PAN AMERICAN UNDERWRITERS, INC.
AND
PAN AMERICAN UNDERWRITERS INSURANCE AGENTS AND BROKERS
AGENCY AND AFFILIATES
COST ALLOCATION AND REIMBURSEMENT AGREEMENT
MARCH 1, 1992
EXHIBIT B
AGENCY AND AFFILIATES
COST ALLOCATION AND REIMBURSEMENT AGREEMENT
This AGENCY AND AFFILIATES COST ALLOCATION AND REIMBURSEMENT AGREEMENT (this
"Agreement") is entered into effective as of March 1, 1992 (the "Effective
Date"), by and among Pan American Underwriters, Pan American Underwriters
Insurance Agents and Brokers (the "Agency"), and the following entities,
hereinafter referred to collectively as the "Affiliates," and each,
individually, as an "Affiliate": Xxxxx Insurance Company, Xxxxx Assurance
Company, and Pan Pacific Benefit Administrators.
RECITALS
(A) The Agency, Xxxxx Insurance Company and Pan Pacific Benefit
Administrators are a wholly-owned subsidiaries of Xxxxx Financial.
(B) Xxxxx Assurance Company is a wholly-owned subsidiary of Xxxxx
Insurance Company.
(C) As described herein, the Agency desires to provide certain
equipment and perform certain services for each of the Affiliates. In
connection with providing such equipment and performing such
services, the Agency will incur certain costs and expenses that are
allocable among the Affiliates.
(D) The Agency desires to be reimbursed by the Affiliates for the
costs and expenses that the Agency incurs in providing such
equipment and performing such services, and the Affiliates desire
to reimburse the Agency for their allocable share 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. The Agency desires to perform certain services and provide
certain equipment to the Affiliates, including, but not limited to,
equipment and services relating to the use of office equipment,
office space and other functions related thereto.
B. All services rendered and equipment provided 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 in which the Agency and
the Affiliates transact business.
2
2. COST ALLOCATION/REIMBURSEMENT BASIS
A. During the term of this Agreement, the equipment and services
referred to 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
-------- ------------
Cleaning Proportionate employee population
Depreciation Proportionate employee population
Insurance (corporate) Proportionate employee population
Machine rent Proportionate employee population
Postage Proportionate employee population
Printing (all except
direct charges) Proportionate employee population
Rent Proportionate employee population
Repairs & maintenance Proportionate employee population
Supplies (all except
direct charges) Proportionate employee population
Telephone Proportionate employee population
Utilities Proportionate employee population
3
Additionally, an Affiliate shall reimburse the Agency within
thirty (30) days after the receipt by such Affiliate an invoice for any
direct costs or expenses paid to any third party by the Agency in connection
with the equipment or services provided to that Affiliate under this
Agreement. Such amounts shall not be included 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 Agency 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 allocations provided for hereunder are made in accordance with
generally accepted accounting principles. In addition, the books, accounts
and records of each party hereto shall be maintained in such a manner so as
to evidence the reasonableness of the cost allocation and reimbursements made
hereunder.
4
E. The Agency 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 party hereto with regard to the equipment
and services provided hereunder.
3. BOOKS AND RECORDS
A. All books of accounts, documents, vouchers, letters and all
other papers and records in the possession of the Agency 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
Agency at its home office in California.
C. Upon the request of any of an Affiliate, the Agency will provide
the requesting Affiliate (or any third party authorized by such Affiliate)
with any documentation or information regarding the equipment and services
provided to such Affiliate by the Agency hereunder.
5
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.
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 Agency
upon ninety (90) days' written notice to each of the Affiliates; and (3) any
Affiliate may terminate its participation in this Agreement at any time upon
ninety (90) days' written notice to each of 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
6
contemporaneous agreements.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date and year first above written.
Agency: Affiliates:
Pan American Underwriters, Inc. Xxxxx Insurance Company
By: /s/ Xxxxxx X. Xxxxxxxx By: /s/ Xxxxxx X. Xxxxxxxx
---------------------------- -------------------------
Title: President and CEO Title: President and CEO
------------------------- ----------------------
Pan American Underwriters,
Insurance Agents & Brokers Xxxxx Assurance Company
By: /s/ Xxxxxx X. Xxxxxxxx By: /s/ Xxxxxx X. Xxxxxxxx
-------------------------- -------------------------
Title: President and CEO Title: President and CEO
------------------------- ----------------------
Pan Pacific Benefit
Administrators
Attest: /s/ Xxxxxxxx X. Xxxxx By: /s/ Xxxxxx X. Xxxxxxxx
------------------------- --------------------------
Title: President and CEO
-----------------------
7
[Logo] PEAT MARWICK
Certified Public Accountants
000 Xxxxx Xxxxxxxx Xxxxxx Telephone 000 000 0000 Telefax 000 000 0000
Xxx Xxxxxxx, XX 00000 Telex 6831572 PMMLA
Cable Address VERITATEM
November 13, 1992
The Board of Directors
Xxxxx Financial:
Xxxxx Financial (the Company) is a holding company with five wholly
owned subsidiaries: Xxxxx Insurance Company (PICO), Xxxxx 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 &
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 ensure 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.
