Please note: while this presentation qualifies for FMDC credit, the views expressed herein are solely those of the speaker, and do not represent the v

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1 Succession Planning for Mutual Insurance Companies NAMIC Insurance Company, Inc OII/OAMIC Fall Seminar

2 Please note: while this presentation qualifies for FMDC credit, the views expressed herein are solely those of the speaker, and do not represent the views of NAMIC or NAMICO.

3 Managing Risk Insurance people, be they Directors or managers, are, or should be, risk managers Managing risk involves more than our customers risks As businesses, we have our own risk to manage...

4 Directors Some opening general observations: Again, in my opinion Directors of mutuals large and small are more aware of their companies and their responsibilities now than 16 years ago Directors are more interested in learning more about being directors now than 16 years ago Management appreciates, generally, having more informed boards

5 Succession Planning Plan ahead Not having a successor for a key position is a risk a company cannot accept Succession Planning is an ongoing process It involves management and the Board

6 The Talent Pool National and State Agricultural surveys show that the number of farms are declining While the average acreage per farm is increasing And the average age of the farm owners is increasing i

7 Succession Planning What do these numbers mean to small farm mutuals? Fewer small real farms for farm mutuals to insure Fewer young people on small farms Fewer prospects for tomorrow s Managers and Directors of farm mutuals

8 Succession Planning Companies need to have plans in place to replace managers and Directors At small companies, having staff to train for promotion may be a big problem Think about other talent t pools

9 Succession Planning At larger companies, succession planning has different issues in terms of talent pool Generally, the talent pool is state wide or national No limitations on directors being policyholders Loosely affiliated candidates will probably find the concept of working on the board of such a company more familiar.

10 Talent Pools Small Mutuals Agency Force? Local Banks? Other Mutuals? Be very, very careful with this Unrelated Businesses Educators Non-profits and volunteer groups

11 Manager Skills What are you looking for in a new manager: Understand the business of Insurance Ability to organize Understand Financial issues People person Public face for the company

12 Manager Skills Managers must be able to handle stress and crisis Managers must be able to gain a working understanding di of technical issues: Financial matters State Regulations Insurance Contracts Claims Process

13 Manager Skills COMMON SENSE and a SINCERE SMILE go a long way some days

14 Talent Pool Similar issues for larger companies: Talent is likely in-house Still may want to look outside Financial abilities may be overriding issue don t forget the Claims Department People skills are still critical

15 Talent Pool Gender cannot be a qualification for being a manager or Director Even if the company is too small to fall within the jurisdiction of state t or federal statutes, the publicity is not something you want tt to deal with...

16 Talent Pool This is the 21st Century Women have the right to vote for the candidate of their choice Women have the right to equal pay and benefits, regardless of marital status

17 Planning A company should have a succession plan in mind doesn t need to be in writing, but that may be a good thing the plan needs to be flexible the target might want to know advantage: you have a career here disadvantage: patience, incentive

18 Planning Advantages: Letting people know You have a place here! Desire to learn the business they ll take over one day Understand d that t today s actions have consequence for the future Develop management skills

19 Planning Disadvantages: Complacency Letting People know Relations with other employees Late arriving stars Losing patience waiting for the change

20 Inside vs. Outside Many companies like to promote from inside, and that s a good thing. It probably doesn t hurt to at least look outside. If going outside, be discreet for the benefit of the inside folks for the benefit of the outside folks

21 Inside Successors Make sure they have necessary training: have them attend seminars have them participate in process, when appropriate at small companies, managers should not be in training for too long (you don t want to be poached)

22 Director Succession Directors come (and some even go, eventually) If you are bound by law to have a policy holder, be aware of who is an insured: more than just your friends retirees spouses

23 Director Succession The Board and management need to work together on knowing who is in the pool Look for specific talents to complement other Board members Be mindful of personalities

24 About boards There is no formula for the perfect board. Strong, independent directors are essential to proper board functioning, but so too are elusive qualities such as collegiality, sense of common purpose, energy, industry knowledge, business sense and TRUST. Each company, through its independent nominating committee, must have the flexibility to determine the mix of qualifications and attributes that is best suited to the specific needs of the corporation. Restoring Trust or Losing Perspective? Wachtell, Lipton, Rosen & Katz August 2003

25 Director Succession Director Skills: Different Directors can fill different roles: not everyone needs to be a financial whiz or insurance agent All Directors need to know about financials and the insurance industry Marketing, PR, HR, Computers, Administration are all valued skills

26 Director Skills Director candidates must be able to work to consensus Directors must be able to continue working together th even after a contentious ti debate They must have time They must be able to read, or be trained to read, financial reports.

27 Director Skills Directors must be more than a nice person Directors must be able to think independently While SOX will not apply directly, the standards for competence for larger corporations will begin to apply to farm mutuals

28 Director Skills NEVER UNDERESTIMATE THE VALUE OF COMMON SENSE!!! A lot of being a Director is exercising common sense

29 Succession by Merger Succession by merger is usually to replace management It needs to be carefully thought out It can be a positive way to bring together two or more companies with strong histories but a need to be larger for the future

30 Succession by Merger It probably blows up about as often as it succeeds Merger means more than a shared manager merged boards merged reinsurance merged computer systems merged agency forces merged employees

31 Succession by Merger Most importantly, it is the merger of two groups of policyholders Historical Ties Company philosophies Local Sensibilities Local Institutional Support These issues are NOT trivial: some will mourn the loss of their company

32 Succession Planning Things to keep in mind: Succession is what keeps the mutual going Small companies face huge issues today New blood needs to be up to the challenge New experience and training is critical today

33 QUESTIONS??

34 Would You Like a Copy? Contact Tim Sullivan TSullivan@NAMIC.org or call Tim (800)