GENERAL AGENCY PROFIT SHARING ADDENDUM
THIS ADDENDUM, effective * forms part of the agreement between PENN-AMERICA
INSURANCE COMPANY and PENN-STAR INSURANCE COMPANY (hereinafter referred to as
"Companies") and [[agency]] (hereinafter referred to as "Agent"), dated
[[date]].
I. INTRODUCTION
A. This plan is designed to reward you for your favorable underwriting
results on a policy year loss ratio basis.
B. Payments of your Agency Profit Sharing under this Addendum will be
made 25% in stock of the Companies' parent, Penn-America Group, Inc.
("PAGI") ("PAGI Stock" or "Stock") and 75% in cash though you can
choose to be paid 50%, 75%, or 100% in shares of stock. Payments will
be in accordance with the provisions of Section IV below. This change
applies to Profit Sharing payments made beginning in May of 2000.
C. In addition to the amount which you receive for your profit sharing in
a given year, you are entitled to receive stock options for policy
years 1999 and later in accordance with the provisions of Section III
below.
II. HOW YOUR AGENCY QUALIFIES FOR THE PLAN
A. There is a two-year waiting period for eligibility owing to loss
development.
B. If you satisfy all requirements, you are eligible for your first
payment by June 1 of the second year following the year of initial
eligibility.
C. To initially qualify you must have written at least $500,000 total
calendar year premium according to the Companies' books as of December
31st.
D. To remain eligible in succeeding calendar years, you must write at
least 90 percent of the previous year's total written premium, subject
to the $500,000 total premium minimum. This 90 percent requirement is
waived in any year you write in excess of $1 million in premium.
E. You must maintain E&O coverage in conformity with the Companies'
standards for such coverage.
F. You agree that the Companies' records are final.
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III THE PLAN
A. Eligible Lines of Business include only the following and will be
evaluated at the end of the second, third, and fourth years. At the
end of each year, you will receive one-third (1/3) of the profit
sharing payment for that year:
1. CMP and Garage Liability includes Section II of commercial multi
peril, liquor liability, garage liability, and when written as
part of commercial multi peril professional liability classes and
increased limits general liability.
2. Monoline General Liability includes general liability, liquor
liability, professional liability and increased general liability
limits when written on a monoline basis.
3. Commercial Automobile Liability includes bodily injury, property
damage, uninsured and underinsured motorists, personal injury
protection, medical payments, and hired and non-owned coverages.
4. Property Business includes Section I of commercial multi peril,
monoline fire and allied lines, crime, glass, inland marine,
automobile physical damage, dealers open lot, and garage keepers
liability.
NOTE: Any classes not specifically mentioned above are not included in
the Plan.
B. Your loss ratio is calculated on a policy-year basis, earned to
incurred. Incurred losses include indemnity paid, reserves, and loss
adjustment expenses and credit for salvage and subrogation.
C. Your profit sharing will be calculated for each policy year you
continue to remain eligible as of March 31; if you qualify, you will
be paid by June 1.
D. The profit calculation includes the following "loss ratios":
"Desired loss ratio" is the target. A loss ratio below the
Desired loss ratio will generate profit subject to the Floor. A
loss ratio above the Desired loss ratio will reduce profit in
other lines of business subject to the Ceiling.
"Ceiling loss ratio" - If you are above this figure, the
calculation will be completed using this figure (a sort of "stop
loss").
"Floor loss ratio" - If you are below this figure, the
calculation will be completed using this figure (a sort of "stop
gain").
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E. Because the policy-year formula is used, there is no need for loss
carry forwards or stop losses - each year stands alone.
F. The "Desired" loss ratio is the ratio which your agency loss ratio
must be below to be eligible for profit sharing. The "Floor" loss
ratio is the lowest loss ratio eligible for profit sharing as any loss
ratio below the floor is calculated using the floor. Similarly, the
"Ceiling" loss ratio limits the amount by which a loss ratio above the
ceiling will reduce profits in other classes of business.
