This is a presentation on the fundamental of risk management for CFOs of furniture manufacturing concerns. This was done in conjunction with the American Home Furnishings Alliance.

1. Fundamentals of Risk Management for CFOs--Unlocking Hidden Value

2. Background—Furniture Industry Furniture Manufacturers are facing grueling, unrelenting economic pressure to survive. In the process, the industry continues to contract resulting in the loss of thousands of jobs To survive, furniture manufacturing companies are actively trying to discover new efficiencies in their business processes Aggressively managing Total Cost of Risk can potentially provide currently unrecognized operational and economic benefits to participating companies

3. Background—Insurance Marketplace The insurance market continues to act in a somewhat irrational manner. Eventually there will be a shift towards a harder market Higher premiums Higher deductibles Insurance carriers impacted by: Poor underwriting performance in 2008 Lack of investment income to offset underwriting results Lack of available capital from outside investors to bolster balance sheets

4. Risk Management Techniques Risk Identification Examples of types of risk: first party, third party, property, management liability, financial, human resources Risk Analysis Frequency of risk, severity of risk, impact on business continuity Risk Treatment Avoid it (discontinue the practice) Control it (engineering, administrative, operating practices) Transfer it (contractual risk transfer, financial risk transfer)

5. Total Cost of Risk

6. Total Cost of Risk Direct losses Losses of any type (workers compensation, third party liability, property, etc…) that are borne by the company or transferred to an insurance carrier Indirect losses “soft losses” that are due to loss of productivity, overtime, delay in delivery, loss of customers, etc… Financial Risk Transfer Costs Insurance premiums paid to insurance carriers to transfer risk Broker/Agent Fees and Commissions Sales commissions or fees paid to brokers/agents for the placement of insurance and delivery of risk management services Internal Administration Costs Internal expenses associated with safety/claims/risk functions

7. Today’s Focus—Basic Operational Property/Casualty Risks Employee Injury/Workers Compensation Third Party Injury or Property Damage/General Liability Third Party Injury or Property Damage/Auto Liability

8. Risk Identification Risk Identification What types of accidents/incidents are we experiencing or have we historically experienced? What types of accidents have occurred most frequently? What types of accidents have created the greatest expense? Can I pinpoint these losses to specific operations or types of jobs? Key reference points: Internal Accident/Incident Investigations OSHA Injury Reporting Logs Insurance Carrier Loss Runs (all lines) Insurance Carrier Safety/Loss Inspection Reports (all lines)

9. Risk Analysis Risk Analysis (Financial)—Basic Questions What is my workers compensation “loss rate” per $100 of payroll? What is my workers compensation experience modification rate? Is it correct? What is my company’s loss ratio (losses compared to premium?) What is the cost of a day away from work or a “light duty” day? How does my risk management program’s performance compare to my peers? What is the financial impact of losses on our business’ financial performance? How much do we have to sell to offset our annual Total Cost of Risk?

10. Risk Analysis Risk Analysis (Financial) – Some Basic Examples Calculation = # of claims (or lost workdays) X 200,000 divided by actual hours worked for the period This measurement allows you to compare to your peer group in these categories

11. Risk Analysis Risk Analysis (Financial)—Basic Examples Workers Compensation Carrier Book of Business Statistics Top 5 Loss Areas # Cases % Total Incurred Average % Total MATERIALS HANDLING-. .. 887 25.34% $4,609,879 $5,197 28.28% SLIPS AND FALLS-SAM... 361 10.31% $2,665,610 $7,384 16.35% REPEATED TRAUMA-UPP .. . 290 8.28% $2,164,979 $7,465 13.28% STRUCK BY/AGAINST 818 23.36% $1,738,407 $2,125 10.66% HAND TOOL-MANUAL AN . .. 401 11.45% $1,339,745 $3,341 8.22% Statistics from a national workers compensation carrier based on 3,501 claims over a three year period This measurement allows you to compare the types and average costs of claims to your peer group. It also may help you focus prevention efforts

12. Risk Analysis Risk Analysis (Financial)—Basic Examples Profitability Analysis based on Annual Sales of $24MM At 5% Profit Margin Total Incurred Workers Compensation Expense = $100,000 Total Incurred Expense x Loss Development Factor = $200,000 Indirect Cost of Accidents = 2X TI Cost of Accidents = $200,000 Total Accident Costs = $400,000 (Developed Costs + Indirect Costs) Annual Sales = $24MM Total Sales Required @ 5% margin to Offset Lost Profit Due to Accident Costs = $8MM Months of Production Required to Offset Accident Costs = 4months This measurement allows you determine the “breakeven” period for your annual loss costs and how the affect profitability

