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Sherwood Insurance Services

201 California St., Suite 1000

San Francisco, Calif. 94111

415-956-3236; fax: 415-956-1204

1996 1995

Premium volume $263,000,000 $238,000,000

Gross revenues $23,800,000 $21,000,000

Employees 147 135

Commercial lines 100% 100%

Admitted business 75% 80%

Non-admitted 25% 20%

It's an eventful time for Sherwood Insurance Services, a unit of Aon Corp.

As a wholesale subsidiary for a company at the forefront of the industry's merger and acquisition activity, Sherwood has been right in the thick of things, helping absorb some of the acquisitions of its parent, said James W. Barnes, Sherwood's chairman and chief executive officer. These are "truly exciting times at Sherwood," he said.

For starters, Aon's purchase of Alexander & Alexander Services Inc. in January brought with it A&A's wholesale unit, Alexander Howden North America. The business is being shared with other Aon wholesale units, noted Mr. Barnes, with Sherwood taking the Western business, Chicago-based Insurance Brokers Services Inc. the Midwestern business and Jenkintown, Pa.-based Bryson Associates Inc. the Eastern business.

Aon's acquisition also brought Sherwood an Alexander Howden MGA construction facility, said Mr. Barnes. While the facility had done a "good job," it needed to be "redirected and refined," he said.

Sherwood has taken over other Alexander Howden MGA products as well for the crane and rigging industry and the underground pipeline industry, and an A&A errors and omissions and directors and officers MGA facility for managed health care that operated out of A&A's Seattle office, said Mr. Barnes.

Concurrently, the wholesaler took over an Aon construction MGA facility for large contractors and owner-controlled wrap-ups that operates out of Pasadena, Calif., he said.

Then in May, Aon bought the Minet Group, whose operations include wholesaler Swett & Crawford. Sherwood will absorb Swett & Crawford's San Francisco, Woodland Hills, Calif., and Irvine, Calif., offices, while Swett & Crawford will continue to run in part as a stand-alone, he said.

In other new developments, Sherwood in February started running a new underwriting division called Loxley Insurance Services. Loxley provides underwriting management services and has some binding authority, explained Phillip Mazur, executive vp. After a contest among Sherwood employees that generated 150 entries, the unit was named after Robin Hood of Loxley, in keeping with the Sherwood theme, Mr. Barnes explained.

Loxley writes smaller excess and surplus business generating about $5,000 to $10,000 in premium per account on a direct basis with retailers, which cuts down on Sherwood employees' paperwork and allows retail brokers direct access to a Sherwood-owned underwriting facility, said Mr. Barnes.

The firm now has three divisions in addition to its Sherwood Insurance Services brokerage business, said Mr. Barnes; Sherwood Construction Program Managers, which includes all construction business that is on an MGA basis; Loxley and Special Risk Services Inc., the banner under which the crane and rigging business operates.

"It's been a whole year of change for Sherwood," summed up Mr. Barnes. "The only thing that's constant around here is, change is constant, but it's been very, very good change," said Mr. Barnes, adding Sherwood's staff has made the integration as smooth as possible.

At year-end 1996, before all the merger and acquisition activity was accounted for, the wholesaler reported $263 million in premium volume, up 10.5% from 1995. Gross revenues also increased 13.3% to $23.8 million. That gain is largely attributable to Sherwood catching the tail-end of the hardest part of the property catastrophe market.

Premium volume for the first six months of 1997, when the assimilation activity began to be felt, increased to $175 million, up about 29.6% from the comparable period a year ago. Mr. Barnes said about 10% of that increase reflects internal growth.

Sherwood, which had a 16.7% premium volume growth rate between 1994 and 1995, could not have continued at that pace without the acquisitions, said Mr. Barnes. "It's not sustainable," he said, noting the wholesaler had anticipated growing at about a 10% to 15% rate annually. "That we do believe is sustainable," he said.

In light of the acquisition activity, Mr. Barnes is reluctant to make projections for this year. "When all is said and done, I have no idea," he said. "We're just so busy" integrating the new business. "It's a major assimilation process," he added, although "we picked up some wonderfully talented people from both Alexander Howden and Swett & Crawford."

Mr. Barnes said it will probably be the first quarter of next year before he gets a "total handle on the entire book of business."

