Exhibit 10(b)
SERVICES AGREEMENT
This Agreement, dated as of January 1, 2003, is by and among
MERCHANTS MUTUAL INSURANCE COMPANY ("Merchants Mutual"), a New York domiciled
mutual property and casualty insurance company, MERCHANTS INSURANCE COMPANY OF
NEW HAMPSHIRE, INC. ("Merchants New Hampshire"), a New Hampshire domiciled stock
property and casualty insurance company, and MERCHANTS GROUP, INC. ("MGI"), a
publicly-traded Delaware business corporation. Merchants Mutual is sometimes
herein referred to as "Administrator"; Merchants New Hampshire and MGI are
sometimes herein referred to individually or jointly as "Client"; and Merchants
Mutual, Merchants New Hampshire and MGI are sometimes herein referred to
collectively as the "Companies" and individually as a "Company".
Recitals
WHEREAS, Merchants New Hampshire is a wholly-owned subsidiary
of MGI; and
WHEREAS, prior to the date of this Agreement the insurance
coverages offered by Merchants Mutual and Merchants New Hampshire have been
marketed together through common, independent agents; and
WHEREAS, the Companies are parties to a Management Agreement
dated as of September 29, 1986 (the "Previous Management Agreement"), pursuant
to which Merchants Mutual has been providing certain management services to
Merchants New Hampshire and MGI; and
WHEREAS, the Previous Management Agreement is scheduled to
terminate on July 23, 2003; and
WHEREAS, the Companies desire to provide for the
administration and management of certain aspects of Merchants New Hampshire's
and MGI's business effective upon the termination of the Previous Management
Agreement; and
WHEREAS, the Companies believe that because Merchants Mutual
(a) has managed the Traditional Insurance Business, as defined below, under the
Previous Management Agreement, (b) is a significant stockholder of MGI, and (c)
will share in the underwriting results of Merchants New Hampshire with respect
to the Traditional Insurance Business pursuant to the Reinsurance Pooling
Agreement, as defined below, that Merchants Mutual is well qualified to manage
the Traditional Insurance Business of Merchants New Hampshire in an efficient
and effective manner and has indicated a willingness and desire to do so; and
WHEREAS, it is the overall intent of the Companies in entering
into this Agreement and Annexes hereto and the Reinsurance Pooling Agreement, as
such terms are defined below, to perpetuate a mutually beneficial relationship
among the Companies upon the termination of the Previous Management Agreement;
to align the insurance interests of Merchants New Hampshire and Merchants Mutual
by pooling risks and assuring common underwriting results on their Traditional
Insurance Business prior to any annual or cumulative profit or loss sharing
calculation; to allow the Companies to pursue independent endeavors, or joint
endeavors if they are mutually so inclined; and to more clearly delineate the
on-going rights and duties of the respective Companies with respect to the
administration, management and oversight of the respective insurance operations
of the Client.
NOW, THEREFORE, in consideration of the mutual promises and
covenants and subject to the conditions herein set forth, each party hereto
agrees as follows:
1. GENERAL DEFINITIONS. The following words and phrases shall
have the meanings set forth below, unless such word or phase is otherwise
specifically defined elsewhere in this Agreement or in one of the Annexes
attached hereto:
(a) "Agreement" shall mean this Services Agreement by and
among Merchants Mutual, Merchants New Hampshire and MGI, dated as of January 1,
2003, and shall include each Annex attached hereto and the Schedules, if any,
attached to each Annex.
(b) "Annex" or "Annexes" shall mean individually or
collectively, as the context may require, the Administrative Services Annex, the
Underwriting Services Annex, the Claims Services Annex and the Investment and
Cash Management Services Annex referred to in Paragraph 8 below.
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(c) "Reinsurance Pooling Agreement" shall mean the Reinsurance
Pooling Agreement between Merchants New Hampshire and Merchants Mutual dated
January 1, 2003.
(d) "Traditional Insurance Business" shall mean those
commercial and personal lines of property, liability and workers' compensation
insurance in any jurisdiction in which either of Merchants New Hampshire or
Merchants Mutual is or was licensed to do an insurance business, which insurance
was produced through the Companies' independent insurance agents pursuant to the
Previous Management Agreement, including residual market assumptions and
assessments, industry underwriting facilities charges, and all similar
assessments and charges attributable to such business, and such other business
as the Companies may mutually agree.
2. EFFECTIVE DATE. Unless otherwise specifically provided
herein or in any Annex hereto, all of the terms and conditions in this Agreement
shall be effective as of 12:00 a.m. on January 1, 2003 ("Effective Date").
3. TERM. This Agreement shall remain in effect until the
expiration or earlier termination of each and every of the Annexes hereto;
provided, however, that the provisions set forth in Paragraphs 4, 5, 6, 9, 10,
11, 12, 13, 14 and 19 herein shall survive the expiration or earlier termination
of this Agreement and each of the Annexes hereto.
4. TERMINATION OF PREVIOUS MANAGEMENT AGREEMENT. The Previous
Management Agreement shall terminate immediately upon the Effective Date;
provided, however, that the Companies shall continue to apply the terms of the
Previous Management Agreement to any transactions outstanding as of that time in
order to provide for a smooth, fair and equitable transition from the Previous
Management Agreement to this Agreement. In the event there is any dispute as to
whether the terms of this Agreement or of the Previous Management Agreement
apply to any such transaction, the terms of the Previous Management Agreement
shall apply.
5. RELEASE AND DISCHARGE. Each of the Companies hereby
releases and discharges each of the other Companies and their officers,
directors, employees and representatives from any and all claims, causes of
action or damages which it has or may have against the other Companies and their
officers, directors, employees and representatives arising out of or under the
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Previous Management Agreement or such other Company's performance or
nonperformance under the Previous Management Agreement; provided, however, the
Companies do not release or discharge each other from claims, causes of action
or damages resulting from or arising out of the direct financial obligations of
each Company to any other Company under the Previous Management Agreement,
accounting adjustments made in the ordinary course of business consistent with
past practices, inadvertent accounting or clerical errors, and any fines,
penalties or assessments asserted by any state insurance department.
6. CONTINUATION OF TERMINATION OF INTER-COMPANY POOLING
AGREEMENT. Merchants Mutual and Merchants New Hampshire are parties to a
Termination of Inter-Company Pooling Agreement dated as of January 1, 1985, as
modified on May 5, 1986, (the "Termination of Pooling Agreement"). This
Agreement shall not amend, change or modify in any respect the Termination of
Pooling Agreement which shall remain in full force and effect in accordance with
its terms. Any ambiguity or conflict between the terms of the Termination of
Pooling Agreement and this Agreement shall be resolved in accordance with the
terms of this Agreement.
7. BOARD OF DIRECTORS CONTROL. Nothing contained in this
Agreement, in any Annex, or in the Reinsurance Pooling Agreement shall be deemed
to be a delegation of the authority or responsibility of either Client's Board
of Directors. The business of each Company will be managed by its officers
subject to the authority of its Board of Directors. Each Company may appoint or
elect as officers of such Company persons who hold offices in the other
Companies, subject at all times to the power of its Board of Directors to
appoint or elect and remove its officers in accordance with the charter,
certificate of incorporation, by-laws, or other governing instrument, statute or
rule of law applicable to such Company.
8. AGREEMENT TO PROVIDE SERVICES; BANK ACCOUNTS; ADDITIONAL
PARTICIPANTS.
(a) Subject to the approval, if required, of the New
York and New Hampshire Insurance Departments and any other regulatory authority
having jurisdiction over any Company, Merchants New Hampshire and MGI, as
Client, hereby engage, retain and appoint Merchants Mutual, as Administrator, to
provide the following services, and Merchants Mutual hereby accepts such
engagement, retention and appointment:
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(i) administrative services for Merchants New
Hampshire and MGI, in accordance with the
terms and conditions set forth in the
Administrative Services Annex attached
hereto and hereby incorporated herein;
(ii) underwriting services for Merchants New
Hampshire, in accordance with the terms and
conditions set forth in the Underwriting
Services Annex attached hereto and hereby
incorporated herein;
(iii) claims services for Merchants New Hampshire,
in accordance with the terms and conditions
set forth in the Claims Services Annex
attached hereto and hereby incorporated
herein; and
(iv) investment and cash management services for
Merchants New Hampshire and MGI, in
accordance with the terms and conditions set
forth in the Investment and Cash Management
Services Annex attached hereto and hereby
incorporated herein.
(b) All underwriting, claims and investment services
provided to the Merchants New Hampshire by Merchants Mutual pursuant to this
Agreement are to be based upon the written standards and guidelines of Merchants
New Hampshire. Merchants New Hampshire shall have the ultimate and final
authority over decisions and policies, including but not limited to the
acceptance, rejection and canceling of risks, the payment or non payment of
claims, and the purchase and sale of securities.
(c) Each Client hereby authorizes Administrator to open,
maintain and use bank accounts in each Client's name for the purpose of
effecting the transactions contemplated in this Agreement, the Annexes referred
to herein, and the Reinsurance Pooling Agreement. Merchants New Hampshire
further authorizes Merchants Mutual to open, maintain and use bank accounts in
the name of Merchants New Hampshire or Merchants Mutual or both companies for
the purpose of effecting the premium collections, loss payments and other policy
related transactions under the Reinsurance Pooling Agreement.
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(d) Each Client acknowledges that Merchants Mutual
intends to form a new, wholly owned subsidiary and to license that subsidiary to
write property and casualty insurance. The Companies may mutually agree to add
that new subsidiary as a party to this Agreement and certain or all of the
Annexes, and the Reinsurance Pooling Agreement.
9. BASIS FOR COMPUTATION OF AMOUNTS DUE. Except as otherwise
required by the context of this Agreement or in any Annex hereto, the amounts
due hereunder shall be determined on a year-to-date basis with such
determination to be made as of the end of each month using the same accounting
principles and practices used by Merchants Mutual and Merchants New Hampshire in
filing quarterly and annual statements with the Insurance Departments of the
States of New York and New Hampshire, respectively, and by MGI in preparing
separate quarterly and annual financial statements for filing with the
Securities and Exchange Commission. The accounting principles and practices used
by Merchants Mutual and Merchants New Hampshire shall be consistent with the
provisions of Regulation 30 of the State of New York, Title 11. Chapter IV
Subchapter C. Part 105. -- Operating Expense Classifications for Annual
Statement Purposes.