13. Risk Analysis Risk Analysis (Operational) How does Risk Management “happen” around here? Is it intentional or passive? Are our results a matter of discipline or luck? Examples of some key questions to ask: How are risk and safety issues managed on a daily or routine basis? Are roles clearly defined for each area/level of management? Are those responsible trained and able to perform their roles? How is performance measured? How is performance rewarded?

14. Contractual Risk Transfer Concept Allows companies to contractually transfer certain types of risks to third parties Key Issues Companies may unknowingly or passively accept risk through contractual indemnification/hold harmless provisions with subcontractors, dealers, vendors, or suppliers Companies may miss opportunities to contractually transfer risk to subcontractors, dealers, vendors, or suppliers through appropriate indemnification provisions

15. Contractual Risk Transfer Analysis Develop list of subcontractors, vendors, suppliers, and dealers Review copies of subcontractor, vendor, supplier, and dealer agreements for appropriate indemnity/hold harmless provisions Potential Corrective Actions Contractually establish third party insurance requirements to ensure each third party’s ability to respond to indemnity and hold harmless agreements Establish a Certificate of Insurance program to ensure each third party has appropriate insurance policies and limits in place

16. Financial Risk Transfer Concept Allows companies to transfer certain financial risks to third parties designed to bear risk (insurance carriers) A general rule of risk transfer is to retain frequency and insure against severity Key Issues Companies may be over or under insured depending on their ability and appetite to retain risk Companies may not have the benefit of performance based insurance programs Companies may be exposed to unidentified coverage gaps

17. Risk Retention/Risk Transfer Decision Grid

18. About Praxiom Praxiom is a professional outsourced risk management firm that provides: Risk assessment Risk control Claims management Review of contractual risk transfer Assistance in the design and placement of financial risk transfer Praxiom’s risk managers have a deep understanding of the furniture manufacturing industry having served as internal risk managers for some of the industry’s leading companies

19. About Praxiom Praxiom is well known to AHFA and several of its member companies through the collaborative development of AHFA’s ISP program Praxiom is proud to be an AHFA Supplier Member

20. Managing the Total Cost of RiskThe Praxiom Service Model Step One: Risk Management Baseline Risk Assessment Report Site visit(s) Management and Employee Interviews Review of Processes /Procedures/Documentation Analysis of Prior Losses to Determine Loss Trends Risk Map of Current Risk Transfer Program Structure and Coverages Policy review by line of coverage

21. Managing the Total Cost of RiskThe Praxiom Service Model Step One Deliverables (from Praxiom) Written Risk Assessment Report Performance Metrics (including certain financial metrics) Identification/Quantification of loss frequency/severity drivers Identification of management opportunities Summary of Key Findings (Issues, Implications, Interventions Format)

22. Managing the Total Cost of RiskThe Praxiom Service Model Ongoing Risk Identification Ongoing Claims Management Ongoing Contractual Risk Transfer Non-Insurance Risk Transfer to and from Third Parties Ongoing Financial Risk Transfer Assistance in the design and placement of insurance programs

23. Participating AHFA Member Benefits Clear identification/reduction/mitigation of actual and potential risk exposures through the use of professional outsourced risk managers to assist in management Total Cost of Risk Professional baseline assessment Comparison to norms and best practices Agreed upon risk management action plan with 360 degree performance accountability Quantitative performance measures/results Ability to customize service platform based on individual company need

24. Participating Member Benefits Ability to make quantitative, informed decisions regarding risk retention and risk transfer Structured fee compensation Complete neutrality during financial transactions Fees based on each company’s individual platform utilization Potential to improve operating efficiencies and profit margins through improving Total Cost of Risk (TCOR)

25. Interested in a Complimentary Baseline Risk Assessment? Basic Qualifications: Must be an AHFA Member in good standing Must be serious about committing to improve your Company’s Total Cost of Risk Must be willing to consider new/different risk management strategies and tactics Contact Bill Perdue at AHFA to arrange an individual conference with Praxiom’s Team