10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

                 (Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2002
Or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ___________________ to ___________________

Commission File Number: 000-25273

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
(Exact name of registrant as specified in its charter)

Florida	59-3422536
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
360 Central Avenue, St. Petersburg, Florida	33701
(Address of Principal Executive Offices)	(Zip Code)

(727) 803-2040
Registrant’s telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [   ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

Class: Common Stock, $.01 par value Outstanding at May 3, 2002: 12,276,063

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.

Form 10-Q Quarterly Report

TABLE OF CONTENTS

			Page
			Number
PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements			1
		Consolidated Balance Sheets as of December 31, 2001 and March 31, 2002		1
		Consolidated Statements of Operations for the three months ended March 31, 2001 and 2002		2
		Consolidated Statement of Shareholders’ Equity for the year ended December 31, 2001 and the three months ended March 31, 2002		3
		Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2002		4
		Notes to Consolidated Financial Statements		5
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			9
	Item 3. Quantitative and Qualitative Disclosures about Market Risk			12
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings			13
	Item 5. Other Information			13
	Item 6. Exhibits and Reports on Form 8-K			14

The statements contained in this report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27a of the securities act of 1933 and Section 21e of the Securities Exchange Act of 1934, including statements regarding the company’s expectations, hopes, beliefs, intentions, or strategies regarding the future. Forward-looking statements include statements regarding, among other things: (i) the ability to retain material customers; (ii) the Company’s intentions involving possible strategic alternatives; (iii) the Company’s financing plans; (iv) trends affecting the Company’s financial condition or results of operations; (v) the Company’s operating strategies; (vi) the impact of competition from new and existing competitors; (vii) changes in the business and/or financial condition of the Company’s clients; (viii) the ability of Bankers Insurance Group, Inc. (“BIG”) to repay outstanding indebtedness to the Company and the sufficiency of the collateral securing such indebtedness; (ix) potential increases in the Company’s costs; (x) the potential for unfavorable interpretation of existing government regulations or new government legislation; (xi) the impact of general economic conditions on the demand for the Company’s services; (xii) the impact of changes in existing service agreements; (xiii) the ability to obtain new customers and retain existing customers; (xiv) the ability to obtain third-party information technology outsourcing services on a timely basis and at reasonable costs; (xv) the outcome of certain litigation involving the Company; (xvi) the outcome of certain administrative proceedings involving the Company’s principal customer; (xvii) trends affecting the insurance industry; and (xviii) the ability to achieve expected expense reductions as a result of management initiatives. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. All forward-looking statements included in this document are based on information available to the Company on the date hereof and the Company assumes no obligation to update any such forward-looking statement. Among the factors that could cause actual results to differ materially are the factors detailed in Part I, Item 2, and Part II, Item 5 of this report and the risk factors set forth under the caption “Item 1. Business — Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Securities and Exchange Commission on April 1, 2002. Prospective investors should also consult the risks described from time to time in the Company’s Reports on Form 10-Q, 8-K and 10-K and Annual Reports to Shareholders.

i

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

					December 31,		March 31,
					2001		2002
							(Unaudited)
				ASSETS
CURRENT ASSETS
	Cash and cash equivalents				$	20,095,808	$	17,983,969
	Accounts receivable, trade — affiliates					4,716,172		3,879,890
	Accounts receivable, trade — net					875,297		686,227
	Prepaid expenses and other assets					883,729		1,070,073
	Note receivable — affiliate					5,026,541		5,026,541
	Income taxes recoverable					—		538,759
		Total current assets				31,597,547		29,185,459
PROPERTY AND EQUIPMENT, net						3,942,712		3,583,215
OTHER ASSETS
	Goodwill, net					2,250,409		2,250,409
	Service contract					2,189,090		2,189,090
	Capitalized software costs, net					564,793		436,655
	Deferred tax assets					429,329		431,629
	Other					25,600		25,600
			Total assets		$	40,999,480	$	38,102,057
				LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
	Accounts payable, trade				$	1,272,921	$	909,035
	Employee related accrued expenses					1,546,078		1,745,619
	Other accrued expenses					2,352,487		1,963,869
	Income taxes payable					1,418,415		—
			Total current liabilities			6,589,901		4,618,523
SHAREHOLDERS’ EQUITY
	Preferred Stock, $.01 par value; 20,000,000 shares authorized, no shares issued and outstanding at December 31, 2001 and March 31, 2002, respectively					—		—
	Common Stock, $.01 par value; 100,000,000 shares authorized, 12,276,063 shares issued and outstanding at December 31, 2001 and March 31, 2002, respectively					122,760		122,760
	Additional paid-in capital					26,394,438		26,439,438
	Retained earnings					7,892,381		6,921,336
			Total shareholders’ equity			34,409,579		33,483,534
			Total liabilities and shareholders’ equity		$	40,999,480	$	38,102,057

The accompanying notes are an integral part of these consolidated statements.

