchmark Observations Excellent Company Results INCREASE8.9% premiums in policy INCREASE1.9 points in policy retention DECREASE4.2 points in loss ratio DECREASE14.1% in personal lines claims frequency Declining Performance DECREASE14.7% new policies per agency INCREASE13.2% LAE paid per claim INCREASE7.5% expense per policy in force versus

21 Profile of Property-Casualty Benchmarking Universe Mix of Business 31.9% 68.1% 37.1% 62.9% Personal Lines Commercial Lines U.S. Agency Benchmark U.S. High Performer Benchmark $532 Million Average GPW $829 Million Average GPW

22 FTEs per $100 Million of Gross Premiums Written Selected BenchmarksTrend Analysis U.S. Agency U.S. High Performers

23 Policies in Force per FTE Selected BenchmarksTrend Analysis U.S. Agency U.S. High Performers

24 Total Expense per Policy in Force Selected BenchmarksTrend Analysis $648$691$697 $497$528$534 U.S. Agency U.S. High Performers

25 Gross Expense as a % of Gross Premiums Selected BenchmarksTrend Analysis 37.9%38.4%37.4% 32.7%33.7%34.2% U.S. Agency U.S. High Performers

26 Billing and Collections Measurements

27 Billing and Collections Expense as a % of Gross Premiums Selected BenchmarksTrend Analysis 0.45%0.44%0.44% 0.32%0.33%0.34% U.S. Agency U.S. High Performers

28 Billing and Collections Expense per Policy in Force Selected BenchmarksTrend Analysis $10$10$9 $6$6$6 U.S. Agency U.S. High Performers

29 Billing and Collections Expense Distribution  Approximately 45% of the total billing and collections expense is related to information technology support.  Credit card fees have increased 19% each year over the last 3 years.

30  Offer online inquiry tools for agents and policyholders  View bill, pay bill, update billing information  Offer EFT and credit card payment options  Achieve superior EFT penetration (and retention)  Centralization of customer service and billing functions allows for better peak-period staffing requirements  Generally have one billing system that supports both direct bill and agency bill Trends Among High Performers Cash Processing and Customer Service

31 Billing and Collections FTEs per $100 Million of GPW Selected BenchmarksTrend Analysis U.S. Agency U.S. High Performers

32 Average Compensation per Billing and Collections FTE Selected BenchmarksTrend Analysis $50.4K$53.1K $54.6K $53.0K$56.5K$57.2K U.S. Agency U.S. High Performers

33  Benefits costs increasing 12% per year since 2003  High performers pay the personnel cost as the industry average  Higher span of control reduces company-wide expense Trends Among High Performers Personnel Costs

34 Span of Control: Ratio of Staff to Management Selected BenchmarksTrend Analysis U.S. Agency U.S. High Performers

35  Fewer levels to communicate objectives  Personnel costs differences between management and staff  Top performers generally have higher span of control Reasons to Consider Span of Control

36 Billing Operating Practices Operating Structure: Percentage of cash processed by source: Bank lockbox Process internally % 34% 51% Web – (EFT, CC)15% Percentage of commercial policies on direct bill 89% 13% 2.7 One location Multiple locations Number of locations 67% Percentage of personal policies on direct bill Average number of billing systems 1.58  Regional companies have centralized billing function  National companies have consolidated number of locations  Personal lines moving towards 100% direct bill  Consolidating systems to one system that can handle both direct and agency bill

37 Telecommunications Expense per FTE How can technology help?  Voice Over Internet (VOIP)  Call queue, scripting and call center management reducing call length  Web based services - Online customer service eliminating phone calls - Self service capabilities Trend Analysis $1,388$1,327$1,220 $1,138$1,131$971 U.S. Agency High Performers

38 Credit Card Credit Card Expense as a % of GPW Credit Card Utilization - % of Policies: Personal Lines Commercial Lines %0.04%0.03% 3.73% 1.32% All Lines2.75% Credit Card Fees as a % of Total Billing and Collections (excludes IT) 20.83%15.38%11.11% 2.81%1.87% 0.99%0.72% 2.06%1.38%

39  Gained efficiencies in the billing and collections function offset by rise in credit card fees  Credit card fees account for one-fifth of the total billing and collections expense  Companies moving towards the use of third party vendors to reduce credit card expense Credit Card Trends

40 Bad Debt Expense per Policy in Force Selected BenchmarksTrend Analysis $6.5$5.7$4.6 $4.5$3.9$3.5 U.S. Agency U.S. High Performers Note: Bad Debt Expense is not a subset of the Billing and Collections Expense metrics

41  Offset to higher credit card use is lower bad debt expense  Implementing equity calculation to minimize past due balances  Approximately 6.5% of accounts receivable balance is past due  53% use in-house collections to attempt to collect past due amounts (versus external collection agency)  Average collection rate on accounts transferred into collections is 39% Collection Trends

42 Questions ?