10. TERMINATION.
(a) Any Company may, at any time, terminate this
Agreement or any Annex for "cause" by written notice specifying (i) the
effective date of termination, which date shall be not less than sixty (60) days
after the date of such notice, and (ii) the reasons for termination. "Cause",
for purposes of terminating this Agreement or any Annex, shall mean either (i)
any material breach of this Agreement or such Annex or (ii) continuous or
repeated failure of a party to comply with a material term of this Agreement or
such Annex. Any termination for cause shall not affect the rights and
obligations of the parties as to transactions or acts by either party prior to
the effective date of termination or relieve either party's obligation during
the pendency of any dispute over the cause of termination. Before a party may
terminate this Agreement or any Annex for cause, the terminating party must
permit the other to rectify such breach, non-performance, or violation within
thirty (30) business days after receipt of written notice of termination. If the
party in breach of this Agreement or any Annex fails to cure within thirty (30)
days of receiving notice of termination of this Agreement or any Annex for
cause, this
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Agreement or any Annex shall terminate on the effective day of the termination
as provided in the notice, unless agreed otherwise in writing by the terminating
party.
(b) Any Company may terminate this Agreement or any
Annex immediately by giving written notice of termination to the other Companies
if either of the other Companies:
(i) is placed under supervision or in
rehabilitation or liquidation by a state
regulatory authority;
(ii) is adjudged bankrupt;
(iii) has a receiver of its assets or property
appointed by a court of competent
jurisdiction;
(iv) makes a general assignment for the benefit
of creditors; or
(v) institutes (or suffers to be instituted and
not dismissed within sixty (60) days) any
proceeding for the reorganization or
arrangement of its affairs.
(c) In addition to the grounds for termination set forth
in Subparagraphs 10(a) and (b) above, Merchants Mutual may terminate this
Agreement, which shall include all (but only all) of the Annexes, upon thirty
(30) days notice given within forty-five (45) days after a "change in control"
shall have occurred with respect to either MGI or Merchants New Hampshire, and
either MGI or Merchants New Hampshire may terminate this Agreement, which shall
include all (but only all) of the Annexes, upon thirty (30) days notice given
within forty-five (45) days after a "change in control" shall have occurred with
respect to Merchants Mutual. For purposes of this Agreement, a "change in
control" shall have occurred with respect to a Company if, after the date of
this Agreement:
(i) Any person (as such term is used in Section
13(d) or Section 14(d)(2) of the Securities
Exchange Act of 1934, as amended, and the
rules and regulations thereunder and
including any affiliate or associate of such
person, as defined in Rule 12b-2 under said
Act, and any person acting in concert with
such person), directly or indirectly
acquires or becomes the beneficial owner of
(within the
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meaning of Rule 13d-3 under said Act), or
otherwise becomes entitled to vote, stock of
MGI or Merchants New Hampshire with 25% or
more of the voting power entitled to be cast
at elections for directors (excluding any
acquisition of stock in one Client by the
other Client or by Merchants Mutual); or
(ii) There occurs any merger or consolidation of
any Company (excluding any merger or
consolidation of one Company with another
Company) or any sale, lease or exchange of
all or any substantial part of the assets of
any of the Companies and their subsidiaries
to any other person, excluding any of the
other Companies, and (i) in the case of a
merger or consolidation, the holders of the
outstanding stock of any of the Companies
entitled to vote in elections of directors
("voting stock") immediately before such
merger or consolidation hold less than 50%
of the voting stock of the survivor of such
merger or consolidation or its parent; or
(ii) in the case of any such sale, lease or
exchange, neither of the Clients or the
Companies as a group owns at least 50% of
the voting stock of the other person; or
(iii) During any period of two (2) consecutive
years, individuals who at the beginning of
such period constitute the entire Board of
Directors of any of the Companies shall
cease for any reason to constitute a
majority thereof, unless the election or the
nomination for the election by that
Company's Directors, shareholders or
policyholders of each new Director was
approved by a vote of at least two-thirds of
the Directors then still in office who were
Directors at the beginning of the period.
(d) This Agreement, and any Annex, may be terminated at
any time upon the agreement of all parties hereto, subject to all necessary
regulatory approvals.
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(e) The right of termination belonging to any party may
be exercised without prejudice to any other remedy to which the terminating or
canceling party may be entitled to at law or under this Agreement.
(f) Upon the effective date of termination for any
reason, Client shall either: (i) assume the responsibility for all functions for
which Administrator may be responsible in accordance with the terms of this
Agreement or any Annex being terminated, or (ii) identify and engage one or more
replacement administrators for one or more of said functions. Upon the effective
date of termination for any reason, Administrator shall be relieved of all of
its obligations and duties hereunder without further liability to Client, except
as provided in Subparagraph 10(g) below and except for those provisions which
shall survive termination as provided in Paragraph 3 above; provided, however,
in such event, Administrator shall cooperate with Client and, if applicable, the
replacement administrator in the transfer without undue delay of files and
information to assist Client or replacement administrator in assuming
uninterrupted service upon the date of termination.
(g) Within thirty (30) days after the effective date of
termination, Client shall pay to Administrator all outstanding sums due to
Administrator pursuant to this Agreement or the Annex being terminated, and
Administrator shall pay to Client all outstanding sums due to Client pursuant to
this Agreement or the Annex being terminated.
11. RECORDS AND INSPECTION.
(a) Administrator shall keep accurate records and
accounts of all transactions undertaken on behalf of Client pursuant to this
Agreement. Said records and accounts shall be maintained in accordance with the
same prudent standards of record keeping as Administrator follows with respect
to its own business and in accordance with all applicable state laws and
regulations concerning records retention. All files shall, upon reasonable prior
written notice to Administrator, be open and available for on-site audit and/or
inspection and reproduction, at Client's expense, by duly authorized
representatives of Client.
(b) Regulatory authorities, having appropriate
jurisdiction, shall have access to files maintained by Administrator for the
purpose of examination, audit, and inspection.
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12. OWNERSHIP OF FILES, RETENTION OF RECORDS. Upon termination
of this Agreement or any Annex or on order of a court having competent
jurisdiction, Client's files and records maintained by Administrator pursuant to
this Agreement shall become the sole property of Client once Administrator has
been paid for the services rendered. Administrator shall have reasonable access
to and the right to copy all files, books and records on a timely basis.
13. REVIEWS. Client may conduct on-site reviews of the
operations of Administrator on behalf of Client. Client may conduct such reviews
during normal business hours upon reasonable notice to Administrator.
Administrator shall cooperate fully with Client, its representatives, and its
designees in such reviews. Client shall prepare written findings in connection
with any review and shall provide Administrator with a copy of such findings
within thirty (30) days after completion of the review.
14. INDEMNIFICATION.
(a) Administrator agrees to indemnify and hold Client
harmless against all claims, liabilities, demands, proceedings, actions,
damages, costs, and expenses (including, without limitation, reasonable
attorneys' fees, fines, penalties or other assessments imposed against Client by
an insurance department or other governmental entities) to which Client may be
subjected arising out of or caused by material breach of this Agreement or any
Annex by Administrator, or the gross negligence or misconduct of Administrator
in processing any transaction and/or the fraudulent conduct or embezzlement or
any other defalcation or gross negligence attributable to Administrator. Nothing
in this Paragraph or in any other provision of this Agreement shall relieve MNH
of its obligations or liabilities to persons or entities not a party to this
Agreement.
(b) Client agrees to indemnify and hold Administrator
harmless against all claims, liabilities, demands, proceedings, actions,
damages, costs, and expenses (including, without limitation, reasonable
attorneys' fees, fines, penalties or other assessments imposed against
Administrator by an insurance department or other governmental entities) to
which Administrator may be subjected arising out of or caused by material breach
of this Agreement or any Annex by Client, or the gross negligence or misconduct
of Client and/or the fraudulent conduct or embezzlement or any other defalcation
or gross negligence attributable to Client.
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15. ERRORS AND OMISSIONS. At any time that Administrator's
capital and surplus, as reported to insurance regulatory authorities as of the
end of each calendar quarter on a Statutory Accounting basis, is below forty
million dollars ($40,000,000), Administrator agrees that it will provide and
maintain insurance coverage for Errors and Omissions Liability in an amount of
not less than one million dollars ($1,000,000) for any one event or occurrence
and in an amount of not less that five million dollars ($5,000,000) in the
aggregate. Client shall receive thirty (30) days written notice of any pending
change, cancellation or other termination of any such Errors and Omissions
Liability policy.
16. ASSIGNMENT. This Agreement shall be binding upon and inure
to the benefit of the parties hereto, their successors and assigns. Except as
otherwise provided below, neither Administrator nor Client may assign this
Agreement or any Annex or the services required herein without the prior written
consent of the other party. This provision shall not prohibit Administrator from
assigning or subcontracting any one or more of the activities to be performed by
Administrator, provided that Administrator obtains any required regulatory
approvals, and provided further that such assignment or subcontracting shall not
relieve Administrator of its obligations to Client under this Agreement.
17. INDEPENDENT CONTRACTOR. Administrator shall act as an
independent contractor in providing services to Client hereunder. Neither this
Agreement nor the performance hereof by Administrator shall create nor be deemed
to create any employer-employee, joint venture or partnership relationship
between Administrator or any of its affiliates, officers, directors, employees,
or other agents or representatives, on the one hand, and Client or any of its
affiliates, officers, directors, employees, or other agents or representatives,
on the other hand.
18. NOTICES.
(a) All notices or other communications required
pursuant to any provision of this Agreement or any Annex shall be in writing and
shall be delivered personally, or sent by a nationally recognized overnight
carrier, or sent by certified mail return receipt requested, postage prepaid,
addressed as follows:
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Administrator: Merchants Mutual Insurance Company
Address: 000 Xxxx Xxxxxx
Xxxxxxx, Xxx Xxxx 00000
Attn.: Xxxxxx X. Xxx, President & CEO
Client: Merchants Group, Inc.
Merchants Insurance Company of New Hampshire, Inc.
Address: 000 Xxxx Xxxxxx
Xxxxxxx, Xxx Xxxx 00000
Attn.: Xxxxxxx X. June
(b) When required or issued pursuant to this Agreement,
notices shall be deemed to have been given at the time when personally
delivered, or the day following the day sent by overnight carrier, or if by
certified mail, upon the third (3rd) day after the date such notice is
postmarked.
19. ARBITRATION. If any dispute arises under this Agreement
that cannot be resolved by the parties hereto it shall be settled by arbitration
in the following manner: The dispute shall be submitted for determination to a
panel of three (3) arbitrators, not related to or affiliated with any of the
parties to this Agreement, one to be chosen by Merchants Mutual, one to be
chosen by MGI and the third to be selected by the mutual agreement of the other
two (2) arbitrators. The arbitration shall take place in Buffalo, New York, and
shall be conducted in accordance with the then current Commercial Arbitration
Rules of the American Arbitration Association. The arbitrators shall not be
authorized to award punitive damages.
20. GENERAL.
(a) This Agreement constitutes the entire agreement of
the parties with respect to the subject matter hereof, and as of the Effective
Date supersedes all previous agreements and/or contracts whether oral or written
between them with respect to the subject matter hereof, including the Previous
Management Agreement unless specifically provided otherwise herein.
