October 24, 2006

1. Benchmarking For Excellence October 24, 2006

2. Presented by: Charles Gall Director, Benchmarking Services Ward Group 513-791-0303 www.wardinc.com

3. Agenda About Ward Group Benchmarking Defined What Makes a Top Performer Billing and Collections Measurements 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. YES (Prove it.) Lead to Superior Performance? Financial Quality Service Best Practice Business Practice It’s just a business practice. NO

13. Benchmarking Framework

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

15. Property-Casualty Benchmarking Framework Other Benchmarking Participants XYZ Company 15

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 2003-2005 • Excellent Company Results • INCREASE 8.9% premiums in policy • INCREASE 1.9 points in policy retention • DECREASE 4.2 points in loss ratio • DECREASE 14.1% in personal lines claims frequency versus • Declining Performance • DECREASE 14.7% new policies per agency • INCREASE 13.2% LAE paid per claim • INCREASE 7.5% expense per policy in force

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

22. FTEs per $100 Million of Gross Premiums Written Selected Benchmarks Trend Analysis U.S. Agency 142.2 136.2 127.4 U.S. High Performers 116.6 113.7 113.6

23. Policies in Force per FTE Selected Benchmarks Trend Analysis U.S. Agency 411 407 421 U.S. High Performers 564 562 563

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

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

26. Billing and Collections Measurements

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

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

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. Trends Among High Performers Cash Processing and Customer Service • 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

31. Billing and Collections FTEs per $100 Million of GPW Selected Benchmarks Trend Analysis U.S. Agency 4.3 3.9 3.4 U.S. High Performers 3.1 3.0 2.9

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

33. Trends Among High Performers Personnel Costs • 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

34. Span of Control: Ratio of Staff to Management Selected Benchmarks Trend Analysis U.S. Agency 7.4 7.4 8.0 U.S. High Performers 9.0 8.9 9.1

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

36. Billing Operating Practices 2005 Operating Structure: • 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 One location 87% Multiple locations 13% Number of locations 2.7 Percentage of cash processed by source: Bank lockbox 34% Process internally 51% Web – (EFT, CC) 15% Percentage of personal policies on direct bill 89% Percentage of commercial policies on direct bill 67% 1.58 Average number of billing systems

37. Telecommunications Expense per FTE How can technology help? Trend Analysis • 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 U.S. Agency $1,388 $1,327 $1,220 High Performers $1,138 $1,131 $971

38. Credit Card 2005 2004 2003 Credit Card Expense as a % of GPW 0.05% 0.04% 0.03% Credit Card Utilization - % of Policies: Personal Lines 3.73% 2.81% 1.87% Commercial Lines 1.32% 0.99% 0.72% All Lines 2.75% 2.06% 1.38% Credit Card Fees as a % of Total Billing and Collections (excludes IT) 20.83% 15.38% 11.11%

39. Credit Card Trends • 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

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

41. Collection Trends • 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%

42. Questions ?