GOE Allocation Presentation

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Latin American & Caribbean GOE Allocation ModelSean Clifford – Controller Latin American RegionDouglas Magill – Latin American Controls Team

June 6, 2012

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Agenda

Current State Objectives Benefits Cost Drivers Compensation vs. Non-Compensation Expense Categories Allocating Compensation Expenses Checks & Balances Demo Challenges

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Current State of GOE Allocation 33+ Entities with their own methods of allocation. Examples:

- Somewhat sophisticated- Very Basic GPW/Headcount- Use of 3rd party vendor- Subject to manual reclassifications

Direct and Indirect charges to minor lines. Directly impacts of pricing. Misallocation of resources.

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Objectives of the new GOE Allocation Model

Standardized Transparent Fair Logical Automated and Easy to Use Flexible

‘Establish an active Business Performance Management Model at all levels of the organization to enable Management to make informed tactical & strategic decisions which improve business results’ Source: Six Core Finance Initiatives (R. Schimek) – Capital Management & Business Performance

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Benefits of new GOE Allocation Model

Profit Centers must assume ownership for costs Clear appreciation of all supports costs necessary to support the business Greater focus on the business to drive down costs rather than influencing how those costs are allocated Greater level of confidence that expenses are factored into product pricing Facilitates more accurate ROE and ROC calculations Gives greater justification for potential divestment strategies

Cost Reductions Expense between countries should be more comparable Drives process improvements and best practices Leverage economies of scale

Reporting More informative Reduces level of manual effort required to calculate and report monthly GOE allocations via MOR and Expense By Cat

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Cost Drivers Metrics used by minor line of business.

- Foreign General Results1. GPW2. NPW3. NLI4. NPE

- CL106 (Claims)1. Claims Count (Sum of open reserve count and closed claims cases)2. Claims Count Weighted3. Closed Claims4. Salvage and Subrogation Count4. GLI

- Policy Transaction Count Report from Operations1. Policy Transaction Count Unweighted2. Policy Transaction Count Weighted

-. FAC Count-. Headcount (To the fraction)-. Operating Minor Lines-. Manual Entry

1. Number of Direct Marketing Campaigns2. Floor Space3. Engineering Surveys

30+ hybrid drivers derived from above Statistics

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Metrics Entry PageCost Drivers / Minor Lines

Aviation LineCasualty Auto

Excess Casualty

General Liability

Workers Compensation

Floor Space Occupied 0.00 8.40 1.30 8.40 0.00

Engineering Cost Driver 0.00 0.00 0.00 0.00 0.00

Marketing Campaigns Per LOB 0.00 0.00 0.00 0.00 0.00

GPW FGen $0 $1,053 $330 $766 $0

GPW FGen Except Global Market $0 $1,053 $330 $766 $0

Commercial Lines FGen GPW $0 $1,053 $330 $766 $0

Commercial Lines except Global Market FGen GPW $0 $1,053 $330 $766 $0

Consumer Lines FGen GPW

NPW FGen $0 $1,050 $219 $660 $0

Commercial Lines FGen NPW $0 $1,050 $219 $660 $0

Consumer Lines FGen NPW

NLI FGen $0 $568 $0 $0 $0

Commercial NLI FGen $0 $568 $0 $0 $0

Consumer NLI FGen

GLI0.00

1,780,082,687.06

496,919,421.72

1,077,529,795.07 0.00

Commercial GLI0.00

1,780,082,687.06

496,919,421.72

1,077,529,795.07 0.00

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Metrics Percentage PageCost Drivers / Minor Lines

