Alberta Local Authorities Reciprocal Insurance Exchange Webinar - - PowerPoint PPT Presentation

Presented by: Date: Alan Wood ALARIE Attorney in Fact Lisa Majeau Gordon MNP LLP Graham Quast MNP LLP Derek Malcolm MNP LLP Grant Dunlop Ogilvie LLP Shannon Kinsella Ogilvie LLP

Alberta Local Authorities Reciprocal Insurance Exchange

Webinar Topic: Equity Distribution of ALARIE

September 19, September 30, October 12, 2016

Page 2

Introduction, ALARIE Background and History:

Alan Wood

MNP Financial Report Overview:

Lisa Majeau Gordon, Graham Quast, and Derek Malcolm

Legal Process:

Grant Dunlop and Shannon Kinsella

Questions:

all

Agenda

Page 3

Alan Wood Affidavit available to you online at: http://www.ogilvielaw.com/sections/alarie

• Alberta Local Authorities Reciprocal Insurance

Exchange - ALARIE

• 1980s, difficult general liability insurance market
• 1990 ALARIE formed by AUMA, AAMDC and ASTA

(later ASBA)

• Reciprocal Insurance Exchange

– alternative to outside insurance companies –

• wned and managed by participants, called subscribers

– AUMA, AAMDC and ASBA - 1 share, 1 director, each

Introduction – What is ALARIE

Page 4

• 1990 – ALARIE started issuing insurance policies
• 1990 Subscribers Agreement

– set out terms of reciprocal insurance – wording never changed – each subscriber (municipality, school board etc.) signed – Exhibit A to MNP report

• 1990 – 2002 ALARIE

– issued policies – managed claims

Introduction - Operations

Page 5

• March 4, 2002

– resolution to wind up – Exhibit A to Alan Wood Affidavit

• AUMA, AAMDC and ASBA decided to set up their
• wn reciprocal insurance exchanges
• December 31, 2002 – ceased issuing policies
• 2003 – 2015 – ALARIE continued to manage claims
• 2015 – last claim resolved
• 2016 – approximately $13.5 million in assets remain

Introduction – Cessation of Operations

Page 6

• Subscribers Agreement article 9.01(c):

“… The distribution of the net assets to each Subscriber shall be in proportion to the amounts by which the cumulative annual premiums paid by such Subscriber to the Exchange exceed the cumulative claims paid by the Exchange to or on behalf of such Subscriber.”

• 1990 – 2002

– ALARIE operation departed from original business plan – but Subscribers Agreement unchanged

Introduction – Distribution of Assets

Page 7

• riginal plan

– start with $10,000 coverage (the “Base Coverage”) – build up capital to be able to issue $1 million cover

• 1990 – 1995 ALARIE levied each subscriber

– basic premium for $10,000 Base Coverage, plus – “Capital Premium” to build up capital so coverage could eventually be increased beyond $10,000

• 1995 – ceased levying capital premium, elected not to

increase cover beyond $10,000

Introduction – ALARIE Evolution

Page 8

• Activities of ALARIE not in original plan

– Base Coverage operated at a loss

• rather than increasing premiums, shortfall in Base Coverage drawn from Capital

– $2 million excess of $10,000 policy (“Excess Coverage”)

• facilitated by ALARIE, but policies issued by outside insurance companies

– Joint Venture Agreements resulted in payments between

• the excess insurer, on the one hand, and
• ALARIE, acting on behalf of AUMA, AAMDC and ASBA, on the other

– Premium Sharing Agreement resulted in

• rebate of commission from broker on Excess Coverage, back to ALARIE, which

attributed those rebates as directed by AUMA, AAMDC and ASMA

Introduction – ALARIE Evolution

Page 9

• $13.5 million assets in 2016 result of

– Base Coverage (net negative) – Capital Premiums – Joint Venture Agreement Payments – Premium Rebates – Interest

• distribution

formula in Subscribers Agreement considers only –

Base Coverage (net negative)

Introduction – Total Operations

Page 10

• Spring 2015 ALARIE retained

– MNP LLP for forensic and investigative accounting – Ogilvie LLP for legal advice

• Spring 2016 MNP and Ogilvie reported

– Recommended distribution method and court process – ALARIE board (AUMA, ASBA and AAMDC representatives) accepted recommendations

Retention of Legal Counsel and MNP

Page 11

Key Requirements: 1. Verify ending equity for distribution 2. Determine the most appropriate method distribution and to prepare an expert report on our analysis,

• bservations and findings.