-1-

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

				Three Months Ended March 31,
				2001			2002
REVENUES
	Outsourcing services — affiliated			$	9,581,963		$	7,090,233
	Outsourcing services				1,219,534			1,377,779
			Total revenues		10,801,497			8,468,012
EXPENSES
	Cost of outsourcing services				8,392,491			7,650,792
	Selling, general and administrative				1,733,662			1,739,671
	Management services from Parent				354,168			122,846
	Depreciation and amortization				775,658			648,964
			Total expenses		11,255,979			10,162,273
OPERATING INCOME/(LOSS)					(454,482	)		(1,694,261	)
OTHER INCOME/(EXPENSE):
	Interest income				42,387			144,416
	Interest expense				(2,066	)		—
		Total other income/(expense)			40,321			144,416
INCOME/(LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS					(414,161	)		(1,549,845	)
PROVISION/(BENEFIT) FOR INCOME TAXES					(137,600	)		(578,800	)
INCOME/(LOSS) FROM CONTINUING OPERATIONS BEFORE DISCONTINUED OPERATIONS					(276,561	)		(971,045	)
INCOME/(LOSS)FROM OPERATIONS OF DISCONTINUED OPERATIONS, NET OF TAX					429,126			—
NET INCOME/(LOSS)				$	152,565		$	(971,045	)
Earnings/(loss) per Common Share:
	Income/(loss) from continuing operations			$	(.02	)	$	(.08	)
	Income/(loss) from discontinued operations				.03			—
NET INCOME/(LOSS) PER COMMON SHARE				$	.01		$	(.08	)
Weighted average common shares outstanding					12,800,261			12,276,063

The accompanying notes are an integral part of these consolidated statements.

-2-

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

					Additional
		Common			Paid-In			Retained
		Stock			Capital			Earnings			Total
Balance at December 31, 2000		$	128,002		$	27,545,901		$	5,438,685		$	33,112,588
	Compensation expense related to stock options issued to non-employees		—			180,000			—			180,000
	Common stock reacquired in Geotrac sale		(5,242	)		(1,331,463	)		—			(1,336,705	)
	Net income		—			—			2,453,696			2,453,696
Balance at December 31, 2001		$	122,760		$	26,394,438		$	7,892,381		$	34,409,579
	Compensation expense related to stock options issued to non-employees (unaudited)		—			45,000			—			45,000
	Net income/(loss) (unaudited)		—			—			(971,045	)		(971,045	)
Balance at March 31, 2002 (unaudited)		$	122,760		$	26,439,438		$	6,921,336		$	33,483,534

     The accompanying notes are an integral part of these consolidated statements.

-3-

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

					Three Months Ended March 31,
					2001			2002
CASH FLOWS FROM OPERATING ACTIVITIES:
	Income/(loss) from continuing operations				$	(276,561	)	$	(971,045	)
	Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
		Depreciation and amortization				775,658			648,963
		Loss on disposal of property and equipment				1,251			—
		Compensation expense related to non-employee stock options				45,000			45,000
		Deferred income taxes, net				(162,600	)		(2,300	)
		Changes in assets and liabilities:
			Accounts receivable, trade			1,134,243			189,070
			Accounts receivable, trade — Geotrac			168,711			—
			Accounts receivable, trade — affiliate			(702,941	)		836,282
			Income taxes recoverable			—			(538,759	)
			Prepaid expenses and other current assets			74,948			(186,344	)
			Other assets			(42,506	)		—
			Accounts payable, trade			30,043			(363,886	)
			Employee related accrued expenses			174,321			199,541
			Other accrued expenses			(208,835	)		(388,618	)
			Income taxes payable			62,310			(1,418,415	)
				Net cash provided by/(used in) operating activities		1,073,042			(1,950,511	)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchases of property and equipment					(532,797	)		(161,328	)
	Collection of notes receivable					71,110			—
	Collection of notes receivable from discontinued operations					1,198,929			—
				Net cash provided by/(used in) investing activities		737,242			(161,328	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Repayment of debt					(64,538	)		—
				Net cash (used in) financing activities		(64,538	)		—
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS						1,745,746			(2,111,839	)
CASH AND CASH EQUIVALENTS, beginning of period						2,391,103			20,095,808
CASH AND CASH EQUIVALENTS, end of period					$	4,136,849		$	17,983,969

The accompanying notes are an integral part of these consolidated statements.