Aviation LineCasualty Auto

Excess Casualty

General Liability

Workers Compensation

Floor Space Occupied 0.00% 0.35% 0.05% 0.35% 0.00%

Engineering Cost Driver 0.00% 0.00% 0.00% 0.00% 0.00%

Marketing Campaigns Per LOB 0.00% 0.00% 0.00% 0.00% 0.00%

GPW FGen 0.00% 1.97% 0.62% 1.44% 0.00%

GPW FGen Except Global Market 0.00% 2.28% 0.72% 1.66% 0.00%

Commercial Lines FGen GPW 0.00% 2.87% 0.90% 2.09% 0.00%

Commercial Lines except Global Market FGen GPW 0.00% 3.57% 1.12% 2.60% 0.00%

Consumer Lines FGen GPW

NPW FGen 0.00% 3.09% 0.65% 1.95% 0.00%

Commercial Lines FGen NPW 0.00% 5.55% 1.16% 3.49% 0.00%

Consumer Lines FGen NPW

NLI FGen 0.00% 4.16% 0.00% 0.00% 0.00%

Commercial NLI FGen 0.00% 7.55% 0.00% 0.00% 0.00%

Consumer NLI FGen

GLI 0.00% 3.50% 0.98% 2.12% 0.00%

Commercial GLI 0.00% 4.30% 1.20% 2.60% 0.00%

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Compensation vs. Non-Compensation Expense Categories

Expense categories and the % of overall expenses they represent in Latin America for 2010

Salary & Comp – 60% Consultancy – 8% Rent – 7% Insurance Taxes, Licenses and Fees – 4% Data Processing – 3.8% Amortization of Mass Marketing – 3% Communication – 3% Advertising – 2.5% Depreciation – 1.7% Travel – 2% Office Supplies – 2% Other Costs - 2% Amortization of EDP Projects - 1%

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Compensation Expense from Payroll File Allocation

Payroll File

PC (Direct) or SC Indirect

Choose Major Line

Program imports data from payroll deciding whether an employee works for a Profit Center or Service Center

Choose Service Center

Choose Minor Line

After major line is chosen a

minor line within major line must be chosen. The “All Minor Lines

within Major Line” option can

be chosen as well.

If “All Minor Lines within major line” option is chosen program will

allocate to all minor lines within major line via 50%

GPW 50% policy transaction count

weighted

All Minor Lines within Major Line

Minor Line 1 Minor Line 2

Minor Line

Choose % of Employee time

An allocation of the

employees time between 0 and 100%

must be allocated to the major/minor line

combination

Import

direct

Direct

Direct

Direct Direct

Indirect

Choose Activity

Indirect

Major Line or Cost Driver

If Major Line is chosen a minor line has to be

chosen or the “All Minor lines within major line” option must be chosen

Minor LineMajor Line (All minor Lines within

Major Line), expense will be allocated to all minor lines via the

cost driver associated with the Service Center employee works for.

Choose % of Employee Time

A Cost Driver is chosen that is

associated with the employees

activity that allocated to

aplicable minor line


All Aplicable Minor Lines

Indirect

IndirectIndirect

IndirectIndirect

Indirect

Indirect

Indirect

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Profit Center Employee Allocation Page

Employee Profit Center Minor Line 1 Percent % Profit Center Minor Line 2 Percent

%

Employee 1 Accident and HealthAll Accident and Health 100%

Employee 2Accident and Health

All Accident and Health

100%




sin nombre Accident and HealthAll Accident and Health 100%

Employee 6 Accident and Health Direct to Consumer 81% Financial Lines Loyalty 4%

Employee 7 Accident and Health Direct to Consumer 70% Accident and Health Group PA 20%



Sales Employee Accident and Health Direct to Consumer 81% SBS AIG Combined 7%

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Service Center Employee Allocation Page

Employee Service Center 1 Activity 1 Cost Driver / Direct Profit Center 1 Direct Minor

Line 1Percent %

Employee 1Administration Administering

x 30 Percent By Operating Minor Lines and 70 Percent based on Headcount

50%


x 30 Percent By Operating Minor Lines and 70 Percent based on Headcount

100%


x 30 Percent By Operating Minor Lines and 70 Percent Based on Policy Transaction Count Weighted

100%


x 30 Percent By Operating Minor Lines and 70 Percent Based on Policy Transaction Count Weighted

100%

Employee 5Claims

Claims Handling and Adjusting Direct Accident and Health

Direct to Consumer

45%

Employee 6Claims

Claims Handling and Adjusting Direct Personal Lines

Extended Warranty

33%

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General Ledger with

GOE Breakout

Indirect or Direct

Expense?

