▇▇▇▇▇ INSURANCE COMPANY
INSURANCE CARRIER AND AFFILIATES
COST ALLOCATlON AND REIMBURSEMENT AGREEMENT
MARCH 1, 1992
EXHIBIT C
INSURANCE CARRIER AND AFFILIATES
COST ALLOCATION AND REIMBURSEMENT AGREEMENT
This INSURANCE CARRIER AND AFFILIATES COST ALLOCATION AND
REIMBURSEMENT AGREEMENT (this "Agreement") is entered into effective
as of March 1, 1992 ( the "Effective Date" ), by and among ▇▇▇▇▇ Insurance
Company ( the "Carrier" ), and the following entities, hereinafter referred
to collectively as the "Affiliates," and each, individually, as an
"Affiliate": ▇▇▇▇▇ Assurance Company, Pan American Underwriters, Inc.,
Pan American Underwriters Insurance Agents and Brokers, and Pan
Pacific Benefit Administrators.
RECITALS
(A) Pan American Underwriters, Inc., Pan American Underwriters
Insurance Agents and Brokers, the Carrier and Pan Pacific Benefit
Administrators are a wholly-owned subsidiaries of ▇▇▇▇▇ Financial.
(B) ▇▇▇▇▇ Assurance Company is a wholly-owned subsidiary of the Carrier.
(C) As described herein, the Carrier desires to perform certain
functions on behalf of and provide certain services to each of the
Affiliates. In connection with performing such functions and providing such
services, the Carrier will incur certain costs and
expenses that are allocable among the Affiliates.
(D) The Carrier desires to be reimbursed by the Affiliates for the costs
and expenses that the Carrier incurs in performing such functions and
services, and the Affiliates desire to reimburse the Carrier for their
allocable share of the same.
NOW, THEREFORE, in consideration of the mutual promises and
covenants contained in this Agreement and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. SERVICES PROVIDED
A. As described herein, the Carrier desires to perform certain
functions on behalf of and provide certain services to the Affiliates,
including, but not limited to, services relating to such matters as general
office administration, human resources, data processing through its
Management Information Services ("MIS"), and other related services.
B. All services rendered to the Affiliates hereunder will be provided
in compliance with all applicable laws, regulations and rulings issued by the
California Department of Insurance and governmental authorities in all other
jurisdictions
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in which the Carrier and the Affiliates transact business.
C. Notwithstanding the services provided hereunder, each of the Affiliates
shall retain the ultimate responsibility for their own general office
administration, employees and other related matters.
2. COST ALLOCATION/REIMBURSEMENT BASIS
A. During the term of this Agreement, the services described in
Section 1 hereof shall be made available to the Affiliates on a cost
allocation/reimbursement basis, in accordance with generally accepted accounting
principles, as follows:
SERVICES BASIS/METHOD
-------- ------------
Administration Utilization
Human resources Proportionate employee population
MIS Utilization
B. Additionally, an Affiliate shall reimburse the Carrier within
thirty (30) days after the receipt by such Affiliate of an invoice for any
direct costs or expenses paid to any third party by the Carrier in connection
with services provided to that Affiliate under this Agreement. Such amounts
shall not be included
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in determining the allocations contemplated by Section 2.A. hereof.
C. Payment for the services contemplated by this Agreement shall
commence as of the Effective Date and shall be paid to the Carrier as
mutually agreed upon by the parties hereto; however, no less frequently than
quarterly after the Effective Date.
D. The basis for the cost allocation and reimbursements made
hereunder shall be reviewed by the parties hereto from time to time, but no
less frequently than annually, and, if required in order to comply with
applicable law, this Agreement shall be appropriately amended so as to ensure
that the cost allocation and reimbursements provided for hereunder are made
in accordance with generally accepted accounting principles. In addition, the
books, accounts and records of each of the parties hereto shall be maintained
in such a manner so as to evidence the reasonableness of the cost allocation
and reimbursements made hereunder.
E. The Carrier and Affiliates agree that the Insurance Departments
of the State of California and Arizona may examine, audit and inspect the
books accounts and records of each of the parties hereto with regard to the
services provided hereunder.
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3. BOOKS AND RECORDS
A. All books of accounts, documents, vouchers, letters and all other
papers and records in the possession of the Carrier and relating to the
business transacted under this Agreement shall be deemed to be the property
of the party to whom such items relate and shall be delivered, where
practical, to the home office of the appropriate Affiliate upon such
affiliate ceasing to be a party to this Agreement.