Our report has been made available to you online at: http://www.ogilvielaw.com/sections/alarie Our report was prepared in conformity with professional standards for Forensic engagements.

What MNP was Retained to Do

MNP Report Reference: Section 2.2

Page 12

Our report provides an analysis and summary of ALARIE’s operations from 1990 to 2016 covering two distinct operating periods: 1. Active Insurance Period: 1990 to 2002 2. Dormant Period: 2002 to 2016 Our examination included:

• Records and data from multiple sources
• 20,000+ data points for 521 unique Subscribers
• 5,000 annual statements for Subscribers
• 26 years of transaction records
• Approx. 30 Bankers’ Boxes of Materials

The MNP Report

MNP Report Reference: Section 2.1 Section 2.2

Page 13

• Due to the prolonged time period from

commencement of operations in 1990 to 2016 (26.5 years), many ALARIE records were missing.

• Our analysis has therefore been restricted as a

result.

• In periods where financial information was

missing, we extrapolated based on other available information.

Limitations

MNP Report Reference: Section 2.3

Page 14

What follows is a summary of our detailed findings: 1. ALARIE provided liability insurance services to 521 unique municipal and school board Subscribers. 2. ALARIE’s

• perations

with its Subscribers were governed by a Subscriber Agreement. 3. In 1996, a reorganization of rural school boards and municipalities, caused 499 Subscribers to become 434. 4. ALARIE’s operations over time evolved to include activities not originally contemplated in the Subscriber Agreement, but with full management intent. 5. ALARIE commingled funds for different purposes into

• ne bank account.

Summary of Conclusions

MNP Report Reference: Section 4.0

Page 15

5. Our work involved verification of financial and

• perational results from extensive records and data.

6. Based on the Agreement, ALARIE’s operations, and its transactions during the past 26 years, we calculate there will be approximately $13,500,000 to distribute to its Subscribers once wind-down fees are paid. 7. Our analysis determined that there are three potential distribution calculation methods for

• ALARIE. We recommend the Comprehensive

Calculation. 8. Under the Comprehensive Calculation, 227 Subscribers will receive funds in the Windup, ranging between $93 and $1.08 Million.

Summary of Conclusions

MNP Report Reference: Section 4.0

Page 16

The following flowchart depicts the flows of funds into and out

• f ALARIE for its operations.

How ALARIE Operated

MNP Report Reference: Section 5.3

Page 17

Subscribers received annual “Statements

• f

Participation” in ALARIE. An example of this for one example Subscriber is as follows:

Subscriber X: September 1, 1992 to September 1, 1993 Layer of Coverage Annual Levy in Total Insurance Premium Portion Capital (Equity) in ALARIE Portion $0 to $10,000 315.75 $10,000 to $2,000,000 947.25 $2,000,000 to $7,000,000 2,365.00

• A. Subtotal to $7M

4,643.00 3,628.00 1,015.00

• B. $7,000,000 to $12,000,000

1,115.00 957.00 158.00

• C. $12,000,000 to $17,000,000

650.00 552.00 98.00

• D. $17,000,000 to $20,000,000

413.00 413.00 NIL Total of Above 6,821.00 5,550.00 1,271.00

Annual Business with Subscribers

MNP Report Reference: Section 5.2

Page 18

Annual Business with Subscribers

MNP Report Reference: Section 5.2

Page 19

Annual Business with Subscribers

MNP Report Reference: Section 5.2

Page 20

Financial Results (All Activities)

MNP Report: Section 5.4 Schedule 1, 2, & 3

Page 21

Amount Total Contributions for ALARIE Business 22,028,511 Less: Capital Payments Identified (8,443,654) Subtotal: Non-Capital Contributions 13,584,857 Less: Loss Claims (15,947,669) Financial Position Before Interest and Expenses (2,362,812)

Insurance Claim Results (>$10K only)

MNP Report Reference: Section 5.5

Page 22

Our verification and analysis work

• n

this engagement can be summarized under two key questions:

• 1. Are the ending net assets of ALARIE and

Subscriber transaction histories reasonably supported by financial records, reports and documents?

• 2. How do we fairly and equitably calculate the

net assets to be distributed to each Subscriber?