He emphasized that despite Sherwood's position as an Aon unit, "We are by no means a captive wholesaler."

Pointing, for instance, to the other Aon wholesale units, he said, "We compete with each other for business both regionally and nationwide, and we believe that's very healthy."

Furthermore, he said, Aon accounts for less than 25% of Sherwood's total

business, "and we find that very healthy."

Mr. Barnes noted that until Aon acquired it in 1992, Sherwood had been a Frank B. Hall unit. Sherwood always has had a retailer as its majority partner, but these retailers never have accounted for more than 20% to 30% of its total business, Mr. Barnes said. He added Sherwood always has operated as though it were an independent wholesaler.

"We've demonstrated for 19 years that it's not a hindrance," he said. This is a business based on trust, and "people know us and trust us," he said.

Sherwood's mix of business has remained constant, with 20% to 25% from Aon, 15% to 20% from other alphabet houses and the rest from independents, said Mr. Barnes. "I think the mix now will change slightly after full integration," he said.

Mr. Barnes anticipates it will evolve to 60% independent and 40% alphabet house, with about a quarter of the alphabet house business from Aon and the rest from other firms.

Sherwood traditionally has focused on Fortune 1,000 property accounts. These are the larger, risk management type accounts with bigger, tougher risks and a heavy emphasis on earthquake exposure, said Mr. Barnes, adding this is a "function of being in California."

About 75% to 80% of its property business includes earthquake peril coverage on a difference-in-conditions or an all-risk basis, including flood coverage. "I suspect that will remain constant," said Mr. Barnes.

Historically, Sherwood's ratio of property to casualty business has been 60 to 40, said Mr. Barnes. "In the last couple, three years, our goal has been to get it to 50/50," though at this point it is about 65/35. At year-end, he anticipates, though, it will be back to 60/40.

"It's very difficult to monitor," said Mr. Barnes, noting property got softer first, but now casualty is "following it very, very quickly. The whole market is very soft right now."

Sherwood's retention rate, which had been declining, has leveled off at about 55% to 60%, said Mr. Barnes, pointing to the soft market's impact.

Sherwood began a program department in October 1996 that has been crafting programs for special markets. One development was a national airport program, for which Sherwood offers up to $100 million in property coverage, up to $25 million in general liability coverage, and up to $5 million in directors and officers liability coverage. That program just had its first anniversary and is "doing very well," said Mr. Barnes.

Less successful was a national roofers program, which has been discontinued. Amid the program introductions and post-acquisition integration, Sherwood's investment in its computer system is paying off.

"Our computer system has been upgraded and enhanced a lot," Mr. Barnes said.

"It was designed by and for Sherwood three years ago, and it has certainly proven its value," said Mr. Barnes. "It has been received very, very well by all new employees," he said. "It's proven to be invaluable" throughout this entire period. The money spent on its development and implementation has been "absolutely well spent," Mr. Barnes said.

With the acquisition, Sherwood now has California offices in Woodland Hills, Irvine and Pasadena in addition to its San Francisco headquarters. It also has branches in Seattle, New York and Chicago.

Sherwood's markets have not changed significantly, despite the Alexander Howden and Swett & Crawford acquisitions, noted Mr. Barnes. Both acquired units had virtually the same markets as Sherwood, although Sherwood has "picked up a few additional markets," said Mr. Barnes.

Sherwood's top markets are: Scottsdale Insurance Co.; RLI Insurance Co., CNA Insurance, Associated International; First State Insurance Co.; Royal Insurance Co.; Westchester Specialty Group;, Agricultural Excess & Surplus, Commonwealth Insurance Co. and Insurance Co. of the West.

It has underwriting authority for CNA, Commercial Underwriters, Essex Insurance Co., First State, Scottsdale and Transamerica Insurance Group.

In addition to Mr. Barnes, other Sherwood officers are Mr. Mazur and Curt Biersch, executive vps; Kevin Schrage, chief financial officer and Marion Woodbury, vp.

Sherwood is a member of the NAPSLO.

Sherwood also belongs to the Professional Liability Underwriting Society, the California Insurance Wholesalers Assn., the Independent Insurance Agents & Brokers of California, and the Professional Insurance Agents of California & Nevada.