B. Copies of purchases and sales invoices shall be retained by
the Carrier at its home office in California.
C. Upon the request of an Affiliate, the Carrier will provide the
requesting Affiliate (or any third party authorized by such parties ) with
any documentation or information regarding the services provided to such
Affiliate by the Carrier hereunder.
4. TERM
A. The term of this Agreement shall be for a one year period
commencing immediately upon the Effective Date. This Agreement shall
automatically renew thereafter for successive like periods.
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B. This Agreement may be terminated as follows. (1) at any time by the
mutual written consent of each of the parties hereto; (2) by the Carrier
upon ninety (90) days' written notice to each of the Affiliates; (3)
any Affiliate may terminate its participation in this Agreement at any
time upon ninety (90) days' written notice to the other parties hereto.
5. GENERAL PROVISIONS
(a) This Agreement constitutes an integration, (b) any amendment
hereto must be in writing, (c) in the event of any dispute hereunder, the
prevailing party shall be entitled to attorneys' fees, (d) this Agreement
shall inure to the benefit of and be binding upon the parties and their
successors and assigns, (e) California law shall apply to the interpretation
of the provisions hereof, and (f) this Agreement and the documents referred
to herein constitute the entire understanding and agreement of the
parties, and supersede all prior or contemporaneous agreements.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
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Carrier: Affiliates:
▇▇▇▇▇ Insurance Company Pan American Underwriters, Inc
By: /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ By: /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
------------------------ -----------------------
Title: President & CEO Title: President & CEO
------------------- ---------------------
Pan American Underwriters,
Insurance Agents & Brokers
By: /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
-----------------------
Title: President & CEO
---------------------
▇▇▇▇▇ Assurance Company
By: /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
-----------------------
Title: President & CEO
---------------------
Pan Pacific Benefit Administrator
Attest: /s/ ▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇ By: /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
---------------------- -----------------------
Title: President & CEO
---------------------
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AMENDMENT NO. 1
Attached to and made a part of
▇▇▇▇▇ INSURANCE COMPANY
INSURANCE CARRIER AND AFFILIATES
COST ALLOCATION AND REIMBURSEMENT AGREEMENT
Dated March 1, 1992
IT IS MUTUALLY AGREED that effective January 1, 1993 this Agreement is
amended to read:
SECTION 1 - SERVICES PROVIDED
A. As described herein, the Carrier desires to perform certain functions
on behalf of and provide certain services to the Affiliates, including,
but not limited to, services relating to data processing through its
Management Information Services ("MIS"), and other related services.
SECTION 2 - COST ALLOCATION/REIMBURSEMENT BASIS
A. During the term of this Agreement, the services described in Section 1
hereof shall be made available to the Affiliates on a cost
allocation/reimbursement basis, in accordance with generally accepted
accounting principles, as follows:
SERVICES BASIS/METHOD
-------- ------------
MIS Utilization
1
Carrier: Affiliates:
▇▇▇▇▇ Insurance Company Pan American Underwriters, Inc.
By: /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ By: /s/ [ILLEGIBLE]
------------------------ -----------------------
Title: President Title: President
------------------- ---------------------
Pan American Underwriters
Insurance Agents & Brokers, Inc.
By: /s/ [ILLEGIBLE]
-----------------------
Title: President
---------------------
▇▇▇▇▇ Assurance Company
By: /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
-----------------------
Title: President
---------------------
Pan Pacific Benefit Administrators
Attest: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ By: /s/ [ILLEGIBLE]
------------------------- -----------------------
Title: /s/ [ILLEGIBLE]
---------------------
2
AMENDMENT NO. 2
Attached to and made a part of
▇▇▇▇▇ INSURANCE COMPANY
INSURANCE CARRIER AND AFFILIATES
COST ALLOCATION AND REIMBURSEMENT AGREEMENT
Dated March 1, 1992
IT IS MUTUALLY AGREED that effective May 1, 1993 this Agreement
is amended to read:
"Affiliates" is hereinafter referred to collectively and each,
individually, as an "Affiliate": ▇▇▇▇▇ Assurance Company, Pan
American Underwriters, Inc., Pan American Underwriters Insurance
Agents & Brokers, Inc., and Pan Pacific Benefit Administrators,
and the parent ▇▇▇▇▇ Financial.
SECTION 1 - SERVICES PROVIDED
A. As described herein, the Carrier desires to perform certain
functions on behalf of and provide certain services to the
Affiliates, including, but not limited to, services relating to
data processing through its Management Information Services
("MIS" ), office space and other functions related thereto, and
other related services.
