Alberta Local Authorities Reciprocal Insurance Exchange Webinar Topic: Equity Distribution of ALARIE Alan Wood ALARIE Attorney in Fact Lisa Majeau Gordon MNP LLP Graham Quast MNP LLP Derek Malcolm MNP LLP Grant Dunlop Ogilvie LLP Presented by: Shannon Kinsella Ogilvie LLP Date: September 19, September 30, October 12, 2016
Agenda 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 Page 2
Introduction – What is ALARIE 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 – owned and managed by participants, called subscribers – AUMA, AAMDC and ASBA - 1 share, 1 director, each Page 3
Introduction - Operations • 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 Page 4
Introduction – Cessation of Operations • March 4, 2002 – resolution to wind up – Exhibit A to Alan Wood Affidavit • AUMA, AAMDC and ASBA decided to set up their own 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 Page 5
Introduction – Distribution of Assets • 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 Page 6
Introduction – ALARIE Evolution • original 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 Page 7
Introduction – ALARIE Evolution • 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 Page 8
Introduction – Total Operations • $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) Page 9
Retention of Legal Counsel and MNP • 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 Page 10
What MNP was Retained to Do Key Requirements: 1. Verify ending equity for distribution 2. Determine the most appropriate method distribution and to prepare an expert report on our analysis, observations and findings. Our report has been made available to you online at: http://www.ogilvielaw.com/sections/alarie MNP Report Our report was prepared in conformity with professional Reference: standards for Forensic engagements. Section 2.2 Page 11
The MNP Report 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 MNP Report • 5,000 annual statements for Subscribers Reference: • 26 years of transaction records Section 2.1 Section 2.2 • Approx. 30 Bankers’ Boxes of Materials Page 12
Limitations • 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. MNP Report Reference: Section 2.3 Page 13
Summary of Conclusions 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 operations 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 MNP Report Reference: Agreement, but with full management intent. Section 4.0 5. ALARIE commingled funds for different purposes into one bank account. Page 14
Summary of Conclusions 5. Our work involved verification of financial and operational 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 . MNP Report 8. Under the Comprehensive Calculation, 227 Reference: Subscribers will receive funds in the Windup, ranging Section 4.0 between $93 and $1.08 Million. Page 15
How ALARIE Operated The following flowchart depicts the flows of funds into and out of ALARIE for its operations. MNP Report Reference: Section 5.3 Page 16
Annual Business with Subscribers Subscribers received annual “Statements of 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 MNP Report $2,000,000 to $7,000,000 2,365.00 Reference: A. Subtotal to $7M 4,643.00 3,628.00 1,015.00 Section 5.2 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 Page 17
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) Schedule Section 1, 2, & 3 Report: MNP 5.4
Insurance Claim Results (>$10K only) 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) MNP Report Reference: Section 5.5 Page 21
MNP Analysis and Verification Our verification and analysis work on 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 MNP Report Subscriber? Reference: Section 5.6 and 5.7 Page 22
Dissolution Considerations 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 . MNP Report Reference: Section 5.7 Page 23
Dissolution Considerations 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 MNP Report Reference: 2. Capital Calculation Section 5.7 3. Comprehensive Calculation Page 24
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