-4-

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1. DESCRIPTION OF ORGANIZATION AND BUSINESS

     Insurance Management Solutions Group, Inc. (the “Company”) is a holding company that was incorporated in the State of Florida in December 1996 by its parent, Bankers Insurance Group, Inc. (“BIG”).

     The Company has operated in two major business segments: providing outsourcing services to the property and casualty insurance industry with an emphasis on flood insurance; and providing flood zone determinations primarily to insurance companies and financial institutions. The Company’s outsourcing services, which are provided by its wholly-owned subsidiaries, Insurance Management Solutions, Inc. (“IMS”) and Colonial Claims Corporation (“Colonial”), include for IMS: policy and claims administration (policy issuance, billing and collection) and information technology services; and for Colonial: claims adjusting and processing. The Company’s flood zone determination services had been provided by Geotrac of America, Inc. (“Geotrac”), a wholly-owned subsidiary of the Company until December 28, 2001, when it was sold. With the disposition of Geotrac, which is reported as discontinued operations herein, Colonial became a separate reportable segment for financial statement reporting purposes (see Note 5).

     The Company is substantially dependent on the business of its affiliated insurance companies under the common control of BIG as the Company derives a substantial portion of its revenue from outsourcing services provided to these affiliated companies and BIG.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

     The accompanying consolidated financial statements of Insurance Management Solutions Group, Inc. and subsidiaries (the “Company”) have been prepared in accordance with the instructions to Form 10-Q and do not include all of the disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. The accompanying consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Securities and Exchange Commission on April 1, 2002. The results of operations for the three-month period ended March 31, 2002 are not necessarily indicative of the results that should be expected for a full fiscal year.

Discontinued Operations

     Geotrac represents discontinued operations and, accordingly, the discontinued segment’s net assets are recorded separately at March 31, 2001. Likewise, the Geotrac results of operations are excluded from continuing operations for all periods presented.

Reclassification

     Exclusive of the separate presentation of continuing and discontinued operations, certain reclassifications have been made to the 2001 financial statements to conform to the 2002 presentation.

New Accounting Policies

     While the Company does not expect any material impact of adopting, effective as of January 1, 2002, Statement of Financial Accounting Standards (SFAS) 142, Goodwill and Intangible Assets, and 144, Accounting for the Impairment or Disposal of Long Lived Assets, the Company has not yet completed its determination of the impact of SFAS 142, which should be completed by June 30, 2002.

     Under SFAS 142, the impact, exclusive of the non-amortization of goodwill, will be recognized as a January 1, 2002 cumulative effect change in accounting principle. As of January 1, 2002, the Company is no longer amortizing goodwill (see proforma below).

-5-

     Proforma results of operations for the three-month periods ended March 31, 2001 and 2002 for the non-amortization provisions of SFAS 142 in those periods follows:

	Three Months Ended March 31,
	2001			2002
Reported income/(loss) from continuing operations	$	(276,561	)	$	(971,045	)
Add: Goodwill amortization, net of tax, $0		33,094			—
Adjusted income/(loss) from continuing operations	$	(243,467	)	$	(971,045	)
Reported net income/(loss)	$	152,565		$	(971,045	)
Add: Goodwill amortization (including $469,896 pre-tax related to discontinued operations, net of tax of $173,000)		330,000			—
Adjusted net income/(loss)	$	482,565		$	(971,045	)

	Three Months Ended March 31,
	2001			2002
Reported income/(loss) from continuing operations per share	$	(.02	)	$	(.08	)
Add: Goodwill amortization per share		—			—
Adjusted income/(loss) from continuing operations per share	$	(.02	)	$	(.08	)
Reported net income/(loss) per share	$	.01		$	(.08	)
Add: Goodwill amortization per share (including $.03 per share related to discontinued operations)		.03			—
Adjusted net income/(loss) per share	$	.04		$	(.08	)
Weighted average common shares outstanding		12,800,261			12,276,063

     In addition, effective January 1, 2002, the Company adopted SFAS 144, Accounting for the Impairment or Disposal of Long Lived Assets. The adoption of SFAS 144 had no impact on the Company’s results of operations or financial condition.

