University of Houston Bauer College of Business January 27, 2005 presentation by: Robert B. Hixon

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University of HoustonBauer College of
BusinessJanuary 27, 2005presentation
byRobert B. Hixon
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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
• PSAs, MSAs and the new Underwriter Service Fee

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Response to Request for Proposal
Sample Broker Presentation
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Discussion Items

• The Wortham Difference
• Insurance Market Update
• Available Services
• Team Selection Support
• Casualty and Energy Claim Handling Services
• International Capabilities
• Cost of Risk and Retention Analysis
• Energy, Liability and Casualty Insurance Renewal
  Strategies
• Employment Practices Liability
• Alternative Programs
• Broker Relationship Compensation
• Closing Comments

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The Wortham Difference
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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

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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

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Mission Statement

• Service to handle our clients 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

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Representative Clients
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Representative Energy Clients
Adams Resource Energy, Inc. American National
Power Anadarko Petroleum Anderson Oil,
Ltd. Apache Corporation City of Austin (Austin
Energy) Bridas Energy Brownsville Public Utility
Board BT Operating Company Chevron Phillips
Chemical Co. LLC CICO Oil Gas Cogen
America ConocoPhillips Company Copano Operations,
Inc. Delta Power Company, LLC Dorchester
Hugoton Dynegy Inc. Edge Petroleum
Corporation Global Octanes HNG Storage
Key Energy Services, Inc. Lewis
Energy LCRA Mosbacher Energy Company Nabors
Industries, Inc. National Fuel Gas / Seneca
Resources Ocean Energy, Inc. Parker Drilling
Company Pioneer Drilling Company Plains
Resources Peoples Energy Production Quicksilver
Resources Range Resources Seitel, Inc. / DDD
Energy, Inc. Spinnaker Exploration Company Tetra
Technologies Texas Petrochemical The George R.
Brown Partnership Verus Energy
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Representative Marine Clients
9 vessels
1 derrick barge
28 harbor tugs
2 seismic vessels
1 derrick barge
10 vessels
5 tankers
32 supply boats
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Non-Energy Profile Clients
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Insurance Market Update
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Standard Poors Ratings Comparisons
Notes (1) Munich has now been downgraded to
A (2) CNA s senior debt was recently down
graded by Fitch to BBB-
Source Standard Poors
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Lloyds of LondonPure Year Profit/Loss,
1985-2002 (m)
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Capacity Utilization (bn)
Estimates from Business Plans
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Risk Code ET Energy, Search and Production
Vessels and Offshore Property, including War
(excluding War Only Risks)
Source Lloyds Syndicate Quarterly Returns
For First Quarter 2003
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Risk Code EW Energy Operators Extra Expenses
and Well Control
Source Lloyds Syndicate Quarterly Returns
For First Quarter 2003
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Premium Rating Index
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Insurance Market -2003

• Additional capacity entered the market following
  2001 losses to take advantage of favorable
  underwriting conditions
• Lloyds 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

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(No Transcript)
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Available Services
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Service DifferentiationRisk Management Support

• Partner in risk management problem solving
• Provide presence when required
• Administrative consultation
• Underwriter meetings
• TPA/claims support meetings
• Trigger technical support
• Submitting frequent open items lists
• Advise as insurance market conditions change

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Critical Wortham Services

• Risk Management Information Systems (RMIS)
  support
• Internet portal
• Electronic certificates
• Contract review
• Retention analysis
• Exposure survey
• Loss control / safety support
• Alternative risk products

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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

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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/worksite
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The Value of Wortham RMIS to Corporations
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

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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

Certificate issuance service is subject to
insurance carrier approval.
http//www.jwortham.com/demo
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Contract Certificate Review Support
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Team Selection Support
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Goals in Team Selection

• Experience in industry, very significant accounts
  and specialization requirements
• Availability to deliver Worthams standard of
  service
• Depth to provide appropriate and timely solutions
  to Noble Corporations risk management needs