MNP Analysis and Verification

MNP Report Reference: Section 5.6 and 5.7

Page 23

Question 1: Are the ending net assets of ALARIE and Subscriber transaction histories reasonably supported by financial records, reports and documents? The answer to Question 1 is Yes.

Dissolution Considerations

MNP Report Reference: Section 5.7

Page 24

Question 2: How do we fairly and equitably calculate the net assets to be distributed to each Subscriber? Question 2 is more difficult to answer. From all our work, we identified three possible distribution methods:

• 1. Base Calculation
• 2. Capital Calculation
• 3. Comprehensive Calculation

Dissolution Considerations

MNP Report Reference: Section 5.7

Page 25

To explain each of the calculations in detail, we created a legend of the variables used in each calculation:

Variable Description A Premiums <$10,000 coverage paid by Subscribers B Claims – all <$10,000 claims for each Subscriber C Capital Premiums D Dividends and other ALARIE adjustments E JVA Adjustments for each Pool F Distribution Assets

Dissolution Considerations

MNP Report Reference: Section 5.7

Page 26

Option 1: Base Calculation Based on Agreement Only

[A – B (each Subscriber)] / Total of all Subscribers = % x F Variable

Variable Description A Premiums B Claims C Capital D Dividends E JVA Adjustments F Distribution Assets

Dissolution Considerations

MNP Report Reference: Section 5.7 Schedule 6

Page 27

Option 2: Capital Calculation Based on Capital Contributions Only

Variable

Variable Description A Premiums B Claims C Capital D Dividends E JVA Adjustments F Distribution Assets

Dissolution Considerations

MNP Report Reference: Section 5.7 Schedule 7

Page 28

Option 3: Comprehensive Calculation Based on All Factors/Activities by Subscriber

Variable

Variable Description A Premiums B Claims C Capital D Dividends E JVA Adjustments F Distribution Assets

Dissolution Considerations

MNP Report Reference: Section 5.7 Schedule 8

Page 29

• Governing Subscriber agreement
• Exchange’s actual activities and management

decisions

• Capital paid into Exchange
• Withdrawn Subscribers
• Negative balances

Dissolution Considerations

MNP Report Reference: Section 5.7 Schedule 9

Page 30

Subscriber No. 12: Premiums Paid (0-10K) $ 50,771 Capital Contributions 56,687 Insurance Claims (158,241) “Dividends” Applied

• JVA Pool Adjustments

(37,126) Net Result ($87,909) Total Payout $0

An example:

MNP Report Reference: Schedule 8

Page 31

Subscriber No. 265: Premiums Paid (0-10K) $70,222 Capital Contributions 43,703 Insurance Claims (80,324) Dividends 19,213 JVA Pool Adjustments (49,467) Net Result $3,347 Total Payout $8,708 The Payout is higher than the net result because

• f interest earned over the period 2002 to 2016.

Another example:

MNP Report Reference: Schedule 8

Page 32

Comprehensive Calculation Overall Results:

Description Count Low End (> 0) High End Subscribers with equity balance before reorganization 499 Subscribers with equity balance after reorganization 434 Subscribers receiving funds: Base Calculation 188 2,275 733,517 Subscribers receiving funds: Capital Calculation 362 1,133 820,132 Subscribers receiving funds: Comprehensive Calculation 227 93 1,079,545

Dissolution Considerations

MNP Report Reference: Section 5.7

Page 33

• Office of the Superintendent of Insurance

– insurance regulator – 1990 – approved ALARIE’s formation – 1990 to present – issued insurance license annually – 2002 – informed of decision to cease operations – 2002 to present – monitored ALARIE’s activities – 2015 – consulted regarding method of approving distribution – June 10, 2016 – approved dissolution, based on application to Court to approve asset distribution

Legal Process

Page 34

• Court of Queen’s Bench of Alberta

– August 5, 2016 – originating application filed – August 15, 2016 – procedural order obtained – August 15, 2016 – webpage established with documents including Alan Wood Affidavit and MNP report – August 25/26, 2016 – email and registered mail to all subscribers – September/October – webinars – October 31, 2016 – deadline for subscribers to advise of

• bjections to proposed order

– December 19, 2016 – application for approval of expenses and distribution of assets

Legal Process

Page 35

• 2017

– January / February 2017 – anticipated distribution, assuming distribution Order granted in December 2016 – Spring 2017 – cancellation of insurance license, after all assets distributed

Legal Process

Page 36

Questions?