Net Income/(Loss) Per Common Share

     Net income/(loss) per common share, which represents both basic and diluted earnings per share (“EPS”), is computed by dividing net income/(loss) by the weighted average common shares outstanding. The following table reconciles the numerator and denominator of the basic and dilutive EPS computation:

	Three Months Ended March 31,
	2001		2002
Numerator:
Net income/(loss)	$	152,565	$	(971,045	)
Denominator:
Weighted average number of common shares used in basic EPS		12,800,261		12,276,063
Diluted stock options		—		—
Weighted average number of common shares and diluted potential common shares used in diluted EPS		12,800,261		12,276,063

     As of March 31, 2001 and 2002, options to purchase 650,250 and 472,250 shares, respectively, of Common Stock were outstanding but were not included in the computation of diluted earnings per share as the inclusion of such shares would have an anti-dilutive effect.

-6-

NOTE 3. DISCONTINUED OPERATIONS

     Effective December 28, 2001, with shareholder approval, the Company sold Geotrac, pursuant to a Stock Purchase Agreement dated September 30, 2001, as amended December 26, 2001, to Geotrac Holdings, Inc. (“Holdings”). Holdings is a corporation formed by Geotrac’s President and his spouse. The consideration received by the Company included $19.0 million in cash and 524,198 shares of the Company’s Common Stock (valued at $1,336,705 based on a quoted market price of the Company’s Common Stock of $2.55 per share as of December 27, 2001) beneficially held by Geotrac’s President and his spouse. In addition, the Company entered into a Flood Zone Determination Service Agreement with Geotrac pursuant to which Geotrac will provide the Company with flood zone determination services for up to ten years at pricing management of the Company currently believes is favorable. The Company valued the agreement at approximately $2,189,090 as supported by an independent third-party investment banking firm’s valuation. Subsequent to this sale, the Company has no restricted net assets which affect retained earnings for the period ended March 31, 2002.

GEOTRAC’S CONDENSED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2001

Flood zone determination services			$	4,294,168
Flood zone determination services — affiliated				218,711
	Total revenues			4,512,879
Cost of flood zone determination services				2,034,394
Selling, general and administrative				1,117,928
Management services from Parent				16,388
Depreciation and amortization				590,493
		Total expenses		3,759,203
Operating income				753,676
Interest income, net				18,750
Provision for income taxes				343,300
Income from discontinued operations			$	429,126

SUPPLEMENTAL DISCLOSURE OF GEOTRAC’S CASH FLOW INFORMATION
FOR THE THREE MONTHS ENDED MARCH 31, 2001

Operating activities:
	Net cash provided by	$	1,031,521
Investing activities:
	Net cash used by		(1,156,939	)
Financing activities:
	Net cash used by		(1,213,371	)
Net increase/(decrease) in cash			(1,338,789	)
Cash at beginning of period			2,801,058
Cash at end of period before sale		$	1,462,269

-7-

NOTE 4. CONTINGENCIES

     On September 28, 2000, October 25, 2000 and October 30, 2000, three alleged shareholders of the Company filed three nearly identical lawsuits in the United States District Court for the Middle District of Florida, each on behalf of a putative class of all persons who purchased shares of the Company’s Common Stock pursuant and/or traceable to the registration statement for the Company’s February 1999 initial public offering (the “IPO”). The lawsuits were consolidated on December 1, 2000, and the consolidated action is proceeding under Case No. 8:00-CV-2013-T-26MAP. The plaintiff’s Consolidated Amended Class Action Complaint, filed February 7, 2001, names as defendants the following parties: the Company; BIG, Venture Capital Corporation, a selling shareholder in the IPO; the five inside directors of the Company at the time of the IPO; and Raymond James & Associates, Inc. and Keefe, Bruyette & Woods, Inc., the underwriters for the IPO. The complaint alleges, among other things, that the defendants violated Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended, by making certain false and misleading statements in the roadshow presentations, registration statement and prospectus relating to the IPO. More specifically, the complaint alleges that, in connection with the IPO, the defendants made various material misrepresentations and/or omissions relating to: (i) the Company’s ability to integrate Geotrac’s flood zone determination business with the Company’s own flood zone determination business and with its insurance outsourcing services business; (ii) actual and anticipated synergies between the Company’s flood zone determination and outsourcing services business lines; and (iii) the Company’s use of the IPO proceeds. The complaint seeks unspecified damages, including interest, and equitable relief, including a rescission remedy. On March 26, 2001, the Company, BIG and the five inside director defendants filed a motion to dismiss the plaintiffs’ complaint for, among other things, failure to allege material misstatements and/or omissions in the roadshow presentations, registration statement and/or prospectus relating to the IPO. On July 11, 2001, U.S. District Judge Richard A. Lazzara denied all of the defendants’ motions to dismiss the complaint.