(b) If any provision of this Agreement shall contravene
or be invalid under the laws of the United States, the state in which
enforcement is sought, or the regulatory requirements of such state, it is
agreed that such provision shall not invalidate the whole
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Agreement but the Agreement shall be construed as if not containing the
particular provision or provisions held to be invalid.
(c) This Agreement shall not be amended, changed or
modified in any manner, except by an instrument in writing signed by all the
parties hereto or their respective successors or assigns.
(d) No party hereto shall be deemed to have waived any
rights or remedies accruing to it hereunder unless such waiver is in writing and
signed by such party.
(e) No delay or omission by any party hereto in
exercising any right shall operate as a waiver of said right on any further
occasion.
(f) The captions are for convenience of reference only
and shall not control or affect the meaning or construction of any provision of
this Agreement.
(g) This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same instrument.
(h) This Agreement shall be interpreted and construed in
accordance with the internal laws of the State of New York without regard to
conflicts of law.
(i) Each party represents to the other that it is
authorized to enter into this Agreement and that its entry into this Agreement
does not and will not violate the terms of any judgment, decree or ruling or any
contract with any third party.
(j) If an unforeseen event or circumstance arises and
the terms of this Agreement or the Annexes are ambiguous as to how the event or
circumstance shall be resolved or managed, or a literal reading of this
Agreement or the Annexes creates a result inconsistent with the purposes for
which the Companies have entered into this Agreement or the Annexes, this
Agreement and the Annexes shall be interpreted in a manner that will effectuate
the purposes of the parties as set forth in the Recitals which appear at the
head of this Agreement.
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CLIENT AND ADMINISTRATOR CERTIFY BY THEIR UNDERSIGNED AUTHORIZED OFFICERS THAT
THEY HAVE READ THIS AGREEMENT, INCLUDING ALL ANNEXES HERETO AND THE SCHEDULES TO
SUCH ANNEXES, AND AGREE TO BE BOUND BY ITS TERMS AND CONDITIONS.
IN WITNESS WHEREOF, this Agreement has been duly executed by
each party hereto in Buffalo, New York on the date first above written.
MERCHANTS MUTUAL INSURANCE COMPANY
By
-------------------------------------------
Xxxxxx X. Xxx, President
MERCHANTS INSURANCE COMPANY OF
NEW HAMPSHIRE, INC.
By
-------------------------------------------
Xxxxxxx X. June, Executive Vice President
MERCHANTS GROUP, INC.
By
-------------------------------------------
Xxxxxx X. Xxxxxx, Vice President
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ADMINISTRATIVE SERVICES ANNEX
This Annex is part of the Services Agreement dated January 1, 2003 (the
"Agreement" or "Services Agreement"), by and between Merchants Group, Inc.
("MGI") and Merchants Insurance Company of New Hampshire, Inc. ("Merchants New
Hampshire") on the one hand (jointly, "Client") and Merchants Mutual Insurance
Company on the other hand ("Administrator").
I. Appointment of Administrator
Client hereby appoints Administrator and Administrator hereby accepts
appointment by Client to provide the administrative, bookkeeping,
accounting and other similar functional services enumerated in Section
II below and related to the administration of Merchants New Hampshire's
Traditional Insurance Business and to the day-to-day administration of
MGI's bookkeeping, accounting and related needs.
Administrator agrees to perform, for the fees set forth below, the
services enumerated in Section II below. Administrator's services shall
be performed in a timely manner in accordance with the legal
requirements and other obligations of Client. Administrator's
performance is subject, however, to the timely performance by Client of
its duties and responsibilities where applicable.
II. Duties of Administrator
With respect to the administration of Merchants New Hampshire's
Traditional Insurance Business and to the day-to-day administration of
MGI's and MNH's bookkeeping, accounting and related needs,
Administrator agrees to perform the duties and obligations listed below
in accordance with the standards established below and the legal
requirements applicable to such Traditional Insurance Business. In the
event that any such duties or obligations are more specifically
provided for in another Annex, that other Annex shall supercede this
Section.
In respect to the authorization and appointment established in Section
I, Client hereby conveys to and confers upon Administrator the required
powers authorizing it to take all necessary action to enable it to
perform its duties hereunder, on behalf of Client, including without
limitation:
A. Accounting services, including the preparation of all income tax
returns, balance sheets, profit and loss statements and convention
statements; making disbursements, other than related to premiums
and claims, following established internal control procedures; the
keeping of all original books and records regarding all receipts
and disbursements and posting all entries in the same; the
compilation of all financial information in such detail and at
such times as shall be required by the Board of Directors of
Client or any committee thereof; compiling information
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for and completing drafts for the review and approval of Merchants
New Hampshire or MGI management of all financial forms and
statements required by any governmental agency, whether state or
federal or for distribution to Client's stockholders and
directors; and, in general, to do and perform all services
customarily done and performed by accounting departments of
property and casualty insurance companies.
B. Actuarial services, including the development and calculation of
loss reserves for property and casualty insurance business
produced pursuant to the Underwriting Services Annex as amended
from time to time. Administrator shall make available its staff
and actuarial advisors for the purpose of carrying out such
functions, evaluating loss reserves and statutory reserves, and
all other management services traditionally performed by actuarial
departments in property and casualty insurance companies.
C. Management of the procurement of legal services, including advice
with respect to all state and federal laws applicable to Client's
insurance operations; the performance of other management services
customarily performed by counsel for property and casualty
insurance companies in the ordinary course-of-business. The
management services provided for in this paragraph shall not
include litigation (whether initiated by Client or others); the
transfer of stock whether by purchase, exchange, or otherwise;
fees incurred in connection with the investment of assets of
Client or any legal management services required other than in the
ordinary course of the business of Client, including without
limitation any corporate advice, advice to the Board of Directors
or securities laws advice. Nothing contained in this paragraph
shall be construed to require Administrator to undertake any
action that would constitute the practice of law in any applicable
jurisdiction.
D. Internal audit services necessary to maintain an adequate system
of internal controls and management reporting.
E. All other administrative services:
i. in conjunction with Client, and, with respect to MGI,
incidental to the operation of a publicly traded corporation
including without limitation, the maintenance of all
corporate records, including drafting minutes of Directors
meetings; the drafting of all filings with the Securities and
Exchange Commission subject to the review and approval by
MGI; handling of investor relations, including relations with
investment analysts and news media;
ii. with respect to Merchants New Hampshire, incidental to the
operation of a property and casualty insurance company
including without limitation, the handling of matters before
all insurance departments having jurisdiction over Merchants
New Hampshire and all legislative matters which might affect
the operation of Merchants New Hampshire in the various
states in which
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Merchants New Hampshire is admitted to do business; the
handling of matters with AM Best and other financial rating
agencies; and
iii. in general, to perform such administrative, management and
development tasks as are or might be, considered prudent,
reasonable and necessary for the operation of Client.
III. Duties of Client
Client agrees to perform the duties and obligations listed below in
accordance with the standards established below and the legal
requirements of all applicable jurisdictions.
A. Advise Administrator of all corporate plans and strategies that
affect the performance of Administrator's duties under this Annex.
B. Disclose to Administrator information relevant to the preparation
and filing of all financial and other reports.
C. Review and approve the following:
i. Securities and Exchange Commission and stock exchange and
other securities filings and reports; and
ii. Press releases.
IV. Fees and Expenses
A. In consideration for the services performed by Administrator
enumerated under Section II of this Annex, Client shall pay to
Administrator fees as follows:
i. For all services as set forth in Section II of this Annex
monthly fees determined as set forth in Schedule 1 attached
hereto, payable monthly within thirty (30) days after the end
of each month
ii. Other services - in accordance with fees to be agreed
B. Client shall be responsible to pay directly to the applicable
taxing authority or to Administrator, if imposed on or paid on
behalf of Client by Administrator, all federal, state and local
taxes and assessments which Administrator may be required to pay
or collect or which may be incurred or assessed against
Administrator, under any existing or future law.
17
V. Term of Annex
This Annex shall commence as of the Effective Date of the
Agreement and continue in force and in effect for an indefinite
period, unless and until terminated (i) at 11:59 p.m. December
31, 2003 or at the end of any calendar quarter thereafter by
either party providing the other with written notice not less
than 180 days prior to the date of termination, or (ii) upon
termination of the Services Agreement.
* * *
18
SCHEDULE 1
Annual Fees for Administrative Services
Set Forth in Section II of this Annex
For each calendar year, Client shall pay to Administrator on a monthly basis 50%
of the expenses incurred by Administrator listed in paragraphs A. and B. below.
This percentage and the category of expenses may be changed by mutual agreement
of Client and Administrator, at any time and from time to time after December
31, 2003.
A. The Client's agreed share of the following DEPARTMENTAL EXPENSES:
1. General accounting services, after deducting:
a. Depreciation - furniture and fixtures
b. Depreciation - electronic data processing
c. Facility administration expenses
d. Legal and audit fees
e. Building rent
2. Actuarial services, but only as respects the agreed percentage
of the actuarial staff as relates to determining the Client's
reserves for losses, loss adjustment expenses and unearned
premiums.
3. Statistical reporting, but including only the agreed
percentage of the Chief Actuary's salary and fringe benefits
relating to this service.
4. Internal audit
The above Departmental Expenses shall also include the allocated
percentages of the following related additional expenses:
1. Fringe benefits applicable to the managers and staff providing
the applicable services, and
2. Occupancy and equipment costs required for the managers and
staff providing the applicable services.
B. Salaries and fringe benefits for the following Executive Managers and
staff, but only as relates to the services provided by the departments
listed in A. above:
1. Chief Executive Officer
2. Chief Financial Officer
3. Assistant Vice President - Finance
4. Controller
5. Executive Assistant.
19
C. In addition to its share of the expenses listed in paragraphs A. and B.
above, Client shall also pay 100% of its direct expenses including, but
not limited to, the following:
1. Legal
2. Audit
3. Insurance
4. Salaries, fringe benefits and other expenses for Client's
employees
5. Fees and expenses for Client's advisors.
6. Rating agency fees.
20
UNDERWRITING SERVICES ANNEX
This Annex is part of the Services Agreement dated January 1, 2003 (the
"Agreement" or "Services Agreement"), by and between Merchants Group, Inc.
("MGI") and Merchants Insurance Company of New Hampshire, Inc. ("Merchants New
Hampshire") on the one hand (jointly, "Client") and Merchants Mutual Insurance
Company on the other hand ("Administrator").
I. Appointment of Administrator
Merchants New Hampshire hereby appoints Administrator and Administrator
hereby accepts appointment by Merchants New Hampshire to act on behalf
of Merchants New Hampshire in underwriting and servicing Merchants New
Hampshire's Traditional Insurance Business incepting and in force
during the Term of this Annex.