KPMG Peat Marwick
The Board of Directors
Xxxxx 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.
KPMG Peat Marwick
The Board of Directors
Xxxxx 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. 1
Attached to and made a part of
Agency and Affiliates
Cost Allocation and Reimbursement Agreement
This Amendment No. l is entered into effective as of December 9, 1994, by and
among the parties to that certain Agency and Affiliates Cost Allocation and
Reimbursement Agreement dated as of March l, 1992 (the "Agreement").
WHEREAS, on December 8, 1994 Oregon Risk Management, Inc., an Oregon
corporation ("ORM"), a wholly-owned subsidiary of Xxxxx 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 ORM will from time to time provide equipment
and perform services for each of the Affiliates (as defined in the Agreement);
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 term "Agency," as defined in the introductory paragraph of the
Agreement, shall henceforth include ORM as well as Pan American Underwriters,
Inc. and Pan American Underwriters Insurance Agents and Brokers, Inc.
2. Paragraph 2. E. shall be amended and restated to read in full as
follows.
"E. The Agency and Affiliates agree that the Insurance 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 equipment and services provided hereunder."
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the first date written above.
Agency: Affiliates:
PAN AMERICAN UNDERWRITERS, INC. XXXXX INSURANCE COMPANY
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
---------------------------- ----------------------
Its: President/CEO Its: President/CEO
--------------------------- --------------------
PAN AMERICAN INSURANCE XXXXX ASSURANCE COMPANY
AGENTS A BROKERS, INC.
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
----------------------------- ----------------------
Its: President/CEO Its: President/CEO
--------------------------- --------------------
(Signatures Continue on Next Page)
EXHIBIT B
OREGON RISK MANAGEMENT, INC. PAN PACIFIC BENEFIT
ADMINISTRATORS, INC.
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
----------------------------- ----------------------
Its: President/CEO Its: President/CEO
--------------------------- --------------------
AMENDMENT NO. 2
ATTACHED TO AND MADE A PART OF
AGENCY AND AFFILIATES
COST ALLOCATION AND REIMBURSEMENT AGREEMENT
This Amendment No. 2 is entered into effective as of December I, 1996 by and
among the parties to that certain Agency and Affiliates Cost Allocation and
Reimbursement Agreement dated as of March 1, 1992, as amended by Amendment No
1 thereto dated as of December 9, 1994 (collectively, the "Agreement"). All
capitalized terms used herein without definition shall have the meanings
ascribed to them in the Agreement.
WHEREAS, the parties to the Agreement have concluded that it is in the best
interests of the Affiliates that the Agency provide additional services on
behalf of the Affiliates in addition to those contemplated by the Agreement;
and
WHEREAS, the parties deem it advisable to document the parties' intention
with respect to the provision of those services and to clarify the method to
be used by the Affiliates to determine the amount of the payment for such
services;
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. Paragraph 1. A. of the Agreement is amended by adding the following at the
end thereof:
"The services provided hereunder shall include, without limitation, the
rendering of general marketing functions on behalf of the Affiliates by
Agency employees in connection with (i) larger employers insured by the
Affiliates for which the Agency does not serve as the broker or agent of
record and (ii) insurance agents and brokers other than the Agency. Such
services are designed to increase the flow of high quality insurance premiums
to the Affiliates using Agency personnel to support the provision of
Affiliate services provided to insureds and brokers and agents appointed by
the Affiliates. The parties acknowledge that the actual value of such
services is difficult to ascertain and, accordingly, the method of
reimbursement by the Affiliates for the rendering of such services must be
flexible in order that the Affiliate not be required to reimburse the Agency
for unproductive services."
2. The list of services provided and the basis/method of
allocation/reimbursements in Paragraph 2.A. of the Agreement is amended by
adding the following at the end thereof under the headings "Services" and
"Basis/Method," respectively:
Unallocated Marketing Services Discretionary. The amount of the
reimbursement to be
determined by the
applicable Affiliate in its sole
discretion based on the amount of
premiums generated by such services
and the benefit to the Affiliate's
reputation and standing in its
marketplace from such services.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the
first date written above:
Agency: Affiliates:
PAN AMERICAN UNDERWRITERS, INC. XXXXX INSURANCE COMPANY
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
---------------------------- ----------------------
President President
PAN AMERICAN UNDERWRITERS XXXXX ASSURANCE COMPANY
INSURANCE AGENTS & BROKERS, INC.
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
---------------------------- ----------------------
President President
AGRI-COMP INSURANCE AGENCY, INC. PAN PACIFIC BENEFIT
(formerly Oregon Risk Management, Inc.) ADMINISTRATORS, INC.
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
---------------------------- ----------------------
President President