     The case has been set for trial during the trial term commencing May 5, 2003, and active discovery is proceeding. Management of the Company believes the material allegations of the complaint are without merit and intends to vigorously defend the lawsuit. No assurances can be given, however, with respect to the outcome of the litigation, and an adverse result could have a material adverse effect on the Company’s business, financial condition and results of operations.

     Bankers Insurance Company (“BIC”), a subsidiary of BIG, and Bankers Life Insurance Company (“BLIC”) and Bankers Security Insurance Company (“BSIC”), subsidiaries of BIC, have been subject to an investigation by the Florida Department of Insurance (the “DOI”), the principal regulator of insurance activities in the State of Florida, stemming from their use of a private investigator to gather information on a DOI employee and the private investigator’s unauthorized use of illegal wiretaps in connection therewith. On March 23, 2000, the Treasurer and Insurance Commissioner of the State of Florida, as head of the DOI, filed an administrative complaint against BIC, BLIC and BSIC based upon the results of such investigation. The administrative complaint charged BIC, BLIC and BSIC with violating various provisions of the Florida Insurance Code including, among other things, a provision requiring insurance companies to have management, officers or directors that are, among other things, trustworthy. The complaint further notified BIC, BLIC and BSIC that the Insurance Commissioner intended to impose such penalties or take such other administrative actions as may be proper or appropriate under applicable law, including possibly entering an order suspending or revoking the certificates of authority of BIC, BLIC and BSIC to conduct business as insurance companies in the State of Florida. Effective February 6, 2002, BIC, BLIC and BSIC entered into a Consent Order with the DOI pursuant to which the DOI’s administrative action against BIC, BLIC and BSIC was dismissed. Also pursuant to this Consent Order, such entities were ordered to pay penalties totaling $1 million (consisting of a fine of $700,000 and reimbursement of attorneys’ fees of $300,000), Robert M. Menke was prohibited from acting as chairman or an officer of any of such entities for a period of three (3) years, another executive officer of each of these entities was removed from such positions, and certain other compliance-related requirements were imposed. BIG has advised the Company that the terms of the Consent Order should not have a material adverse effect on the business and/or operations of BIG, but no assurances can be given in this regard.

     On November 19, 1999, the United States, on behalf of the Federal Emergency Management Agency (“FEMA”), filed a civil action against Bankers Insurance Company, a subsidiary of BIG (“BIC”), in the United States District Court for the District of Maryland stemming from FEMA’s investigation of certain cash management and claims processing practices of BIC in connection with its participation in the National Flood Insurance Program (“NFIP”). The complaint alleges, among other things, that BIC knowingly failed to report and pay interest income it had earned on NFIP funds to the United States in violation of the False Claims Act. The complaint further alleges various common law theories, including fraud, breach of contract, unjust enrichment and negligent misrepresentation. The complaint seeks civil penalties of $1.08 million and actual damages of approximately $1.1 million, as well as treble, punitive and consequential damages, costs and interest. The suit is currently stayed pending arbitration following a decision by the United States Court of Appeals for the Fourth Circuit in favor of BIC on its motion to stay the litigation pending arbitration. The government has not appealed the Fourth Circuit Court of Appeal ruling requiring arbitration and the case is stayed pending arbitration. By letter dated January 30, 2002, FEMA notified BIC that it intends to move forward with arbitration and set forth proposed procedures. BIC has further informed the Company that it intends to vigorously defend against the action, but no assurances can be given as to the outcome thereof. However, BIG has advised the Company that an adverse judgment in this action should not have a material adverse affect on the business and/or operations of BIC, although no assurances can be given in this regard.