1
SECTION 2 - COST ALLOCATION/REIMBURSEMENT BASIS
A. During the term of this Agreement, the services described in
Section 1 hereof shall be made available to the Affiliates on a
cost allocation/reimbursement basis, in accordance with
generally accepted accounting principles, as follows:
SERVICES BASIS/METHOD
-------- ------------
MIS Utilization
Rent Proportionate Employee Population
Telephone Proportionate Employee Population
Utilities Proportionate Employee Population
2
Carrier Affiliates:
▇▇▇▇▇ Insurance Company Pan American Underwriters, Inc.
By: /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ By: /s/ [ILLEGIBLE]
------------------------ -----------------------
Title: President Title: President
------------------- ---------------------
Pan American Underwriters
Insurance Agents & Brokers, Inc.
By: /s/ [ILLEGIBLE]
-----------------------
Title: President
---------------------
▇▇▇▇▇ Assurance Company
By: /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
-----------------------
Title: President
---------------------
Pan Pacific Benefit Administrators
By: /s/ [ILLEGIBLE]
-----------------------
Title: President
---------------------
▇▇▇▇▇ Financial
Attest: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ By: /s/ [ILLEGIBLE]
------------------------ ------------------------
Title: President
---------------------
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[Letterhead]
November 13, 1992
The Board of Directors
▇▇▇▇▇ Financial:
▇▇▇▇▇ Financial (the Company) is a holding company with five wholly owned
subsidiaries: ▇▇▇▇▇ Insurance Company (PICO), ▇▇▇▇▇ Assurance Company
(PACO), Pan American Underwriters, Inc. and Pan American Underwriters
Insurance Agents and Brokers (collectively PAU), and Pan Pacific Benefit
Administrators (PPBA).
The Company is primarily involved in writing workers compensation insurance
for the agricultural industry in California and Arizona. This coverage is
written by PICO. PACO writes both accident A health and life coverages.
PACO's premium volume has traditionally been insignificant as the Company
chooses to emphasize workers compensation coverages and only writes the
additional lines to provide a comprehensive package of insurance. PAU is
the underwriting agent which generates the business for PICO and PACO. All
PICO and PACO business is generated through PAU, but PAU also produces
business for outside carriers. PPBA is a third party administrator which
began operations in late 1991.
Prior to March 1, 1992, expenses were allocated between these subsidiaries
based on a Managing General Agent (MGA) agreement between PAU and the other
affiliates. In accordance with the MGA agreement, PAU employed all Company
personnel, paid most operational expenses and received reimbursement based
on the terms of the agreement.
Effective March 1, 1992, the MGA agreement was terminated. Concurrent with
the termination, all Company personnel were assigned to specific affiliates
and new agreements were executed intending to modify the Company's cost
allocation process. Under the revised process, each subsidiary pays the
expenses directly related to its operations, while expenses related to all
subsidiaries are allocated based on newly executed cost allocation
agreements.
The Company has asked us to review the newly proposed cost allocation
process to ensue that each subsidiary has been allocated its appropriate
share of expenses and that the overall cost allocation methodology is
reasonable under the circumstances.
COST ALLOCATION METHODOLOGY
In the process of refining their cost allocation methodology, the Company
identified two categories of expenses: direct and allocated. Direct costs
are those directly associated with a particular affiliate. These expenses
are paid by the related affiliate. Allocated costs are expenses in which
more than one affiliate derives the benefit. These costs are allocated
using one of two methods: proportionate employee population or utilization.
[Logo]
The Board of Directors
▇▇▇▇▇ Financial
November 13, 1992
2
Under the proportionate employee population method, expenses are
allocated based on an affiliates' percentage of assigned employees at
a particular location. This method was used to allocate costs when the
expense could be associated with employee use.
The utilization method is driven by the level of activity related to
the business of a particular affiliate as determined by inquiry and
analytical reviews of related factors.
Costs related to facilities, office space and equipment are paid by
PAU and allocated to the other affiliates based on their proportionate
employee population. Services in this category include, but are not
limited to, cleaning, depreciation, corporate insurance, machine rent,
postage, printing, rent, repairs and maintenance, supplies, telephone,
and utilities.
Services associated with human resources, management information
systems and data processing (MIS), and administration are initially
paid by PICO and then allocated to the other subsidiaries. Costs
related to the human resource function are allocated based on each
affiliates proportionate employee population. Administration and MIS
expenses are allocated based on utilization.