Minor Line or Major Line?

Minor Line Major Line

SC or Exp Cat


General Expense by Category

Minor Lines

Service Center

Minor Lines

Import

Direct Indirect

DirectDirect

Direct

Direct

Indirect Indirect

IndirectIndirect

Non-Salary Expense by Category Allocation Decision Tree

Allocate to all minor lines within major lines via the cost driver

associated with the expense

category

Allocate expense to a service center

or to an expense by

category bucket

Use Cost Driver

associated with expense category to

allocate to all minor lines and Service

Center

Allocate to all applicable

minor lines via the cost driver

associated with the

Service Center

Indirect

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Profit CentersDirect

Marketing Campaign Expenses

Advertising Expense Non

DM

Total Advertising

Cost

Accident and Health Total $66,574,723 $1,405,000 $72,076,008

Direct to Consumer $66,574,723 $66,574,723

Individual Travel $1,405,000 $5,501,285

Life $0

Voluntary Employee Benefits $0

All Accident and Health $0

Aviation Total $0 $0 $0

Aviation Line $0

Service Centers Advertising

Cost to Service Centers

Executive $17,832,922 $17,832,922

Finance and Accounting $0

Human Resources $0

Legal $0

Other $1,868,172 $1,868,172

Company Wide Total Unallocated

General $0

Total: $146,036,408 $23,092,577 $173,225,270

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GOE Allocation Flow Chart – Non Salary

Trial Balance with Direct

GOE breakout

Direct to a LOB (Minor Line) General Cost by

Category bucketMajor Line (Profit

Center)

Service Centers

IndirectIndirectDirectDirect

All LOBs (Minor Lines) within Major

Line (PC)Direct

Allocate to all LOBs under major line via

cost driver associated with expense category

from which cost originates

Headquarter Expenses (No Reallocation)

Other Costs (20-20-20-20-20)

Consultancy (20-20-20-20-20)

Insurance (20-20-20-

20-20)

Advertising(20-20-20-

20-20)

Tax Fee Lic (20-20-20-20-

20)

Amort of PL DM Costs (Direct to Personal Lines)

Intercompany (20-20-20-20-

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Amort of A&H DM Costs

(Direct to DTC LOB)

FFE (Headcount)

Office Supplies

(Headcount)

Communication (Headcount)

Data Processing (30% Operating

LOB, 35% Headcount, 35%

Policy Trans Count Unweighted)

Rent (Floor Space)

Other Personnel

(Headcount)

EDP (30% Operating LOB, 35% Headcount,

35% Policy Trans Count Unweighted)

Travel (Headcount)

Actuarial (20-20-20-20-20)

Administration (20-20-20-20-20)

Claims (Claims Cases)

Finance and Accounting (20-

20-20-20-20)

CSU and CSG (Policy Trans Count

Weighted)

Engineering (Engineering Cost

Driver)

Compliance (20-20-20-20-20)

DTC (Campaigns per LOB)

Other (20-20-20-20-20)

Reinsurance (30% Operating LOB and 70% FAC Count)

Legal (20-20-20-20-20)

IT and Operations (30% Operating LOB, 35%

Headcount, 35% Policy Trans Count Unweighted)

Sales (GPW excluding Global Market)

Executive (20-20-20-20-20-20)

Human Resources (Headcount)

All LOBs (Minor Lines)

Parent Service Fees (20-20-20-

20-20)

Mgmt & Other Fee Income (20-20-20-

20-20)

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Checks & BalancesPayroll Import File = Sum of GL Salary Expense AccountsEvery employee must allocate 100% of his/her activity to a profit center or support departmentPayroll Import deletes employees not in payroll and forces the 100% allocation of new employees prior to runningSalary Data hidden, protected and encryptedAll Cost Drivers must = 100%Model will alert when all newly created cost centers or GL expense accounts are not mapped Mapping of Local General Ledger Accounts to Expense By Category determines allocation driver bucket