     FEMA’s investigation of certain claims processing practices of BIC in connection with its participation in the NFIP is continuing, and BIC has produced documentation in connection therewith. If the parties are either unable to reach agreement in these matters or resolve their disagreement in arbitration, the United States could amend its complaint against BIC to add additional claims under the False Claims Act and/or various common law and equitable theories relating to such matters. In the event such continuing investigation or any consequence thereof materially adversely affects the business or operations of BIC, it could result in the loss of or material decrease in the Company’s business from BIC, which would have a material adverse effect on the Company’s business, financial condition and results of operations.

-8-

     The Company is involved in various other legal proceedings arising in the ordinary course of business. Management believes that the ultimate resolution of these other proceedings will not have a material adverse effect on the Company’s financial position, results of operations, or liquidity, although no assurances can be given in this regard.

     Lastly, the Company continues to review the adequacy of reserves it has established prior to January 1, 2002 for two specific items as follows: (i) a $200,000 provision for potential billing adjustments booked during the fourth quarter of 2001 related to billing adjustments under the new Service Agreement with BIG, effective October 1, 2001; and (ii) a settlement accrual of $800,000 relating to an unaffiliated third-party customer contract which was terminated in 2000 and for which no settlement has yet been reached with this former customer. No discussions between the Company and this customer have taken place since October 2000. These two items will continue to be reviewed throughout the course of this year, although no assurances can be given as to their ultimate resolution and, upon what terms.

NOTE 5. SEGMENT INFORMATION

				Outsourcing
	Outsourcing			Services -			Intercompany
	Services -			Claims			Eliminations			Consolidated
	Administration			Adjusting			And Other			Totals
MARCH 31, 2001
Operating revenues-affiliated	$	9,581,963			—			—		$	9,581,963
Operating revenues-unaffiliated	$	917,387		$	302,147			—		$	1,219,534
Operating income/(loss)	$	(243,588	)	$	(210,894	)		—		$	(454,482	)
Interest expense	$	2,066			—			—		$	2,066
Depreciation and amortization	$	733,700		$	41,958			—		$	775,658
Identifiable assets	$	40,712,725		$	5,566,078		$	(6,133,988	)	$	40,144,815
MARCH 31, 2002
Operating revenues-affiliated	$	7,096,983			—		$	(6,750	)	$	7,090,233
Operating revenues-unaffiliated	$	1,123,525		$	254,254			—		$	1,377,779
Operating income/(loss)	$	(1,454,979	)	$	(239,282	)		—		$	(1,694,261	)
Depreciation and amortization	$	638,359		$	10,605			—		$	648,964
Identifiable assets	$	38,188,330		$	5,525,287		$	(5,611,560	)	$	38,102,057

     Outsourcing Services — Administration. Identifiable assets at March 31, 2001 includes net assets of discontinued operations of $21,187,665.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements (unaudited) and the notes thereto included in “Item 1. Financial Statements” above.

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RESULTS OF OPERATIONS

     The following table sets forth, for the periods indicated, certain selected operating results of the Company as a percentage of total revenues:

			Three Months Ended March 31,
			2001			2002
REVENUES
	Outsourcing services			100.0	%		100.0	%
		Total revenues		100.0			100.0
EXPENSES
	Cost of outsourcing services			77.7			90.3
	Selling, general and administrative			16.1			20.5
	Management services from Parent			3.3			1.5
	Depreciation and amortization			7.2			7.7
		Total expenses		104.3			120.0
Operating income/(loss)				(4.3	)		(20.0	)
Interest income, net				0.4			1.7
Income before income taxes and discontinued operations				(3.9	)		(18.3	)
Provision/(benefit) for income taxes				1.3			(6.8	)
Income/(loss) before discontinued operations				(2.6	)		(11.5	)
Income/(loss) from discontinued operations				4.0			—
Net income/(loss)				1.4	%		(11.5	)%

OVERVIEW

     During the three months ended March 31, 2002, the Company experienced a significant reduction in outsourcing services revenue due primarily to reduced premium production by BIG, the Company's principal customer. The Company anticipates that this trend will continue for the remainder of the fiscal year. Consequently, the Company is currently focused on implementing cost reduction measures and eliminating support or service expenses associated with the provision of services to BIG. See “Item 5. Other Information”.

COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2001 AND 2002

CONTINUING OPERATIONS

     Outsourcing Services Revenues. Outsourcing services revenues decreased $2.3 million, or 21.3%, to $8.5 million for the three months ended March 31, 2002 from $10.8 million for the corresponding period in 2001. The decrease was primarily attributable to a decrease in affiliated direct written premium (“DWP”) volumes related to BIG’s homeowners, worker’s compensation, and commercial lines, coupled with the impact of the reduced base rates charged for certain affiliated lines of business under the new affiliated service agreements which became effective October 1, 2001. Affiliated homeowners DWP volumes decreased 23.7% during the first quarter of 2002 as compared to the corresponding period of 2001. The Company expects affiliated homeowners DWP volumes to decrease further as a result of the sale of BIG’s Florida wind-inclusive policies to an unaffiliated third party effective February 2002. In addition, BIG ceased writing new worker’s compensation policies in November 2001. As a result, the Company will not generate additional revenue from the administration of new policies for this affiliated line of business. However, the Company will continue to generate revenue from the processing of claims under existing policies during the run-off period, which is expected to continue on a declining basis until approximately the end of the second quarter of 2003. The foregoing decreases were partially offset by a 13.0% increase in unaffiliated outsourcing revenue primarily resulting from an increase in unaffiliated flood processing business from existing unaffiliated customers.

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     Cost of Outsourcing Services. Cost of outsourcing services decreased $700,000, or 8.3%, to $7.7 million for the three months ended March 31, 2002 from $8.4 million for the corresponding period in 2001. As a percentage of outsourcing services revenues, cost of outsourcing services increased to 90.3% for the three months ended March 31, 2002 from 77.7% for the corresponding period in 2001. The decrease in the dollar amount of cost of outsourcing services was due primarily to: (i) a decrease in salary expense due to a 50% reduction in IT staff; (ii) a decrease in telephone expenses due to a change of service provider effective October, 2001; and (iii) a decrease in computer leasing expense. This decrease was partially offset by an increase in flood zone determination expense arising from higher flood DWP volumes and increased contract labor expenses relating to claims administration.

     Selling, General and Administrative Expense. Selling, general and administrative expenses were consistent with prior year at $1.7 million for the three months ended March 31, 2002 and included operating expenses such as: payroll and related expenses, professional fees, insurance expense, and other normal administrative expenses.

     Management Services from Parent. Management Services from Parent decreased $231,000, or 65.3%, to $123,000 for the three months ended March 31, 2002 from $354,000 for the corresponding period in 2001. The decrease was primarily related to the assumption of administrative services, including human resources and legal, that were previously provided to the Company by BIG. Additionally, the reduction reflects reduced office lease expense under the new sublease agreement with Bankers Financial Corporation which took effect in late December 2001.

     Interest Income. Interest Income increased 242% to $144,000 for the three months ended March 31, 2002 from $42,000 in 2001. The increase reflects interest earned on the remaining net cash proceeds from the sale of Geotrac in late December 2001, coupled with interest earned on the Company’s line of credit with BIG (see LIQUIDITY AND CAPITAL RESOURCES below).

     Provision/(Benefit) for Income Taxes. The Company’s effective income tax/(benefit) rates were (37.3%) and (33.2%) for the three months ended March 31, 2002 and 2001, respectively.

     For additional information on the reconciliation of the Company’s effective income tax rate to the federal statutory income tax rate, see “Note 10 - - Income Taxes”, in the Notes to the Consolidated Financial Statements of the Company for the year ended December 31, 2001, included in the Company’s Form 10-K filed with the Securities and Exchange Commission on April 1, 2002.

DISCONTINUED OPERATIONS

     As a consequence of the sale of Geotrac on December 28, 2001, net income from discontinued operations was $0 for the 3 months ended March 31, 2002 as compared to $429,000 for the corresponding period in 2001. For selected financial information on discontinued operations, see “Note 3. Discontinued Operations” in the Notes to the Consolidated Financial Statements (unaudited) of the Company included in “Item 1. Financial Statements” above.

NEW ACCOUNTING POLICIES

     While the Company does not expect any material impact of adopting, effective as of January 1, 2002, Statement of Financial Accounting Standards (SFAS) 142, Goodwill and Intangible Assets, and 144, Accounting for the Impairment or Disposal of Long Lived Assets, the Company has not yet completed its determination of the impact of SFAS 142, which should be completed by June 30, 2002.

     Under SFAS 142, the impact, exclusive of the non-amortization of goodwill, will be recognized as a January 1, 2002 cumulative effect change in accounting principle. As of January 1, 2002, the Company is no longer amortizing goodwill.