This Annex shall not be considered an exclusive relationship between
Merchants New Hampshire and Administrator, and Merchants New Hampshire
may act on its own behalf or engage such other underwriting
administrators to act for it with respect to other policies or
insurance business not included in Traditional Insurance Business as
Merchants New Hampshire may designate from time to time. Conversely,
Administrator may provide similar services to others.
Administrator agrees to perform, for the fees set forth below, the
services enumerated in Section II. below. Administrator's services
shall be performed in a timely manner in accordance with the legal
requirements of the state in which the policy was written.
Administrator's performance is subject, however, to the timely
performance by Merchants New Hampshire of its duties and
responsibilities where applicable.
II. Duties of Administrator
With respect to Traditional Insurance Business, Administrator agrees to
perform the duties and obligations listed below and Client authorizes
Administrator to perform all such duties and obligations, all in
accordance with the standards established below and the legal
requirements of the state in which the applicable policy was written.
In the event that any such duties or obligations are more specifically
provided for in another Annex, that other Annex shall supercede this
Section.
A. Market Traditional Insurance Business through Merchants New
Hampshire's appointed independent agents.
B. Appoint agents on behalf of Merchants New Hampshire in accordance
with marketing plans as are approved by Merchants New Hampshire.
C. Ensure that each insurance applicant qualifies for new or renewal
insurance in accordance with Merchants New Hampshire's
underwriting guidelines and
21
eligibility rules as are in effect from time to time; provided,
however, that Administrator has the authority to interpret
underwriting guidelines as the same apply to individual insurance
applicants.
D. Solicit and receive insurance policy applications and renewal
information, and bind and issue policies in accordance with
Merchants New Hampshire's underwriting manuals and guidelines, as
the same may be amended from time to time at the suggestion of or
in consultation with Administrator.
E. Price all new and renewal premiums in accordance with premium
rates, rating plans and rules as are in effect from time to time.
F. Prepare and maintain all policy files.
G. Submit premium xxxxxxxx to insureds or agents as applicable,
collect premiums or pay or credit return premiums, and deposit
cash in depository accounts approved by Merchants New Hampshire
("Deposit Account(s)"); the funds held in such Deposit Accounts
may be commingled with funds of the Administrator but shall only
be used by the Administrator to satisfy obligations related to the
Traditional Insurance Business.
H. Provide all policyholder services not otherwise provided by
Merchants New Hampshire's independent insurance agents, including
fielding and responding to inquiries, processing policy changes
and issuing endorsements, billing additional premiums and
disbursing return premiums.
I. Establish and maintain files for each appointed agent including,
among other things, agent's appointment agreement, commission
structure, and binding authority, if any.
J. Calculate, process, and pay out of the Deposit Account(s) on
behalf of Merchants New Hampshire all commissions and collect all
return commissions in accordance with commission rates and plans
as are in effect from time to time. Administrator shall have the
authority to negotiate commissions on individual policies.
K. Calculate, process, and pay out of the Deposit Account(s) on
behalf of Merchants New Hampshire all premium taxes out of
Merchants New Hampshire's Deposit Account(s).
L. Calculate, process, and pay out of Deposit Account(s) on behalf of
Merchants New Hampshire all policyholder dividends in accordance
with the dividend plans in effect from time to time.
M. Maintain, and make available to Merchants New Hampshire as
required all accounting records in the format and media maintained
by Administrator
22
including, but not limited to: premium registers; cash receipt
journals; cash disbursements journals; open premium receivables
and commission payables; and other related xxxxxxxx, receipts,
payables and disbursements. Such records shall be available to
Merchants New Hampshire during normal business hours upon
reasonable notice.
N. Prepare and submit to Merchants New Hampshire periodic management
reports as set forth in Schedule 1.
O. Make all systems, records and files available to Merchants New
Hampshire and its actuaries and analysts. Such information shall
be available to Merchants New Hampshire during normal business
hours upon reasonable notice.
P. Prepare and file premium rating plans and amendments, as
appropriate, whenever required, and submit to Merchants New
Hampshire for specific approval any filing that deviates from
credibility weighted actuarial indications by more than the
greater of two (2) percentage points from the indication and 20%
of the indication. In addition, Administrator shall also submit to
Merchants New Hampshire for specific approval any filing that,
after amendment following consultation or negotiation with the
applicable state insurance department, deviates from credibility
weighted actuarial indications by more than the greater of three
(3) percentage points from the indication and 30% of the
indication. Absent a response, Merchants New Hampshire is deemed
to have approved any filing after ten (10) days from receipt of
the submission from Administrator.
Q. Prepare and maintain, subject to the approval of Merchants New
Hampshire, the following:
i. Underwriting guidelines and eligibility rules.
ii. Premium rating plans based on current underwriting
statistics, revised on a regular basis.
iii. Independent agency commission structures - base and
incentive.
iv. Policy dividend programs.
Absent a response, Merchants New Hampshire is deemed to have
approved any such guidelines, rules, plans, structures and/or
programs (as applicable) after ten (10) days from receipt of the
submission from Administrator.
R. Respond to and resolve insurance department inquiries and
complaints, and notify Merchants New Hampshire promptly of any
such inquiries or complaints and Administrator's responses thereto
and the resolutions thereof.
00
X. Xxxxxx Xxxxxxxxx Xxx Xxxxxxxxx with determining reinsurance needs
and placement of reinsurance with reinsurers approved in
accordance with criteria established by Merchants New Hampshire.
Merchants New Hampshire retains final authority for approval of
placement of all reinsurance; provided, however, that
Administrator shall have the authority to place facultative
reinsurance on individual risks with reinsurers approved by
Merchants New Hampshire.
T. Manage Merchants New Hampshire's residual market obligations.
U. Perform such other tasks as are traditionally the responsibility
of an insurance underwriting administrator, including those
previously performed by Administrator under the Previous
Management Agreement.
III. Duties of Client
With respect to Merchants New Hampshire's Traditional Insurance
Business, Merchants New Hampshire agrees to perform the duties and
obligations listed below in accordance with the standards established
below and the legal requirements of the applicable state(s) in which
the policy was written:
A. Approve or reject, within ten (10) days of receipt of any
submission from Administrator, any proposed new or changes to
existing:
i. Policy forms (except for changes required by law which can be
made without Merchants New Hampshire's approval).
ii. Underwriting guidelines and eligibility rules.
iii. Premium rating plans and rules based on current underwriting
statistics and revised on a regular basis.
iv. Independent agency commission structures - base and
incentive.
v. Policy dividend programs.
Absent a response, Merchants New Hampshire is deemed to have
approved any such forms, guidelines, rules, plans, structures
and/or programs (as applicable) after ten (10) days.
B. Approve or reject all premium rate filings as submitted by
Administrator in accordance with Subsection II. P. above.
C. Approve or reject the placement of all reinsurance and establish
the criteria for any company with whom reinsurance is placed;
provided, however, that Administrator shall have the authority to
place facultative reinsurance on individual risks with reinsurers
approved by Merchants New Hampshire.
24
D. Authorize Administrator to appoint agents on behalf of Merchants
New Hampshire in accordance with guidelines agreed between the
Administrator and Merchants New Hampshire.
E. Authorize Administrator to obtain underwriting application
information, and to bind and issue policies in accordance with
Merchants New Hampshire's underwriting manuals and guidelines, as
amended from time to time at the suggestion of Administrator or in
consultation with Administrator.
F. Authorize Administrator to xxxx and collect premiums and to pay
return premiums.
IV. Cash Receipts and Disbursements
A. Merchants New Hampshire hereby authorizes and empowers
Administrator to collect and receive all premiums related to
Merchants New Hampshire's Traditional Insurance Business. Such
funds shall be deposited in an account (the "Deposit Account")
established and maintained by Administrator for premiums collected
on Traditional Insurance Business written by Merchants New
Hampshire, Merchants Mutual and other affiliated insurers (the
"depositing companies") which might also underwrite the same lines
of insurance as are included with Merchants New Hampshire's
Traditional Insurance Business. Premium refunds, commissions,
premium taxes and other expenses related to premiums written by
the depositing companies will be paid by Administrator from funds
deposited in the Deposit Account.
B. Administrator is also authorized to fund Merchants New Hampshire's
claims settlement accounts, and make payments for Merchants New
Hampshire's reinsurance premiums (less reinsurance loss
recoveries), general operating expenses and Merchants New
Hampshire's allocated share of unallocated loss adjustment
expenses from the Deposit Account.
C. Balances at the end of each month will be settled with the
depositing companies. Positive balances will be paid to and
negative balances will be collected from the depositing companies
within thirty (30) days after the end of the month.
D. Amounts maintained in the Deposit Account by Administrator on
behalf of or for Merchants New Hampshire, shall be held by
Administrator in a fiduciary capacity.
E. Administrator shall maintain and make available to Merchants New
Hampshire as required records of all deposit and disbursement
transactions with respect to the Deposit Account. Such records
shall be available to Merchants New Hampshire during normal
business hours upon reasonable notice.
25
V. Service Fees, Payments and Direct Expenses
A. In consideration for the services performed by Administrator
enumerated under Section II of this Annex, Merchants New Hampshire
shall pay to Administrator monthly fees based upon an allocated
share of Administrator's other underwriting expenses as agreed
between Merchants New Hampshire and Administrator determined
pursuant to statutory accounting rules and set forth in Schedule 2
attached hereto. The expenses shall be allocated based on
Merchants New Hampshire's premiums written that are subject to
this Annex relative to the total of all premiums written by
Administrator plus Merchants New Hampshire's premiums written
subject to this Annex during each month. The calculation shall be
made based on cumulative premiums and expenses and the monthly
changes thereof for each year this Annex is in effect. Merchants
New Hampshire shall pay the fee within thirty (30) days after the
end of each month.
B. In addition to the above fees paid to Administrator, Merchants New
Hampshire shall be responsible for the payment of all agent
commissions and other direct policy acquisition costs.
C. Merchants New Hampshire shall be responsible to pay directly to
the applicable taxing authority or to Administrator, if imposed on
or paid on behalf of Merchants New Hampshire by Administrator, all
federal, state and local taxes and assessments which Administrator
or Merchants New Hampshire may be required to pay or collect or
which may be incurred or assessed against Administrator or
Merchants New Hampshire, under any existing or future law,
including, without limitation, premium taxes, residual market
assessments, and industry underwriting facilities charges, and all
similar taxes, assessments and charges attributable to Merchants
New Hampshire's business underwritten and serviced pursuant to
this Annex.
