September 17, 2004
Source: Associated Industries Insurance Services, Inc.

I have previously discussed with you the opportunities that the establishment of a Professional Employer Organization (PEO) could provide to both of our companies. While each of us could create a PEO alone, I believe there are definite benefits to us entering into a joint venture which far surpass each of us going it alone. AmTrust brings to the joint venture initial capital and workers’ compensation insurance companies to write selected businesses and AIIS brings a nationwide sales network on a stateby state basis (43 states), personnel with the expertise to create and operate the PEO, the service company to operate that part of the AmTrust insurance companies participating in the PEO venture, and the physical location in Boca Raton to house the PEO “next door to” the workers’ compensation service company at an exceptionally low rental rate for Class A office space.

To start discussions of a possible joint venture to create and operate a PEO, I offer the following Key Points:

• OWNERSHIP: The company would be owned by AmTrust and AIIS.
• INITIAL CAPITAL: AmTrust would provide the initial capital for the joint venture and AIIS would pick up its share of funding out of profits from operations. Ultimately both AmTrust and AIIS would pay for operations from first dollar of start up based on their percentage of ownership interest.
• LEGAL WORK TO CREATE PEO: Steve Ungar and Mary Ann Stiles could perform all legal work. Mary Ann is the former Owner/CEO of a PEO and is well-versed in all legal matters relating to creation and operations of PEO’s.
• VENUE FOR CREATION OF PEO: Recommend venue as Florida. The state is very friendly to PEO’s from a statutory and regulatory point of view.
• MANAGEMENT: We have a young man who is available to become the Chief Executive Officer (CEO) of the PEO. He has previously served in this capacity with a PEO in Florida which was purchased by a national PEO and he is still in the industry. We trained this gentleman in workers’ compensation and insured his PEO for several years with excellent results, as he followed our directions regarding all workers’ compensation matters. He is available to join us on very short notice to develop the Business Plan and start the company.
• WORKERS’ COMPENSATION COVERAGE FOR THE PEO: As we both know, the biggest problem PEO’s experience nationwide is the securing of workers’ compensation for their customers. The AmTrust insurance companies could write for the PEO in accordance with your Underwriting Guides and we could operate under our present contract relative to Technology Insurance Company (TIC) and Associated Industries Insurance Company (AIIC) in Florida only. In all other states, your insurance companies would be the carriers. We could start in states where your companies are licensed and move to other states as you expand the states where your companies are licensed. AIIS would be the service company for all business written by your companies nationwide (and AIIC in Florida only) for the PEO customers. There obviously would be a major advantage having the PEO and insurance company servicing operations co-located where there would be hourly and instantaneous coordination. We would attempt to secure a carrier that would write business for the PEO that did not meet our Underwriting Guides.
• MARKETING ON A “STATE-BY-STATE” BASIS: AIIS can bring a marketing network than no one else has access to. We would utilize the relationship of our parent, Associated Industries of Florida, Inc. (AIF), with the major business organizations in most (43) of the states of the nation. We could select the states where we would like to start and proceed on a state-by-state basis as we deem appropriate. PEO and AIIS personnel would develop and provide marketing material and training to personnel of our counterpart organizations to enable them to sell our PEO services which would include workers’ compensation coverage. Our counterparts would be able to engage local business associations, insurance agents and other marketing entities as sub-contractors, subject to our approval. Marketing entities would be paid a commission and would share their brokerage commissions with sub-brokers. All commissions would be paid direct by the PEO. Having its own “in-house” insurance company would put our PEO in a very competitive position nationwide and in the individual states. No other PEO in America can put together this type of marketing program and it will give us penetration, through the endorsement and marketing efforts, of the major business organization in each state we desire to enter. No other PEO can ever match this marketing platform because they do not enjoy the relationships with the other statewide business organizations that we do.
• WHY “CREATING” RATHER THAN “BUYING” A PEO IS THE BEST DECISION: Many existing PEO’s have liabilities that are not readily apparent and may not be disclosed or easily identified. The type agreement a PEO has entered into to secure workers’ compensation coverage that creates potential long term liabilities may not, on the surface, be known for a number of years. It is best to start a PEO from scratch and not face unknown liabilities in the future due to unknown workers’ compensation deals which the PEO has entered into over the years. Start-up costs, as opposed to a purchase transaction, will require less capital up front. It would still be possible to purchase “books of business” from other PEO’s within the industry as time goes on and thereby grow by acquisition as well as by individual accounts. Making acquisitions later, as opposed to getting into the industry by acquisition, would be much safer since we would have our own professional staff to do the analysis. AIIS already has office space and equipment that can immediately be used for the start-up and the occupancy costs certainly will be less than what other companies are paying. In addition, there could well be an opportunity for AmTrust, or related corporations, or the joint venture, to purchase the building(s) in the future if they so desire.
• ATTRACTIVENESS OF PEO/WORKERS’ COMPENSATION “COMBINATION” TO INVESTORS: Certainly a company which owns a PEO and insurance companies which operate in tandem will be very attractive to investors. All knowledgeable investors know that the major problem with PEO’s is they have major problems securing and retaining workers’ compensation coverage. Knowledgeable people also raise an eyebrow at carriers that write workers’ compensation coverage for PEO’s. Having a company that owns both the PEO and insurance carriers not only resolves the usual concerns but actually is a definite major plus to the investment community. This is the type of program you put at the forefront and sell as the “unique feature of the company” when you take the company public. In the 1990’s workers’ compensation companies that went public sold themselves as companies with “major managed care programs” (sometimes this was true and sometimes it wasn’t, but that’s what sold in the ‘90’s) and that was the buzz word in the industry for the 1990’s. I believe that a combination of PEO’s and workers’ compensation carriers within the same corporate structure is what is going to turn on the investment community in this era. We might well be the only ones to have this situation where we started the PEO and insurance carriers from the ground up. This would give the investment community confidence because we are not making acquisitions and “trying to fit things together,” but rather starting all from the ground up and growing them together on an integrated basis from the start.
• PEO IS THE “OTHER PIECE” OF WORKERS’ COMPENSATION BUSINESS ACQUISITION: Historically workers’ compensation insurance coverage extended by carriers has been sold though licensed independent agents, with the exception of a few direct writers such as Liberty Mutual, who also added an agent-based entity to its approach several years ago. AmTrust and AIIC rely on agents/brokers for their business. While PEO’s have been around for awhile, they continue to become increasingly popular to employers to an ever increasing degree. PEO’s are definitely the wave of the future and “the future is here and now.” Every time an employer chooses a PEO, it is one less employer available for our insurance companies to write. Basically our market is decreasing as PEO’s grow. The formation of a PEO would expand our market to the entire universe of employers and provide us with two profit centers rather than one, which is our situation today. It is simply logical and makes good business sense to enter the PEO market since it expands our present market opportunities in workers’ compensation and provides us with a new profit center where our expertise in workers’ compensation and our capability to provide coverage are keys, if not the keys, to success.

I would like to discuss this matter with you at your earliest convenience and can come to New York at just about anytime that is convenient to you. We are prepared to move forward with a joint venture in this area immediately.  

 

Associated Industries Insurance Services, Inc.
901 N.W. 51st Street , Boca Raton , Florida 33431 • Phone (800) 866-1234 • Fax (561) 997-6444
Email us at: aiis@aif.com or visit our website: www.aiic-insurance.com