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Q: How has the soft market impacted your operations and what is your sense in terms of timing?Where are we in the cycle?

Michael Sicard: In Q3 and Q4 of 2007 we saw a dramatic difference in soft market timing. We saw a real rate decline [then] and in the beginning of 2008 that was different from what we saw in Q1 and Q2 of 2007.To break down the soft market into three phases--early, mid and late--we are clearly in the mid. We're not making projections about the market hardening in 2008 or 2009. We're not seeing indications that the market is reversing. We're not expecting a continuing precipitous decline but we expect the market to continue to soften.

John Howard: It concerns us in that the rate decline appears to be increasing. Certainly, [it] varies by the size of the account, by line of business, by geographic region. On average, we're seeing 15 percent declines at this point. We don't see an end or turning point. Our company benefits from the diversification of our three divisions. The largest, our life insurance wholesale business, isn't affected by the soft P/C cycle at all. It represents about 40 percent of earnings. We also administer retirement plans for small and mid-market companies. That represents about 30 percent of earnings. So 70 percent of earnings aren't affected at all by P/C market fluctuations. Our P/C business, 30 percent of earnings, is a combination of excess surplus lines brokerage [and] MGA activities, [where] we don't see the same fluctuations.

Q: Have you been able to negotiate higher commission rates?

Martin Hughes: Absolutely. We're relentless at negotiating. I don't know what they're telling you but I can tell you that we've had success.

Q: In terms of magnitude, is it a one-off or a more holistic approach?

Martin Hughes: It's both. Our offices work very hard on every single account. Sometimes underwriters ask us to give up commissions. More often than not, we are successful. We say, if you look at the average commission we collect, this is what the contract calls for?[so] pay us.

Michael Sicard: Even though we're all brokers, we do different things--different territories, different requirements, different skill sets. We're able to sit down with the carriers and say, 'Here's what we know how to do, here's where you want to grow.' That's where we find particular success in negotiating commission rates.

John Howard: We've had some success in negotiating our compensation with carriers. It's a high priority for us as you would expect. But [as a wholesaler] we are in the middle. Our clients support nearly all of the 100 largest retail brokers in the U.S. So as those brokers need additional compensation it places more pressure on our net commission. So that's something we certainly take into account when we're negotiating.

Q: How important are quality, volume-based contingent commissions to your organizations?

Martin Hughes: They are absolutely vital. They represent about 7 percent of our revenue and in the area of 25 percent of our cash earnings. We have seen some carriers move from traditional contingent payments to guaranteed supplementals. They're the same. One is retrospective, the other prospective. That seems to be the trend.

Michael Sicard: We see the same trend, but we focus on the net commission fee. To the extent we continue to grow our business, we are doing something right for our clients and our organization. Then, typically, supplemental commissions and other commission rates will tend to be easier to negotiate.

John Howard: As a wholesaler we're in a slightly different position. We don't do retail, so we don't have any fiduciary obligation to the retail policyholder. Our obligation is to the carrier. There never was any fiduciary or regulatory concern around contingent commissions. It is a relatively small amount of total commissions but certainly one that is very high margin [and] predicated on underwriting results.

August 1, 2008

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