VI. Term of Annex
This Annex shall commence as of the Effective Date of the Agreement and
continue in force and in effect for an indefinite period, unless and
until terminated (i) at 11:59 pm on December 31, 2007 or any December
31 thereafter by either party providing the other with written notice
not less than one year prior to the date of termination, or (ii)
coincident with the termination of the Reinsurance Pooling Agreement
ceding Merchants New Hampshire's Traditional Insurance Business to
Merchants Mutual, but not earlier than at 11:59 p.m. on December 31,
2007, or (iii) upon termination of the Services Agreement.
* * *
26
SCHEDULE 1
Management Reports
o Monthly Production Reports (DWP)
o Monthly Management Reports (Regional Reports)
o Quarterly Agent Production and Profitability Reports ("55's")
o Quarterly Loss and LAE Results, by line
o Quarterly Profitability Analysis
o Internal Underwriting and Claims File Reviews, as completed
o Rate Indications and Rate and Rule Filings as prepared in the ordinary
course of business
o Monthly Cash Flows
27
SCHEDULE 2
Other Underwriting Expenses
For each year, the combined amount of underwriting expenses of Administrator and
Merchants New Hampshire as are to be reported in such year's Underwriting and
Investment Exhibit, Part 4 - Expenses of the Administrator and Merchants New
Hampshire Annual Statements included in Column 2 on lines 3 through 18 plus line
24, excluding the following specific items:
1. Expenses unrelated to the Traditional Insurance Business;
2. Expenses deemed to be direct expenses of either Merchants New
Hampshire or Administrator;
3. Administrative expenses of Administrator that will be included in
the determination of the fees payable under the Administrative
Services Annex of the Services Agreement;
4. Provisions for payment of Senior Management bonuses by
Administrator; and
5. Other expenses as may, from time to time, be agreed by the
parties.
28
CLAIMS SERVICES ANNEX
This Annex is part of the Services Agreement dated January 1, 2003 (the
"Agreement" or "Services Agreement"), by and between Merchants Group, Inc.
("MGI") and Merchants Insurance Company of New Hampshire, Inc. ("Merchants New
Hampshire") on the one hand (jointly, "Client") and Merchants Mutual Insurance
Company on the other hand ("Administrator").
I. Appointment of Administrator
Client hereby appoints Administrator and Administrator hereby accepts
appointment by Client as claims manager to represent and act for
Merchants New Hampshire with respect to those claims incurred on
Merchants New Hampshire's Traditional Insurance Business and
investigated and settled during the Term of this Annex.
Merchants New Hampshire may act on its own behalf or engage such other
claims administrators to act with respect to other such of its policies
or insurance business not included in its Traditional Insurance
Business as Merchants New Hampshire may designate from time to time.
Administrator may provide similar services to others.
Administrator agrees to perform, for the fees set forth below, the
services enumerated in Section II below. Administrator's services shall
be performed in a timely manner in accordance with claims guidelines
and practices as adopted by Merchants New Hampshire from time to time,
and with the legal requirements of the state in which the policy was
written or the claim was incurred. Administrator's performance is
subject, however, to the timely performance by Merchants New Hampshire
of its duties and responsibilities where applicable.
II. Duties of Administrator
With respect to claims arising under Merchants New Hampshire's
Traditional Insurance Business, Administrator agrees to perform the
duties and obligations listed below in accordance with the standards
established below and the legal requirements of the state(s) in which
the applicable policy was written and the claim was incurred. In the
event that any such duties or obligations are more specifically
provided for in another Annex, that other Annex shall supercede this
Section.
A. Receive, accept and establish a file for each claim. Enter claim
data into Administrator's claims management system.
B. Conduct necessary investigations of all claims submitted to it by
insureds or claimants to determine their validity and
compensability.
29
C. Furnish to insureds and claimants all claim forms necessary for
the proper administration of claims.
D. Verify insured's coverage provided by Merchants New Hampshire.
E. Establish case specific reserves, adjust, resist and/or settle
claims in accordance with authority levels granted to
Administrator by Merchants New Hampshire and set forth on Schedule
1 hereto.
F. Utilize investigators, legal counsel and other service providers
required for the administration of claims and assist selected
legal counsel in the preparation of cases for hearings, appeals,
and/or trials. Administrator shall propose and Merchants New
Hampshire shall approve a list of service providers (the "approved
list"). As respects specific claims, Administrator may retain a
service provider not on the approved list, but must provide
Merchants New Hampshire with notice of such retention as soon as
reasonably practical, along with the reasons for the selection. If
Merchants New Hampshire so directs, Administrator will terminate
the non-approved service provider and retain one acceptable to
Merchants New Hampshire.
G. Supervise all litigation and other proceedings involving a claim
and, where required, attend judicial or administrative hearings
involving a claim.
H. Issue drafts for settlement of claims and payment of all allocated
loss adjustment expenses out of the Deposit Account(s) established
pursuant to the Underwriting Services Annex.
I. Evaluate all claims for reinsurance coverage; submit claims
reports and related information to reinsurers; negotiate
settlement and collection of all reinsurance claims.
J. Pursue all reasonable possibilities of subrogation, contribution
or indemnity, where in the reasonable judgment of Administrator
there is a substantial likelihood of a net recovery, and pay all
such recovered amounts to Merchants New Hampshire.
K. Maintain and make available to Merchants New Hampshire as required
all accounting records in the format and media maintained by
Administrator including, but not limited to: loss payment
journals; individual claim reserves and periodic adjustments;
salvage and subrogation receipts journals; open salvage and
subrogation receivables; reinsurance claims reports and receipts.
Such records shall be available to Merchants New Hampshire during
normal business hours upon reasonable notice.
30
L. Prepare and submit to the Merchants New Hampshire periodic
management reports as set forth in Schedule 2.
M. Maintain all loss and allocated loss adjustment expense systems
and data files and provide access to the systems and files to
Merchants New Hampshire and its actuaries and analysts. Such
information shall be available to Merchants New Hampshire during
normal business hours upon reasonable notice.
N. Respond to all insurance department and regulatory complaints and
inquiries, and cooperate with Merchants New Hampshire to dispose
of such complaints and inquiries.
O. Hold all funds and assets of Merchants New Hampshire, which come
into the possession or control of Administrator pursuant to this
Annex, in a fiduciary capacity on behalf of Merchants New
Hampshire.
P. Maintain all applicable regulatory licenses and use its best
efforts to ensure that all individuals employed, retained or
acting under the direction of Administrator hold all required
individual regulatory licenses.
III. Duties of Merchants New Hampshire
With respect to Merchants New Hampshire's Traditional Insurance
Business, Merchants New Hampshire agrees to perform the duties and
obligations listed below in accordance with the standards established
below and the legal requirements of the applicable state(s) in which
the policy was written and the claim was incurred.
A. Authorize Administrator to receive and provide to Administrator
Notices of Claim including XXXXX forms, letters, or phone reports,
if and when received by Merchants New Hampshire within twenty-four
(24) hours of receipt by Merchants New Hampshire. Merchants New
Hampshire shall promptly forward, or cause to be forwarded to
Administrator, all claims, claim forms, demands, notices,
inquiries or correspondence concerning or related to claims
received by Merchants New Hampshire.
B. Provide, and authorize Administrator to utilize, all policy and
other data in order to allow Administrator to promptly verify
coverage after receipt of Notice of Claim by Administrator.
C. Advise Administrator within two (2) business days of receipt of
all inquiries affecting Merchants New Hampshire's licenses,
requests for audits, or regulatory inquiries.
D. With respect to any claim requiring Merchants New Hampshire
approval, pursuant to the claims handling procedures as set forth
on Schedule 1,
31
Merchants New Hampshire shall provide such approval or disapproval
within ten (10) days from receipt of the submission from
Administrator.
IV. Cash Disbursements and Account Funding
A. Merchants New Hampshire authorizes Administrator to disburse cash
to settle claims (within agreed limits of authority as set forth
in Schedule 1 or otherwise in this Agreement) with funds provided
by Merchants New Hampshire to Administrator and maintained by
Administrator for such purpose.
B. Funds held by Administrator on behalf of Merchants New Hampshire
shall be held in a fiduciary capacity. Such funds shall be
deposited in an account established and maintained by
Administrator in a federal or state insured financial institution.
Claims and allocated loss adjustment expenses will be paid from
this account.
C. Administrator is authorized to obtain reimbursement for claims
payments and Administrator's Service Fees (as such term is defined
in Section V (A) below) from:
i. The fiduciary account to which premiums and related
transactions are deposited and disbursed as authorized by the
terms of the Underwriting Services Annex (the "Deposit
Account"), and to the extent this account is insufficient;
ii. The general operating funds of Merchants New Hampshire.
D. Merchants New Hampshire shall deposit and maintain in the Deposit
Account with Administrator a minimum required balance of one
hundred thousand dollars ($100,000) by periodically transferring
additional funds to such account in order to replenish the account
so that it equals or exceeds the minimum required balance.
E. Administrator shall render a monthly accounting within thirty (30)
days after the end of each month to Merchants New Hampshire
reporting the balance of the funds and the details of all
transactions with respect to such funds.
V. Service Fees and Payment
A. In consideration for the services performed by Administrator
enumerated under Section II of this Annex, Merchants New Hampshire
shall pay to Administrator monthly service fees ("Service Fees")
based upon an allocated share of Administrator's unallocated loss
adjustment expenses as agreed between Merchants New Hampshire and
Administrator determined pursuant to statutory accounting rules
and set forth in Schedule 3. The expenses shall be allocated based
on the claims attributable to Merchants New Hampshire that are
subject
32
to this Annex relative to the total of all claims being handled by
Administrator outstanding each month by averaging the number of
claims outstanding at the beginning and end of each month. The
calculated share for Merchants New Hampshire shall be applied to
Administrator's total unallocated loss adjustment expenses to
determine Administrator's monthly Service Fee. It is the intent of
the parties that claims expenses will continue to be allocated in
the manner utilized under the Previous Management Agreement.
Merchants New Hampshire shall pay each monthly Service Fee within
(30) days after the end of each month.
B. In addition to the Service Fees paid to Administrator, Merchants
New Hampshire shall be responsible for the payment of all
Allocated Loss Adjustment Expense(s) as defined in Section VI of
this Annex to the persons to whom such Allocated Loss Adjustment
Expenses are owed.
C. Merchants New Hampshire shall be responsible to pay directly to
the applicable taxing authority or to Administrator, if imposed on
or paid on behalf of Merchants New Hampshire by Administrator, all
federal, state and local taxes and assessments which Administrator
may be required to pay or collect or which may be incurred or
assessed against Administrator, under any existing or future law,
relating to the handling and settlement of any claims under this
Annex.