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Service Team

• Primary account service team members chosen to
  meet Your needs
• Access to Worthams 425 member team of experts
• Continuity the average tenure of our partners
  and professionals is over 20 years

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Your Wortham Team
Partner Account Executive
Joyce Gilbert Assistant
Partner Risk Mgmt. Services Partner RMIS Loss
Control
Partner Alternative Risk Partner Prof.
Indemnity Partner Crime/Bond Manager
Partner Marine Partner Marine
Partner Casualty International Casualty Partne
r Casualty Claims
Partner Energy Partner Energy
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Casualty and Energy Claim Handling Services
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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
• Worthams continued assurance of quality control

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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

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Energy, Well Control and Property Claims

• Worthams 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 clients 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.

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International Capabilities
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WorthamNet

• Business partnerships with 179 successful
  brokerages in 134 countries worldwide
• In-country knowledge and expertise
• Wortham quality, service and standards of coverage

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Wortham Assurex Global Partner

• Made up of nearly 70 of the largest independent
  PC 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

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Your Wortham International Correspondents

• Noble Locations JLW Network Allow Non-Admitted
• Barbados Lynch Insurance Brokers Must be approved
• Brazil Adams Porter Sociedade de Corretagem No
• Canada, Alberta Trilagy Insurance Financial
  Services, Inc. No (40 tax)
• Canada, Newfoundland Anthony Insurance, Inc. Yes
• Cayman Islands Crusader International Management
  (Cayman) Ltd. Yes
• Denmark Dahlberg Assurance Brokers Ltd. Yes
• Germany Leve Nill GmbH Yes
• Nigeria Femi Johnson Company Ltd. No
• Norway Aon Grieg AS Yes
• Qatar Arab Commercial Enterprises Qatar, Ltd. Yes
• Scotland Willis Corroon Scotland Limited Yes
• The Netherlands Meeus Assurantien Yes
• United Arab Emirates HSBC Insurance Brokers No
• Venezuela Asegure, S.A. No

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Cost of Risk and Retention Analysis
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Cost of Risk Premiums Retained Losses
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Risk Retention Factors

• Materiality of extraordinary losses
• Frequency and severity of expected losses
• Cost and availability of insurance excess of
  various retention levels
• Companys degree of risk aversion

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Risk Retention Materiality Cash Flow
2003 Estimated Cash Flow from operations
-234,000,000 (annualized first six months)

• 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

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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

• Loss Net Income After Change in Change in
• Decrease 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

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Retention Capacity

• Based on industry standards established by
  International Risk Management Institute (IRMI) in
  millions
• Method Basis Low High Median
• Working Capital 173 3.5 26.0 14.8
• 2-15
• Total Assets 3,098 31.0 154.9 92.9
• 1-5
• Earnings 166 5.0 13.3 9.1
• 3-8
• Operating Margin 227 1.1 2.8 5.5
• ½-2
• As of June 30, 2003 or annualized first 6
  months of 2003

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Marine, Liability and Casualty Insurance Renewal
Strategies
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Worthams 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

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Worthams 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

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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.

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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

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Marine PackageLloyds 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 Brokers
• HSBC International
• JLT Limited
• Park International

We are Independent
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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 oversubscribed
• If the market does not experience a major
  catastrophe, some Underwriters may find it
  difficult to reach their premium targets for the
  year.

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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

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Maritime Employers Liability (PI) 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

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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

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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

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Primary CasualtyLoss Forecasting Strategy

• Price Waterhouse Cooper (PWC) loss forecasting
  software calculates insureds 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

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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

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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

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Alternative Programs
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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

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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

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Broker Relationship Compensation
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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

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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
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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

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3 Year Negotiated Commission
(In 000s)

• Year 1 Year 2 Year 3 Total
• Base

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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

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Closing Comments
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We invite you to contact ourClient Reference List

• Intentionally left blank

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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
• Worthams hands-on approach to energy claims
  means the same people who negotiated the wording
  will adjust the claims

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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

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THANK YOU for this opportunity