The Disagreement: Cincinnati Financial Versus CalPERS

When the Sacramento, Calif.-based pension fund California Public Employees Retirement System listed Cincinnati Financial Corp. on its “Focus List” of companies with poorly run governance, executives were “caught blind,” according to Kenneth W. Stecher, the insurers chief financial officer.

The company, which traces its beginnings back to 1950, was started by agents and has always retained a strong relationship with independent agents, both executives in the company and observers outside of the company have said. Founder John J. Schiff Sr. is responsible for starting that relationship, and it seems only natural that the company would want to keep it going, they said.

“It was a company started by and for agents–and John Schiff grew it into one heck of a company,” observed William E. Bailey, an attorney in Boston and special counsel to the New York City-based Insurance Information Institute.

“It is dedicated to the independent agency system, and that system has helped it grow into a huge company. There is a special relationship there.”

That relationship extends to appointing six independent agents to the 15-member of the board of directors.

CalPERS however, thought otherwise about the relationship, and in addition to naming Cincinnati Financial to its “Focus List,” it moved to change the rules governing the definition of who can sit on the board. Essentially, the fund wanted all of the members of the board to be totally free of any connection with the company.

Mr. Stecher said this was the first time in the history of the company that any stockholders moved for a shareholder vote. In the past, and with CalPERS, executives opened a dialogue with concerned shareholders to resolve any questions or issues they had, he said.

CalPERS however, pushed for a vote, which was defeated by 75 percent of the shareholders in April of this year.

After reporting the vote to CalPERS, nothing has occurred since, Mr. Stecher said. “As far as we are concerned, this has become a dead issue,” he said.

Numerous calls to CalPERS seeking requests for comment for this article were not returned.

“If they call, we will talk again,” Mr. Stecher said. “We are not out to be adversarial.”

As for the boards governance, Allan R. Weiler, a board member for more than 10 years and one of the six independent agent board members, said that Cincinnati Financials board members are probably among the most aggressive and questioning. The president, chief executive officer and chairman of Archer-Meek-Weiler Agency Inc. in Columbus, Ohio, believes there is a lot of strength in having agents on the board because they bring an expertise and independence that other boards may lack.

“I feel we are far more aggressive on this board than on any other where [agents] have little expertise,” Mr. Weiler observed. “We know the companys strengths and weaknesses, and feel we are able to be good directors because of that.”

“We talk on every issue conceivable, and, while technically some may feel we are not independent, we are very independent on our positions,” Mr. Weiler continued. “Our positions on the board speak well for how the company has done.”

Earlier this month, the company reported that it is on track to achieve a combined ratio target of 101.3 this year despite catastrophic and non-catastrophic losses of $80 million. Its combined ratio last year was 103.6.

Supporting the argument that independent agents are truly independent, Mr. Weiler said his agency deals with at least 20 different insurers, and that as a board members, the agents do not deal with questions over compensation to brokers and agents.

“Independence has never really been an issue,” said Mr. Weiler. “When I joined the board, John Schiff made clear to me that I wear a Cincinnati Company hat. There has never been a conflict.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, July 22, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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The Disagreement: Cincinnati Financial Versus CalPERS

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