VI. Definition of "Allocated Loss Adjustment Expense"
A. For the purposes of this Annex, Allocated Loss Adjustment Expenses
("Allocated Loss Adjustment Expenses") shall mean any expense not
incurred by Administrator as a part of its day to day intrinsic
operation (such as its own internal payroll, office expenses,
overhead, etc,) which is chargeable or attributable to the
investigation, coverage analysis, adjustment, negotiation,
settlement, defense or general handling of any claim(s) or
action(s) related thereto, or to the protection and/or perfection
of Merchants New Hampshire's and/or its insureds' rights of
subrogation, contribution or indemnification.
B. Allocated Loss Adjustment Expenses include, but are not limited to
the following:
i. Attorney's fees and disbursements incurred in connection
with the determination of coverage and/or the adjustment,
defense, negotiation or settlement of any claim;
attorney's fees incurred for representation at
depositions, hearings, pretrial conferences and/or trials.
ii. Costs incurred in handling any Alternative Dispute
Resolution proceeding ("ADR"), legal actions, including
trials or appeals, or in pursuing any declaratory judgment
action, including deposition
33
fees, costs of appeal bonds, court reporter or
stenographic service fees, filing fees, and other court
costs, fees and expenses, transcript or printing costs and
all discovery expenses; fees for service of process; fees
for witnesses' testimony, opinions, or attendance at
hearings or trial.
iii. Statutory fines or penalties to the extent incurred in
connection with the adjustment, negotiation, settlement or
defense of any claim; pre- and post-judgment interest paid
as a result of litigation, unless legal requirements
define such interest as indemnity payments.
iv. Subcontractors' fees and travel expenses, including
independent adjusters, automobile and property appraisers,
to the extent that same are incurred in the adjustment,
negotiation, settlement or defense of any claim (excluding
Administrator's employees).
v. Experts' fees including reconstruction experts, engineers,
cause & origin reports, photographers, accountants,
economists, metallurgists, cartographers, architects,
handwriting experts, physicians, appraisers and other
natural and physical science experts, plus the costs
associated with preparation of expert reports,
depositions, and testimony.
vi. Fees for surveillance, undercover operative and detective
services or any other investigations.
vii. Costs for medical examinations, or autopsies, including
diagnostic services, and related transportation costs,
fees for medical reports and rehabilitation evaluations.
viii. Costs for any public records, medical records, credit
bureau reports, and other like reports.
ix. Costs and expenses incurred where Administrator determines
it is reasonable to pursue the rights of contribution,
indemnification, salvage or subrogation of Merchants New
Hampshire and/or its insured, including attorney and
collection agency fees and/or expenses.
x. Medical or vocational rehabilitation expenses, and all
other medical cost containment services, including, but
not limited to utilization review, pre-audit admission
authorization, hospital xxxx audit or adjudication;
provider xxxx audit or adjudication, and review of medical
case management.
34
xi. Extraordinary travel and related expenses incurred by
Administrator at the express request of Merchants New
Hampshire, which are not otherwise payable under this
Annex.
VII. Term of Annex
This Annex shall commence as of the Effective Date of the Agreement.
With respect to claims incurred during the period when the parties
are operating pursuant to the Reinsurance Pooling Agreement or
another reinsurance or pooling agreement, this Annex may only be
terminated by mutual agreement of the parties, or for cause pursuant
to Subparagraph 10(a) of the Services Agreement, or pursuant to
Subparagraphs 10(b) or (c) of the Services Agreement. For claims
incurred prior to the Effective Date, this Annex shall continue in
force and in effect for an indefinite period, unless and until
terminated (i) at 11:59 p.m. December 31, 2004 or any month end
thereafter by either party providing the other with written notice
not less than six (6) months prior to the date of termination, or
(ii) upon termination of the Services Agreement.
* * *
35
SCHEDULE 1
Claims Handling Procedures
1. Administrator will report any and all claims, regardless of
liability or policy limits, to Merchants New Hampshire with a
total reserve of $50,000 or more, as soon as such exposure is
known. On these claims, Administrator will provide Merchants New
Hampshire with sufficient information to enable it to
independently evaluate the individual claim and determine whether
Merchants New Hampshire may require additional information. After
such notice, Merchants New Hampshire may request additional
information and documentation, which Administrator shall provide.
2. Administrator will report to Merchants New Hampshire all claims,
regardless of liability or policy limits, which and when to its
knowledge involve one or more of the following:
a. Fatalities
b. Brain stem injuries, quadriplegia, paraplegia,
hemiplegia or paralysis.
c. All second or third degree burn injuries involving 25%
or more of the body.
d. All amputation, whether partial or whole, or loss of
use of limbs.
e. Loss of use of any of the five senses.
3. With respect to any claims referenced in Sections 1 or 2 above, in
addition to the other notice requirements contained in the
Agreement, Administrator will report, in a timely fashion, to
Merchants New Hampshire concerning any substantive settlement
demands, dispositive motions or scheduled trials or hearings.
4. Administrator may settle, adjust, compromise, pay, defend,
litigate, or submit to arbitration all actions, suits,
proceedings, accounts, claims and demands in which Merchants New
Hampshire may become a party, and in connection therewith to make
and execute, in Administrator's discretion or as otherwise
directed by Merchants New Hampshire, general and specific
releases, covenants not to xxx, and any and all documents
necessary or proper and to make or to accept and receive payment
or other consideration in satisfaction of any disputes on behalf
of or for the use of Merchants New Hampshire and retain counsel to
represent Merchants New Hampshire for the purposes expressed
herein. Settlement of any claim in excess of $100,000 or any other
amount as may, from time to time, be agreed to by Merchants New
Hampshire and Administrator, shall require the prior approval of
Merchants New Hampshire. Merchants New Hampshire acknowledges that
time is often of the essence in settlement negotiations and that
if Merchants New Hampshire, through its designated
36
officer or employee, is not available, Administrator shall have
the authority to settle such claim based upon the exercise of its
good faith judgment consistent with applicable statutes and how
Administrator handles its owns claims.
5. Administrator will provide a written report to Merchants New
Hampshire concerning any claim where the estimated fair value for
the injuries, without regard to liability, exceeds $100,000 in the
judgment of Administrator wherein allegations of bad faith or
unfair claim practices are made against Merchants New Hampshire
and/or Administrator.
6. Merchants New Hampshire shall also have the right to withdraw from
Administrator and assume control of any claim, at Merchants New
Hampshire's expense. Any withdrawn claim(s) will not be included
in the calculation of Administrator's Service Fee from the time
such claim is withdrawn, and the amount of any Claims Related
Extra Contractual Obligation, as defined in the Reinsurance
Pooling Agreement, arising from or relating to a withdrawn claim
shall not be included in the calculation of profit sharing or
retrospective amounts under the Reinsurance Pooling Agreement.
37
SCHEDULE 2
Management Reports
Large Claims Advisory -- as prepared in the ordinary course of business
Monthly Claims
Management Reports --
Internal Claim File Reviews -- as completed
38
SCHEDULE 3
Unallocated Loss Adjustment Expenses
For each year, the combined amount of unallocated loss adjustment expenses of
Administrator and Merchants New Hampshire as are to be reported in such year's
Underwriting and Investment Exhibit, Part 4 - Expenses of the Administrator and
Merchants New Hampshire Annual Statements included in Column 1 on lines 3
through 18 plus line 24, excluding the following specific items:
1. Expenses unrelated to the Traditional Insurance Business;
2. Expenses deemed to be direct expenses of either Merchants New Hampshire
or Administrator;
3. Administrative expenses of Administrator that will be included in the
determination of the fees payable under the Administrative Services
Annex of the Services Agreement;
4. Provisions for payment of senior management (positions with a title of
assistant vice president or higher or a pay grade of 27 or higher)
bonuses by Administrator; and
5. Other expenses as may, from time to time, be agreed by the parties.
39
INVESTMENT AND CASH MANAGEMENT SERVICES ANNEX
This Annex is part of the Services Agreement dated January 1, 2003 by and
between Merchants Group, Inc. and Merchants Insurance Company of New Hampshire,
Inc. on the one hand ("Client") and Merchants Mutual Insurance Company ("MMIC")
on the other hand ("Manager").
I. The Account
The cash, securities and other assets placed by Client in the account
to be managed under this Annex (the "Account") are listed on Section I.
A. of Schedule A. At the sole discretion of Client, assets may be added
to or withdrawn from the Account at any time. Client will provide
notification to the Manager of any such additions or withdrawals. The
Account will include these assets and any changes in them resulting
from transactions directed by Manager, withdrawals and additions made
by Client, or dividends, interest, stock splits and other earnings,
gains or losses on the assets.
Assets of the Client that are not to be managed by Manager are
separately identified on Section I. B. of Schedule A ("Unmanaged
Assets"). Manager may include these assets in its periodic reports to
Client, but will exclude their value when calculating Manager's asset
management fees.
II. Management of the Account
Manager will make all investment decisions for the Account, in
Manager's sole discretion and without first consulting or notifying
Client, in accordance with the investment restrictions and guidelines
which are attached as Schedule B (the "Investment Guidelines"). If
Manager manages only a portion of Client's portfolio, unless otherwise
specified by Client in writing, Investment Guidelines' restrictions
relate specifically to the assets managed by Manager. Client may change
these Investment Guidelines at any time, but Manager will be bound by
the changes only after it has received and agreed to them in writing,
which agreement may not be unreasonably withheld. Other than by the
Investment Guidelines and the terms of this Annex, the investments made
by Manager on behalf of the Client will not be restricted in any
manner, except by operation of law.
Manager will have full power and authority, on behalf of Client, to
instruct any brokers, dealers or banks to buy, sell, exchange, convert
or otherwise trade in all securities, futures or other investments for
the Account.
Manager will not be responsible for giving Client investment advice or
taking any other action with respect to Unmanaged Assets.
Client appoints Manager as the true and lawful attorney of the Client
for and in the name, place and stead of Client, in Manager's
unrestricted discretion, to operate and conduct the Cash Accounts and
the Account of the Client and any brokerage accounts necessary to
40
manage the Account, and to do and perform all and every act and thing
whatsoever requisite in furtherance of this Annex, including the
execution of all writings related to the purchase or sale, assignments,
transfers and ownership of any stocks, bonds, commodities, or other
derivatives or securities. Manager is hereby fully authorized to act
and rely on the authority vested pursuant to said power of attorney.
III. Transactions for the Account
Manager will arrange for securities transactions for the Account to be
executed through those brokers, dealers or banks that Manager believes
will provide best execution, unless specifically directed otherwise by
Client as provided below in this Section III. In choosing a broker,
dealer or bank, Manager will consider the broker, dealer or bank's
execution capability, reputation and access to the markets for the
securities being traded for the Account. Manager will seek competitive
commission rates, but not necessarily the lowest rates available.