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Cost Center / Minor Line Total Direct Costs Total Indirect CostsTotal FGEN GOE

Results

Percentage of FGEN GOE

Results

Accident and Health $1,109,750,301 $331,937,111 $1,540,672,246 38.08%

Direct to Consumer $1,003,597,511.74 $193,627,303.58 $1,272,217,255 31.44%

Group PA $35,580,772.25 $55,186,770.72 $97,965,284 2.42%

Group Travel $20,134,725.14 $16,419,039.01 $40,031,697 0.99%

Individual Personal Accident $5,443,774.29 $499,306.25 $6,020,390 0.15%

Individual Travel $34,946,220.47 $52,367,039.50 $98,224,733 2.43%

Life$0.00 $0 0.00%

Voluntary Employee Benefits $10,047,296.87 $13,837,652.38 $26,212,886 0.65%

Aviation $4,022,919 $0 $4,022,919 0.10%

Aviation Line$4,022,919.00 $4,022,919 0.10%

Casualty $84,954,658 $83,787,411 $191,507,996 4.73%Casualty Auto $47,717,793.67 $47,524,604.11 $109,319,566 2.70%

Excess Casualty $11,704,340.94 $13,269,050.52 $27,867,439 0.69%

General Liability $25,532,523.03 $22,993,756.84 $54,320,991 1.34%

Workers Compensation$0 0.00%

Total GOE Results

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Cost Center / Minor LineDirect Data

Processing CostsIndirect Data

Processing Costs Total DP ResultsPercentage of DP

Results

Accident and Health $59,783,539 $41,958,059 $101,741,598 30.68%

Direct to Consumer $51,878,632.31 $21,638,312.58 $73,516,945 22.17%

Group PA $1,779,069.86 $8,167,530.75 $9,946,601 3.00%

Group Travel $1,657,391.09 $2,275,544.96 $3,932,936 1.19%

Individual Personal Accident $141,140.00 $80,679.29 $221,819 0.07%

Individual Travel $3,840,920.13 $7,398,651.81 $11,239,572 3.39%

Life$0.00 $0 0.00%

Voluntary Employee Benefits $486,385.61 $2,397,339.51 $2,883,725 0.87%

Aviation $0 $0 $0 0.00%

Aviation Line$0 0.00%

Casualty $4,971,175 $11,243,202 $16,214,377 4.89%Casualty Auto $1,631,898.00 $6,402,334.35 $8,034,232 2.42%

Excess Casualty $1,581,470.00 $1,928,616.57 $3,510,087 1.06%

General Liability $1,757,807.00 $2,912,250.73 $4,670,058 1.41%

Expense by Category Results

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Service Center / Activity Driver Direct Costs Indirect Costs

Total Property Line

Percentage of Property Line

Percentage of Overall Cost

Category

Actuarial $0 $0 $0 0.00% 0.00%

Actuarial Duties$0 0.00% 0.00%

Administration $0 $585,316 $585,316 0.16% 6.16%

Administering$585,316 $585,316 0.16% 6.16%

Claims $7,566,809 $188,373 $7,755,181 2.17% 5.70%Claims Handling and

Adjusting $33,151 $188,373 $221,523 0.06% 0.45%

Manage Claims Department$7,533,658 $7,533,658 2.11% 8.64%

Salvage and Subrogation Processing $0 0.00% 0.00%

Compliance $0 $1,511,727 $1,511,727 0.42% 10.72%

Comp. Audit and Reporting$1,511,727 $1,511,727 0.42% 10.72%

Property Minor Line GOE Results

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ChallengesBuy-in of PCMsTrainingAccess to PayrollDiffering source files to be imported (Payroll, Trial Balances, CL106,Policy Transaction Count, FAC Count)Maintenance of MappingsExcel 2003 and 2007 compatibility issues. Time Sheets

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Q&A

Documents

GOE Allocation Presentation