G. The current annual "Companies' Desired, Floor, and Ceiling Loss
Ratios" are:
Pay Out Floor Desired Ceiling
Class of Business Year Ratio Loss Ratio Ratio
----------------- -------- ----- ---------- -------
CMP and Garage Liability 1st Year 12.50% 27.50% 42.50%
2nd Year 17.50% 37.50% 57.50%
3rd Year 30.00% 47.50% 65.00%
Commercial Auto Liability 1st Year 27.50% 40.00% 52.50%
2nd Year 35.00% 47.50% 60.00%
3rd Year 37.50% 50.00% 62.50%
Monoline General Liability 1st Year 12.50% 20.00% 27.50%
2nd Year 17.50% 25.00% 32.50%
3rd Year 25.00% 35.00% 45.00%
Property Business 1st Year 40.00% 50.00% 60.00%
2nd Year 40.00% 55.00% 70.00%
3rd Year 40.00% 55.00% 70.00%
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EXAMPLE:
Policy Year 1999 - Total Written Premium Volume $1,400,000:
-----------------------------------------------------------
(CMP Liability Written Premium = $300,000)
(Monoline Liability Written Premium = $500,000)
(Commercial Auto Written Premium = $100,000)
(Property Written Premium = $500,000)
Profit Calculation:
(Subtract commission paid from
1999 earned premium; multiply by Per Year
Policy difference between Companies Pay Out Value
Year Company Agency Desired Loss Ratio and Agency (1/3 of 1/2 agency
Valued Class of Desired Actual Actual Loss Ratio; divide by half to portion) of
As Of Business Loss Ratio Loss Ratio establish value of Agency portion) expected profit
----- -------- ---------- ---------- --------------------------------- ---------------
3/31/01* CMP and Garage 27.50% 15.00% Earned Premium = $300,000 $4,875
Liability - $66,000 commission paid
$234,000 x 12.5% = $29,250
$29,250/2 = $14,625
Monoline General 20.0% 12.5% Earned Premium = $500,000 $4,875
Liability - $110,000 commission paid
$390,000 x 7.5% = $29,250
$29,295 / 2 = $14,625
Commercial Auto 40.0% 30.0% Earned Premium = $100,000 $1,300
- $22,000 commission paid
$78,000 x 10.0% = $7,800
$7,800 / 2 = $3,900
Property 50.0% 55.0% Earned Premium = $500,000 $(3,250)
- $110,000 commission paid
$390,000 x -5.0% = $(19,500)
$(19,500) / 2 = $(9,750)
1999 First Payout $7,800
------
*Note: First Year loss ratios below the Floor will be evaluated at the Floor
percentage above. First Year loss ratios above the Ceiling will be
evaluated at the Ceiling percentage above.
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EXAMPLE (Cont.):
Profit Calculation:
(Subtract commission paid from
1999 earned premium; multiply by Per Year
Policy difference between Companies Pay Out Value
Year Company Agency Desired Loss Ratio and Agency (1/3 of 1/2 agency
Valued Class of Desired Actual Actual Loss Ratio; divide by half to portion) of
As Of Business Loss Ratio Loss Ratio establish value of Agency portion) expected profit
3/31/02* CMP and Garage 37.5% 20.0% Earned Premium = $300,000 $6,825
Liability - $66,000 commission paid
$234,000 x 17.5% = $40,950
$40,950 / 2 = $20,475
Monoline General 25.0% 17.5% Earned Premium = $500,000 $4,875
Liability - $110,000 commission paid
$390,000 x 7.5% = $29,250
$29,250 / 2 = $14,625
Commercial Auto 47.5% 35.0% Earned Premium = $100,000 $1,625
Liability - $22,000 commission paid
$78,000 x 12.5% = $9,750
$9,750 / 2 = $4,875
Property 55.0% 40.0% Earned Premium = $500,000 $9,750
- $110,000 commission paid
$390,000 x 15% = $58,500
$58,500 / 2 = $29,250
1999 Second Payout $23,075
-------
*Note: Second Year loss ratios below the Floor will be evaluated at the Floor
percentage above. Second Year loss ratios above the Ceiling will be
evaluated at the Ceiling percentage above.
3/31/03* CMP and Garage 47.5% 30.0% Earned Premium = $300,000 $6,825
Liability - $66,000 commission paid
$234,000 x 17.5% = $40,950
$40,950 / 2 = $20,475
Monoline General 35.0% 25.0% Earned Premium = $500,000 $6,500
Liability - $110,000 commission paid
$390,000 x 10.0% = $39,000
$39,000 / 2 = $19,500
Commercial Auto 50.0% 40.0% Earned Premium = $100,000 $1,300
Liability - $220,000 commission paid
$78,000 x 10.0% = $7,800
$7,800 / 2 = $3,900
Property 55.0% 40.0% Earned Premium = $500,000 $9,750
- $110,000 commission paid
$390,000 x 15.0% = $58,500
$58,500 / 2 = $29,250
1999 Third Payout $24,375
-------
*Note: Third Year loss ratios below the Floor will be evaluated at the Floor
percentage above. Third Year loss ratios above the Ceiling will be
evaluated at the Ceiling percentage above.