Manager may send transactions for the Account to brokers who charge
higher commissions than other brokers, provided that Manager determines
in good faith that the amount of commissions Manager pays is reasonable
in relation to the value of the brokerage and research services
provided, viewed in terms either of that particular transaction or
Manager's overall responsibilities with respect to all clients whose
accounts Manager manages on a discretionary basis.
Portfolio transactions for each client account generally are completed
independently. However, if Manager decides to purchase or sell the same
securities for Client and other clients at about the same time, Manager
may combine Client's order with those of other clients if Manager
reasonably believes that it will be able to negotiate better prices or
lower commission rates or transaction costs for the combined order than
for Client's order alone. Client will pay the average price and
transaction costs obtained for such combined orders. Manager generally
will allocate securities purchased or sold as part of a combined order
to Client's Account and to accounts of other clients according to the
size of the order placed for each client.
If Manager cannot obtain execution for the total amount of the
securities in the combined orders, adjustments to the allocation will
be made on pro-rated methodology. However, Manager may increase or
decrease the amounts of securities allocated to each client if
necessary to avoid having odd or small numbers of shares held for the
account of any client. Each client that participates in a combined
order will receive or pay the average share price and/or transactions
costs for all transactions executed as part of the combined order.
If Client directs Manager to use particular brokers, dealers or banks
to execute transactions for the Account, Manager will do so, but in
that situation Manager will not seek better execution services or
prices for Client from other brokers, dealers or banks, and Client may
pay higher prices or transaction costs as a result. Also, in that
situation
41
Manager may not be able to seek better execution services for Client
by combining Client's orders with those of other clients.
Client may direct all transactions for the Account to a particular
broker, dealer or bank, by writing the name and address of that broker,
dealer or bank in the space provided on Schedule A.IV.
IV. Transaction Confirmations
Manager will instruct the brokers, dealers or banks who execute
transactions for the Account to send to Client copies of all
transaction confirmations, unless Client chooses not to receive
confirmations.
Client may elect to receive individual confirmations at any time by
giving Manager written notice.
V. Custody of Account Assets
The assets in the Account will be held for Client by the custodian
named on Schedule A.II (the "Custodian"). Manager will not have custody
of any Account assets. Client will pay all fees of the Custodian.
Client will authorize the Custodian to follow Manager's instructions to
make and accept payments for, and to deliver or to receive, securities,
cash or other investments purchased, sold, redeemed, exchanged, pledged
or loaned for the Account. Client also will instruct the Custodian to
send Client and Manager periodic statements showing the assets in and
all transactions for the Account during the month, including any
payments of Manager's fees.
Client will provide Manager with a copy of its agreement with the
Custodian, and will give Manager reasonable advance notice of any
change of Custodian. Any additional direct costs and any identifiable
indirect costs, such as increased salaries, which are incurred by
Manager as a result of a change in Custodian by Client, not initiated
or suggested by Manager, shall be paid to Manager by Client.
VI. Reports to Client
Manager will send Client monthly written reports showing the identity,
cost and current market value of the assets in the Account and each
transaction made for the Account during the period covered by the
report. The Account's performance will be sent quarterly, semi-annually
or annually upon Client's request.
VII. Account Valuation
Manager will value the securities in the Account using independent
pricing sources. All securities in the Account that are listed and
traded on a national securities exchange or on
42
NASDAQ shall be valued on the valuation date at the closing price on
the principal market where the securities are traded. All other
securities shall be valued in accordance with any reasonable valuation
method selected by Manager, consistent with accepted industry
practices. While Manager does its best to obtain representative market
prices for all securities in the Account, such prices do not always
reflect the price actually received or paid on the open market.
VIII. The Cash Accounts
For the purposes of this Annex, the Cash Accounts shall be considered
as any other asset class and be subject to the same reporting
requirements, custodial agreements, valuation guidelines and fees;
provided, however, that Cash Accounts of Client will continue to be
subject to the control of Manager as long as any of (i) the Reinsurance
Pooling Agreement; (ii) the Underwriting Annex; or (iii) the Claims
Services Annex remain in effect.
IX. Manager's Fees
In consideration for the investment management services provided for
under this Annex, the Client shall pay to the Manager a quarterly
management fee (the "Management Fee") for its services in accordance
with the following fee schedule: 5 basis points on the first $100
million, and 2 basis points thereafter. The Management Fee shall be
payable promptly after the end of each fiscal quarter and shall be
based on the average amount of Account assets and accrued interest for
each fiscal quarter, computed in accordance with the provisions of
Section VII above and before deducting the Management Fee for such
quarter. In any partial quarter, the fees will be reduced pro rata
based on the number of days the Account was managed.
Client will be billed directly by Manager and will pay each quarterly
Management Fee within 30 days of receiving the xxxx.
If Manager invests in securities issued by money market funds or other
investment companies for the Account, these securities will be included
in the value of the Account when Manager's fees are calculated. These
same assets will be subject to additional investment management and
other fees that are paid by the investment company but ultimately borne
by its shareholders. These additional fees are described in each
investment company's prospectus.
X. Legal Proceedings
Manager will not advise or act for Client in any legal proceedings,
including bankruptcies or class actions, involving securities held in
the Account or issuers of those securities. The costs of such legal
proceedings are to be borne by the Client. However, Manager agrees to
cooperate as a witness for or lend such other reasonable assistance to
the Client in any legal proceedings, other than any legal proceeding
between the Manager or any
43
affiliate or subsidiary of the Manager and the Client or any affiliate
or subsidiary of the Client arising out of any security purchased by
the Manager on behalf of the Client.
XI. Risk
Manager cannot guarantee the future performance of the Account, promise
any specific level of performance or promise that its investment
decisions, strategies or overall management of the Account will be
successful. The investment decisions Manager will make for Client are
subject to various market, currency, economic, political and business
risks, and will not necessarily be profitable. Client hereby
acknowledges these limitations and risks.
XII. Standard of Care; Limitation of Liability
Manager shall manage the Account in accordance with all state insurance
laws that are applicable to Client's investments.
Manager will not be liable to Client for any loss (i) that Client may
suffer as a result of Manager's good faith decisions or actions where
Manager exercises the degree of care, skill, prudence and diligence
that a prudent person acting in a like fiduciary capacity would use;
(ii) caused by following Client's instructions; or (iii) caused by the
Custodian, any broker, dealer or bank to which Manager directs
transactions for the Account or any other person.
Federal and state securities laws impose liabilities under certain
circumstances on persons who act in good faith, and this Annex does not
waive or limit Client's rights under those laws.
Manager will not be responsible for Client's own compliance with the
insurance investment laws of Client's state of domicile or for Client's
compliance with applicable tax laws.
In managing the Account, Manager will not consider for diversification
or other purposes any other securities, cash, or other investments or
assets Client owns but which are not in the Account. Manager shall have
no responsibility whatsoever for the management of the Unmanaged Assets
or any assets of Client other than the Account and shall incur no
liability for any loss or damage which may result from the management
of such other assets.
XIII. Client Directions
The names and specimen signatures of each individual who is authorized
to give directions to Manager on Client's behalf under this Agreement
are set forth on Schedule C. Directions received by Manager from Client
must be signed by at least one such person. If Manager receives
directions from Client which are not signed by a person that Manager
reasonably believes is authorized to do so, Manager shall not be
required to
44
comply with such directions until it verifies that the directions are
properly authorized by Client.
Manager shall be fully protected in relying upon any direction signed
or given by a person that Manager reasonably believes is authorized to
give such directions on Client's behalf. Manager also shall be fully
protected when acting upon an instrument, certificate, or paper that
Manager reasonably believes to be genuine and to be signed or presented
by any such person or persons. Manager shall be under no duty to make
any investigation or inquiry as to any statement contained in any
writing and may accept the same as conclusive evidence of truth and
accuracy of statements contained therein.
XIV. Confidentiality
Except as Client and Manager otherwise agree or as may be required by
law, all information concerning the Account and services provided under
this Annex shall be kept confidential. Notwithstanding the foregoing,
Client may generally discuss the Account with other members of its
industry. Client shall not discuss the specific composition of the
Account, meaning the assets purchased for the Account by the Manager,
without the Manager's prior agreement. Client acknowledges that the
composition of the Account is considered proprietary work product of
the Manager constituting a trade secret.
XV. Non-Exclusive Agreement
Manager manages investments for its own account and may provide
investment advice to other clients and may give them advice or take
actions for them, for Manager's own accounts or for accounts of persons
related to or employed by Manager that is different from advice
provided to or actions taken for Client.
Manager is not obligated to buy, sell or recommend for Client's Account
any security or other investment that Manager may buy, sell or
recommend for other clients or for the account of Manager or its
related persons or employees.
If Manager obtains material, non-public information about a security or
its issuer that Manager may not lawfully use or disclose, Manager will
have no obligation to disclose the information to Client or to use it
for Client's benefit.
XVI. Term and Termination of Annex
This Annex shall commence as of the Effective Date of the Agreement.
Either Client or Manager may cancel this Annex with one year's written
notice. If said notice is given within a calendar quarter, the one
year's notice will begin at the end of the calendar quarter. This Annex
will remain in effect until terminated. Termination of this Annex will
not affect (i) the validity of any action that Manager or Client has
previously taken; (ii) the liabilities or obligations of Manager or
Client for transactions started before termination; or (iii) Client's
obligation to pay Manager's fees through the date of
45
termination. Upon termination, Manager will have no obligation to
recommend or take any action with regard to the securities, cash or
other assets in the Account.
XVII. Annex Not Assignable
This Annex may not be assigned within the meaning of the Investment
Advisers Act of 1940 (the "Advisers Act") by Manager without Client's
consent.
XVIII. Governing Law
The internal laws of the State of New York without regard to principles
of conflicts of law will govern this Annex. However, nothing in this
Annex will be construed contrary to any provision of the Advisers Act
or the rules thereunder to the extent that the Advisers Act is
applicable to Manager.
XIX. Miscellaneous
If any provision of this Annex is or becomes inconsistent with any
applicable law or rule, the provision will be deemed rescinded or
modified to the extent necessary to comply with such law or rule. In
all other respects, this Annex will continue in full force and effect.
This Annex contains the entire understanding between Manager and Client
and may not be changed except in writing signed by both parties.
Failure to insist on strict compliance with this Annex or with any of
its terms or any continued conduct will not be considered a waiver by
either party under this Annex.
XX. Representations of Client
Client represents and warrants to Manager that (a) Client is the
beneficial owner of all assets in the Account and, except as
specifically identified by Client, there are no restrictions on
transfer or sale of any of those assets; (b) the Agreement has been
duly authorized, executed, and delivered by Client and is Client's
valid and binding obligation; (c) the names of the individuals who are
authorized to act under this Annex on behalf of Client have been given
to Manager in writing; (d) no government authorizations, approvals,
consents, or filings not already obtained are required in connection
with the execution, delivery, or performance of this Annex by Client;
and (e) Client certifies that it is not an employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as
amended or a plan subject to Section 4975 of the Internal Revenue Code
of 1986, as amended, nor a Person acting on behalf of any such plan.