PROCEDURES PERFORMED
We read the cost allocation agreements and noted that the terms of these
agreements are consistent with the methodology discussed above.
Additionally, we read the chart of accounts for each subsidiary and noted that
each expense account had been identified as being a direct or allocated cost. It
is the Company's intent that expenses, as reported in accordance with generally
accepted accounting principles, are to be allocated. We noted that the Company's
classification as to direct or allocated expense appeared consistent with the
nature of the expense and the operations of the subsidiary.
Under the new agreements, expenses relating to facilities, office space,
equipment and human resources are to be allocated based on proportionate
employee population. We reviewed the Company's assignment of personnel to each
affiliate noting that the distribution of employees was consistent with the
nature of operations and related employee functions.
Administration and MIS expenses are allocated based on utilization.
Administration expenses relate primarily to executive officers. Utilization of
these expenses was determined based on premium volume and investment income,
which is intended to estimate the relative time spent on each affiliate's
operations.
MIS expenses include both systems related expenses and personnel expenses for
the MIS department. Systems expenses are allocated based on estimates of usage
and personnel expenses are allocated based on estimates of time spent on related
functions.
[Logo]
The Board of Directors
▇▇▇▇▇ Financial
November 13, 1992
3
While establishing a cost allocation process involves a selection among
various acceptable methodologies, we believe that the Company's cost
allocation methodology described above is appropriate and reasonable under
the circumstances.
We understand that the Company has implemented procedures to more precisely
track certain usage factors. We recommend that the Company use these
results to continue to refine the cost allocation process. Additionally, we
recommend that the Company perform regular reviews of the allocation
process to insure that the methodologies and factors used remain
appropriate under the circumstances.
Very truly yours,
/s/ KPMG Peat Marwick
AMENDMENT NO. 3
Attached to and made a part of
Insurance Carrier and Affiliates
Cost Allocation and Reimbursement Agreement
This Amendment No 3 is entered into effective as of December 9, 1994, by
and among the parties to that certain Insurance Carrier and Affiliates Cost
Allocation and Reimbursement Agreement dated as of March 1, 1992, as amended
by that certain Amendment No. l thereto dated as of January 1, 1993 and that
certain Amendment No.2 dated as of May 1, 1993 (as amended, the "Agreement").
WHEREAS, on December 8, 1994 Oregon Risk Management, Inc., an Oregon
corporation ("ORM"), a wholly-owned subsidiary of ▇▇▇▇▇ Financial,
purchased substantially all of the assets of three Oregon corporations
involved in the business of placing workers' compensation and other
insurance coverage with insurance carriers and commenced business as an
insurance agency;
WHEREAS, it is anticipated that the Carrier will from time to time perform
certain functions on behalf of and provide certain services to ORM;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree
that-the Agreement shall be amended as follows:
1. The terms "Affiliates" and "Affiliate," as defined in the introductory
paragraph of the Agreement, shall henceforth include ORM as well as ▇▇▇▇▇
Assurance Company, Pan American Underwriters, Inc., Pan American Underwriters
Insurance Agents and Brokers, Inc., Pan Pacific Benefit Administrators, Inc.
and the parent ▇▇▇▇▇ Financial.
2. Paragraph 2. E. shall be amended and restated to read in full as follows:
"E. The Carrier and Affiliates agree that the Instance Departments of the
States of California, Arizona and Oregon may examine, audit and inspect the
books, accounts and records of each party hereto with regard to the
services provided hereunder."
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the first date written above.
Affiliates: Carrier:
PAN AMERICAN UNDERWRITERS, INC. ▇▇▇▇▇ INSURANCE COMPANY
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
--------------------------- ---------------------
Its: President/CEO Its: President/CEO
--------------------------- ---------------------
PAN AMERICAN INSURANCE
AGENTS BROKERS, INC.
By: /s/ [ILLEGIBLE]
---------------------------
Its: President/CEO
---------------------------
(Signatures Continue on Next Page)
EXHIBIT C
OREGON RISK MANAGEMENT, INC.
By: /s/ [ILLEGIBLE]
---------------------------
Its: President/CEO
---------------------------
▇▇▇▇▇ ASSURANCE COMPANY
By: /s/ [ILLEGIBLE]
---------------------------
Its: President/CEO
---------------------------
PAN PACIFIC BENEFIT
ADMINISTATORS, INC.
By: /s/ [ILLEGIBLE]
---------------------------
Its: President/CEO
---------------------------