VALUE OF YOUR COMPENSATION

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VALUE OF YOUR COMPENSATION

• Session 41 February 28, 2006
• Session Producer
• Clark Heitkamp, FSA, MAAA, LTCP
• 1st Vice President and Actuary
• Mutual of Omaha

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PANEL

• John Hennessey, General Manager, American
  Independent Marketing
• Rick Dennen, President and CEO,
• Oak Street Funding
• Richard Pitbladdo, Chief Financial Officer, LTC
  Global Solutions

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Value of CompensationWhose Perspective?

• Home Office
• Wholesaler
• Street
• Purchaser
• Lender

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Value of Compensation

• Field Marketing Perspective
• Past, Present and Future
• by
• John Hennessey
• American Independent Marketing

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Changes in Commission Structure Over Time

• Mid 90s Age-Graded versus Level Schedules
• Mid to Late 90s Reduction in Commissions in
  years 11
• 2000
• Return to level
• Lower base commissions

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Average Issue Age By Year and Decline
RatesAverage issue age shaded in blue - AIM
experience

• Decreasing Average Ages
• Increasing Decline Ages

7
Level for Life Versus Reduction in Year 11Assume
issue age 55, premium paid to age 85
ACTUARIAL

• Agent Perspective
• Level renewal produces 50 more total
  compensation!
• Retirement income reduced by 62.5 (3 / 8
  37.5 )

Focused on Solutions The 6th Annual
Intercompany LTCi Conference
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Other Factors Impacting Compensation

• Lower Compensation Rates
• Higher Decline Rate
• Increased Product/Application Complexity
• Higher Premium Rates
• Do Not Call
• Lower Direct Mail Response Rate
• Higher Direct Mail Costs
• Lower Seminar Attendance

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Decreased Profitability
Commissions
Costs

Pleasure
Pain
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Compared to What?

• Annuities
• Life
• Med-Supp
• Critical Illness
• Other

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Additional Changes Impacting Marketing

• Trend toward inflexibility in Home Office
• Limited number of schedules available to work
  with
• Compression of range between top and bottom
• Limited ability for agents to have different
  commission arrangements for different situations

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Recognizing MultipleAudiences

• LTCi a mainstream product
• Occasional Producer versus Big Hitter
• New agents versus established agents

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Equivalent Commissions 1 pt. years 2-10 equals 4
pts. first year1 pt. first year equals 1 pt.
years11
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Where Do We Go From Here?

• Favorable demographics Long term
• Phenomenal persistency
• Younger ages, longer renewal stream
• Return to market stability
• Pendulum beginning to swing back?

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Value of Your Compensation

• A Lenders Perspective
• by Rick Dennen
• Oak Street Funding

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• Lenders Calculation of the Value of Compensation
• Compare LTCI with other products
• Considerations for borrowing against compensation

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First Year Premium Persistency Projections
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Renewal PremiumPersistency Projections
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Total Estimated Value of Premium
Note Without commission schedule or cost to
service included in calculation
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Effect of Commission Schedule

• Assumptions
• LTC Year 1 70 Year 2 -10 8 Year 11 up
  8
• Med Sup Book Year 1 6 25 Year 7-10 12.5
  Year 11 up 2
• Other Critical Illness Year 1 70 Year 2 -10
  5 Year 11 up 0
• Life Insurance Year 1 90 Year 2 up 3
• Whole Life Year 1 90 Year 2 up 3
• PC Book Year 1 -10 10 Year 11 up 0

Note Cost to service not included in calculation
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Value of Premium vs. Commission
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Premium vs Commission Gross and Net
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Other Contributing Factors

• Agent Loyalty to Carrier
• Captive vs. Non-captive
• Regulations controlling the transfer (rolling) of
  policies
• Level of ongoing service required per product
• Ability of policy holders to shop for new policy
  (i.e. age of policy holder)
• Fundamental differences between LH and PC
  servicing

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Value of Commission Stream

• Lender will evaluate current status of the book
• Current active policy holder set
• Commission Schedule
• Agent Contract
• Lender will project future commissions on the
  book
• The amount of the loan will affect the level of
  risk involved
• More risk usually means a higher interest rate
• The performance of a book of business will be
  inherently different based on the agents
  continued interest in the commission stream

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Pros Cons of Borrowing

• Pros
• Interest costs are tax deductible
• Retain ownership of the book
• Retain long term value
• Could improve your credit score
• Doesnt tie up conventional collateral
• Cons
• Loan represents a long term obligation
• Typically less cash upfront as compared to sale

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Value of Agent Compensation

• Exploiting an Underappreciated Business Asset
• by
• Richard Pitbladdo
• LTC Global Solutions

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Important Questions

• How do I finance business investment and growth?
• How can I accelerate my reward for producing
  business?
• How can I diversify my asset base?
• Whats the best exit strategy?

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Renewal Commissions

• LTC renewal commissions represent a significant
  source of value
• Banks generally do not recognize the value and
  stability of renewals
• Specialist lenders
• Specialist buyers

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How Much Capital Can I Raise?

• Age (younger the better)
• Duration (more seasoned is better)
• Sex (female is better unless single)
• Marital Status (married is better)
• Step-downs
• Benefit plan
• Contract provisions
• Carrier and underwriting

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Range of Values

• 2X
• B-rated carrier, no longer selling, liberal
  underwriting
• Florida
• Mostly single
• 75 year attained age average
• No inflation
• High cash indemnity NH daily benefits
• Rate increases not commissionable

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Range of Values

• 4X
• Top tier carrier, strict underwriting
• Mostly married
• 70 year attained age average
• 5 inflation
• Rate increases commissionable
• GPOs
• Limited rights of withholding

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Selling Commissions

• Quick and Easy
• No risk to company failure
• No risk to increasing morbidity, mortality
• No covenants
• Lose upside of commission performance
• Accelerated taxation, ordinary income
• Installment Sales

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Collateralized Borrowing

• Keep upside of good performance
• Defer taxation (must plan carefully)
• Still on the hook for risk
• Ongoing covenants
• More complex legally but the right lender can
  streamline process
• Better choice for products requiring active
  servicing (P/D, MedSup)

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Selling Agency Stock

• Remove risk as in commission sale
• Capital gains tax rate
• Installment sales defer
• Can get paid for going concern as well as
  renewals
• Can start new entity to receive new business

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Summary

• Renewals are valuable
• Developing capital markets providing liquidity
• Many ways to skin cat
• Best solution depends on particular situation