Total three-year Value of Pay Out for Policy Year 1999: $55,250
=======
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The above examples only reflect calculations and payments for the 1999
policy year. It is possible that you may be paid on more than one
policy-year statement in a given year as calculations for subsequent
policy-year statements are made assuming you maintain eligibility each
year.
Example: In 2003 you could be paid profit sharing payments based upon
property experience from policy years 1999, 2000, and 2001.
H. In addition to the amount to which you are entitled for your profit
sharing in a given year, you are entitled to receive stock options
based on the following formula: Your profit sharing for the policy
years 1999 and later times 10% divided by the stock price on the date
of grant. The options will vest as of the date of grant and will be
exercisable for a period of five (5) years from the date of grant.
For example, if your payments for the 1999 policy year in 2001, 2002,
and 2003 are $7,800, $23,075, and $24,375 and the stock price on March
31, 2001, 2002, and 2003 is $12, $14, and $16, your options would be
calculated as follows:
Stock
Profit Price # of
Policy Pmt Sharing Formula Divided 3/31 of Options Vesting Exercisable
Year Year Amount % by Pmt Year Granted Date Through
-----------------------------------------------------------------------------------------------------
1999 2001 $7,800 X 10% / $12 65 3/31/01 3/31/06
1999 2002 $23,075 X 10% / $14 165 3/31/02 3/31/07
1999 2003 $24,375 X 10% / $16 152 3/31/03 3/31/08
---
Total three-year options granted for policy year 1999 382
===
IV. PAYMENTS TO YOU UNDER THE PLAN
A. Allocation of Profit Sharing between stock and cash:
1) You may, at your option, exercisable by written notice to the
Companies received by us on or before March 15, take either 25%,
50%, 75%, or 100% of your Profit Sharing in shares of PAGI stock.
2) For purposes of the calculation, any portion of your payment in
PAGI Stock will be valued as of the median between the bid and
asked price for the Stock as of the March 31 profit sharing
calculation date. If the stock markets are closed on that date,
the valuation will be made on the same basis as of the nearest
previous business day.
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3) Notwithstanding the above, if the value of your Profit Sharing is
less than $2,500, payment of the Profit Sharing will be made
entirely in cash.
B. Payment Due Date:
1) Your Profit Sharing will be distributed to you by June 1.
2) Shares of stock distributed to you will be delivered free of all
commissions and transaction costs.
C. Your Profit Sharing will be subject to income tax in accordance with
applicable IRS laws and regulations. Stock distributed to you under
the Plan may not be sold until after August 1 of the same year and
will be legended accordingly.
V. TERMINATION
A. If your General Agency Agreement is terminated by either party, the
program also terminates, with the final calculation and pro-rata
payment made at June 1 of the following year.
B. The plan may be terminated or amended by us at any time without cause,
but existing obligations will be honored.
C. Profit Sharing Upon Termination. Upon termination of this Addendum for
any reason:
1) Before the end of a full calendar year, its terms and conditions
shall apply to all prior calendar years in which this Addendum
was in effect, without proration and without allowance for the
portion of the year in which this Addendum was terminated; and
2) The Agency's right to Profit Sharing shall cease on December 31
of the year preceding the year in which termination is effective,
notwithstanding the continuance in force and effect of any
unexpired policies or binders after such calendar year.
3) In the event of termination of the General Agency Agreement by
either party, this Addendum shall terminate simultaneously and
the Agency shall not be eligible for Profit Sharing in the
termination or succeeding years.
D. If the General Agency Agreement is terminated by us because of a
breach of its terms by you and/or in accordance with any of the terms
of paragraphs 9 (iii) or (iv) of the General Agency Agreement, there
shall be no further calculations made, nor profit sharing payments
made.
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VI. GENERAL
This Profit Sharing Program constitutes the entire and exclusive agreement
between Companies and Agency on the subjects of profit sharing (contingent
commissions), and supersedes any and all prior or contemporaneous
agreements, representations, and understandings, written and oral, on these
subjects. The undersigned signatories hereby warrant that they have full
power and authority to execute this Addendum on behalf of the respective
parties thereto.
IN WITNESS WHEREOF, this Addendum has been executed in duplicate by the parties
hereto.
DATE:
PENN-AMERICA INSURANCE COMPANY
PENN-STAR INSURANCE COMPANY [[agency]]
By: By:
Xxxx X. XxXxxxx, CPCU [[attention]]
Executive Vice President [[title2]]
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