Client agrees to notify Manager in writing within five (5) calendar
days after the occurrence of an event making the above statement no
longer accurate.
XXI. Representations of Manager
Manager represents and warrants that the Agreement has been duly
authorized, executed and delivered by Manager and is its valid and
binding obligation.
46
SCHEDULE A
I. ACCOUNT ASSETS.
A. Managed Assets - Client has deposited the following
securities, cash and other assets with the Custodian identified below to be
managed under this Annex:
See Exhibit I
B. Unmanaged Assets - Client also deposited with the Custodian
the following assets which are not to be managed under this Annex: None.
--------------------------------------------------------------------------------
II. CUSTODY OF ACCOUNT ASSETS. The assets to be managed under this Annex and
any Unmanaged Assets will be held by:
XX Xxxxxx Investor Services
Custodial Account Number: G55021
Xxxxx Xxxxxxxx, AVP
0 Xxxxx Xxxx Xxxxxx - 0xx Xxxxx
Xxxxxxxx, Xxx Xxxx 00000
Contact Phone Number: 000-000-0000
--------------------------------------------------------------------------------
III. QUARTERLY FEES. Manager's fees for services provided under this Annex
shall be as follows, computed in accordance with Section IX of this Annex:
Asset Management Fees:
Quarterly fee of .05% (five hundredths of one percent) of the first $100 million
of the market value of the assets under management; plus
Quarterly fee of .02% (two hundredths of one percent) of the market value of the
assets under management in excess of $100 million.
--------------------------------------------------------------------------------
IV. BROKERAGE DIRECTION. Client directs Manager to cause all transactions for
the Account to be executed through the following broker, dealer or bank:
--------------------------------------------------------------------------------
Client has read, understands and accepts the limitations that this direction
will place on Manager's ability to seek best execution for the Account. This
direction may be changed by Client at any time by notifying Manager in writing.
--------------------------------------------------------------------------------
47
V. NAME OF CLIENT: VI. DATE:
Merchants Group, Inc.
Merchants Insurance Company of New Hampshire, Inc.
January 1, 2003
By: ____________________________________________
48
SCHEDULE B
INVESTMENT GUIDELINES: The investment guidelines to be followed by Manager in
managing Client's Account are set forth below:
I. INVESTMENT STRATEGY
Client's investment strategy is to pursue growth in shareholders'
equity by maximizing after-tax returns WITHIN STATED PARAMETERS, while
controlling risk in the portfolio. The strategy aims to provide for
sufficient liquidity and maintain a management-informed relationship
between assets and liabilities.
II. INVESTMENT POLICY GUIDELINES
A. OBJECTIVES
1. RETURN REQUIREMENTS
Return objectives emphasize after-tax total return that seeks a balance
between capital growth and current income.
2. CREDIT PROFILE
As of January 1, 2003, except as otherwise provided in this Schedule B,
purchases of fixed income and preferred stock securities shall be
limited to those rated AA/Aa or better by at least one of the
nationally known rating agencies including, but not limited to,
Standard and Poor's, Xxxxx'x or Fitch.
B. CONSTRAINTS
1. LIQUIDITY REQUIREMENTS
The variable cash flow from Client's insurance operations necessitates
vigilant monitoring of liquidity needs. Sufficient cash reserves, or
cash equivalents, will be maintained to minimize the potential for
having to liquidate assets at undue cost. In addition, cash reserves
will be maintained at the direction of the Client's Board of Directors
to serve any structural or corporate needs that develop.
2. TIME/MATURITY HORIZON
As of January 1, 2003 purchases shall target a maturity of up to five
(5) years at the time of purchase.
49
3. TAX CONSIDERATIONS
At January 1, 2003, Client is in a taxable position. Manager will
maintain flexibility in shifting between income from taxable or
tax-advantaged sources in an effort to maximize after-tax income
annually, subject to other guidelines.
4. LEGAL AND REGULATORY REQUIREMENTS
Manager shall comply with Article 14 of the New York Insurance Law
regarding permissible Client investments.
5. ADDITIONAL CONSIDERATIONS
Client has adopted additional guidelines for the investment of assets,
beyond those required by Article 14 of the New York Insurance Law (see
II.B.5.c.), as follows:
a. GENERAL GUIDELINES
These guidelines apply to all fixed income and preferred stock
investments except investments made under Section 1404(b) ("Leeway
Provision") of the New York Insurance Law.
i. QUALITY
All investments will be limited to securities rated among the top
two (2) quality grades (AA or better) by at least one of the
nationally recognized rating agencies.
ii. MATURITY
All fixed income purchases will be limited to a maximum maturity
of five (5) years, except mortgage-backed and asset-backed
securities that may have stated maturities longer than five (5)
years. All cash equivalents will be invested in money market
instruments with a maximum maturity of six (6) months. Perpetual
preferred stocks (i.e. stocks with no stated maturity) and
preferred stocks having longer-term call or sinking fund
provisions are permitted up to, but not to exceed, a purchase
amount of $10.0 million in the aggregate.
iii. MARKETABILITY
Issue size will be sufficiently large enough to ensure an ongoing
secondary trading market.
50
iv. POSITION SIZE
Unsecured investment securities of any single issue will be
limited to no more than 10% of the Client's statutory surplus at
any time. Additionally, investment in any one industry will be
limited to no more than 25% of the statutory surplus of Client.
The above restrictions do not apply to securities issued or
guaranteed by the United States Government or United States
Government Agencies, or to investments in subsidiaries.
v. REPORTING REQUIREMENTS
Manager will report all investment transactions to the Client's
Board of Directors at their regularly scheduled meetings.
b. EQUITY SECURITIES
As of January 1, 2003 equity securities are not a permitted class
for new purchases. However, should these instructions change to
permit equity investments, the following guidelines will followed:
i. EXCHANGE TRADED
The shares must be traded on at least one nationally recognized
exchange (New York Stock Exchange, American Stock Exchange,
NASDAQ, Boston, or Philadelphia Stock Exchanges).
ii. POSITION SIZES
The aggregate cost of all equity interests is limited to the
lesser of Client's policyholders' surplus or 10% of admitted
assets. This excludes any insurance company shares.
Investments in any single domestic institution's equity securities
(common shares) are limited to 1% of admitted assets as of the
last statement date. (Initial investment shall be limited to the
lesser of $5,000,000 beginning cost or 15% of statutory surplus as
of the last statement date.)
Individual equity purchase recommendations may be made by the
Client's Board of Directors or their designated representative and
initiated through Manager.
51
iii. REPORTING REQUIREMENTS - MANAGEMENT
Manager will report all investment transactions under this section
to the Client Board of Directors at their regularly scheduled
meetings.
c. SPECIAL GUIDELINES
These special guidelines apply specifically to investment made
under Section 1404(b) ("Leeway Provision") of the New York
Insurance Law.
i. TOTAL CAPACITY
Aggregate investments made under Section 1404(b) will be limited
to 5% of admitted assets of the Company as of December 31st of the
most recently completed year.
ii. NATURE OF INVESTMENTS
Investments made under Section 1404(b) will primarily consist of
below investment grade bonds and unsecured subordinated debt, as
well as equity interests in non-publicly traded companies.
Maturity on debt instruments will be generally limited to ten (10)
years. However, at the direction of the Client's Board of
Directors or their designee, investments with maturities greater
than ten (10) years are permitted.
Investments that expose Client to financial risk in excess of its
original principal investment are prohibited.
iii. POSITION SIZE
Investments in securities issued by any single entity will be
limited to $1.0 million. Securities purchased with the intention
of holding until maturity may be purchased in reasonable sizes
under $1.0 million.
iv. REPORTING REQUIREMENTS
Manager will report all investment transactions at the regularly
scheduled meetings of the Client's Board of Directors.
Management will report and review the performance of investments
made under these special guidelines separately at least twice a
year at regularly scheduled meetings of the Client's Board of
Directors.
52
NAME OF CLIENT: DATE:
Merchants Group, Inc.
Merchants Insurance Company of New Hampshire, Inc. January 1, 2003
_________________
By: ____________________________________________
53
SCHEDULE C
MERCHANTS GROUP, INC.
SECRETARY'S CERTIFICATE
I, Xxxxxx X. Xxxxxx, the Secretary of Merchants Group, Inc. (the
"Corporation"), a Corporation organized and existing under the laws of the State
of Delaware hereby certify that each of the following officers of the
Corporation, acting singly, is authorized in the name and on behalf of the
Corporation, to give instructions to Merchants Mutual Insurance Company
("Manager") with respect to any and all matters, including investment and
reinvestment of securities, pertaining to the Investment and Cash Management
Services Annex between the Corporation and Manager, and to execute and deliver
any and all documents and to take any and all other action to carry out the
purposes of said Investment and Cash Management Services Annex. I further
certify that the specimen signature set forth next to the names of such
officers, is the true and genuine signature of such persons.
Name of Officer Title Signature
--------------------- --------------------- ------------------------
--------------------- --------------------- ------------------------
--------------------- --------------------- ------------------------
This Certificate shall be in effect from the date hereof until written
notice is given on behalf of the Corporation to terminate or revise it.
IN WITNESS WHEREOF, I set my hand and seal of the Corporation.
----------------------------------- -------------------
(Corporate Seal) Secretary Date
54
SCHEDULE C
MERCHANTS INSURANCE COMPANY OF NEW HAMPSHIRE, INC.
SECRETARY'S CERTIFICATE
I, Xxxxxx X. Xxxxxx, the Secretary of Merchants Insurance Company of
New Hampshire, Inc. (the "Corporation"), a Corporation organized and existing
under the laws of the State of New Hampshire hereby certify that each of the
following officers of the Corporation, acting singly, is authorized in the name
and on behalf of the Corporation, to give instructions to Merchants Mutual
Insurance Company ("Manager") with respect to any and all matters, including
investment and reinvestment of securities, pertaining to the Investment and Cash
Management Services Annex between the Corporation and Manager, and to execute
and deliver any and all documents and to take any and all other action to carry
out the purposes of said Investment and Cash Management Services Annex. I
further certify that the specimen signature set forth next to the names of such
officers, is the true and genuine signature of such persons.
Name of Officer Title Signature
--------------------- --------------------- ------------------------
--------------------- --------------------- ------------------------
--------------------- --------------------- ------------------------
This Certificate shall be in effect from the date hereof until written
notice is given on behalf of the Corporation to terminate or revise it.
IN WITNESS WHEREOF, I set my hand and seal of the Corporation.
----------------------------------- -------------------
(Corporate Seal) Secretary Date
55