     In addition, effective January 1, 2002, the Company adopted SFAS 144, Accounting for the Impairment or Disposal of Long Lived Assets. The adoption of SFAS 144 had no impact on the Company’s results of operations or financial condition.

     See Note 2 of the Notes to Consolidated Financial Statements for further information.

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LIQUIDITY AND CAPITAL RESOURCES

     During 2001, the Company’s principal sources of liquidity consisted of cash on-hand, cash flows from operations, and cash proceeds from the sale of the Company’s Geotrac subsidiary in late December 2001. The Company received net cash proceeds of approximately $18.2 million as a result of the sale of its Geotrac subsidiary in late December 2001. Prior to the consummation of the sale of Geotrac, the Company was party to a Corporate Governance Agreement, dated July 31, 1998, with Geotrac and Daniel J. White (“Mr. White”), setting forth certain terms and conditions pertaining to the operation of Geotrac. Pursuant to this Corporate Governance Agreement, Mr. White could impede the Company’s ability to access excess cash balances retained by its Geotrac subsidiary.

     On April 13, 2001, the Company entered into a Commitment Letter with BIG pursuant to which BIG has agreed to advance to the Company, beginning June 1, 2001, up to $1.5 million per month as a prepayment of service fees due by BIG and its affiliates under their service agreements with the Company. Such advances are available to the Company beginning June 1, 2001 continuing through December 1, 2002 and shall be payable upon demand by the Company. Any funds advanced by BIG to the Company under the Commitment Letter shall constitute a prepayment of, and shall be credited toward, the service fees charged to BIG by the Company during the month following such advance.

     On August 14, 2001, the Company entered into a Credit and Security Agreement with BIG (together with the related loan documentation, the “Credit Agreement”), pursuant to which the Company established a short-term, secured line of credit in favor of BIG in the amount of up to $5.0 million (the “Line of Credit”). The principal purpose of the Line of Credit is to assist BIG, the Company’s principal customer and shareholder, with certain short-term working capital needs. Pursuant to the Credit Agreement, all unpaid principal and interest became due and payable in full on February 28, 2002. As of such date, BIG owed the Company an aggregate of approximately $5.0 million under the Line of Credit. On March 14, 2002, the Company and BIG amended the Credit Agreement (the “Amended Credit Agreement”) to extend the Line of Credit until May 31, 2002. Pursuant to the Amended Credit Agreement, interest is payable monthly on amounts outstanding under the Line of Credit at an annual rate equal to the Prime Rate (4.75% at March 31, 2002) as defined in the Amended Credit Agreement, plus 1.5%. As of March 31, 2002, the aggregate principal amount outstanding under the Line of Credit was $5.0 million.

     The Line of Credit is secured by (i) a first lien security interest in all accounts and contract rights of Bankers Underwriters, Inc., a wholly-owned subsidiary of BIG (“BUI”), with insurance agents (including but not limited to general agents with respect to the sale of federal flood insurance) (collectively, the “Flood Book”), and (ii) an option (the “Option”) to purchase from BIG the outstanding capital stock, consisting of 10,898 shares (the “Option Shares”) of common stock, $318 par value per share, of First Community Insurance Company, a New York insurance company licensed in all fifty states and a subsidiary of BIG. Management of the Company believes that, as of March 31, 2002, the fair market value of the Flood Book exceeded the aggregate principal amount of the Line of Credit.

     The Company has been advised by BIG that it is considering various methods of satisfying its obligations under the Line of Credit, including the possible sale of certain of its assets. No assurances can be given, however, that payment in full of all amounts due and owing under the Line of Credit will be received on a timely basis.

     The Company believes that cash on-hand (including the remaining net cash proceeds from the Geotrac sale) and cash flows from operations will be sufficient to support the Company’s currently anticipated working capital requirements for the foreseeable future.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company has not entered into any transactions using derivative financial instruments or derivative commodity instruments and believes that its exposure to market risk associated with other financial instruments (such as variable rate debt) is not material.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     There have been no material changes to the disclosure set forth under the caption “Item 3. Legal Proceedings” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Securities and Exchange Commission on April 1, 2002.

ITEM 5. OTHER INFORMATION

     On May 7, 2002, the Company further reduced its workforce by eliminating 45 positions, or approximately 10.7% of its total workforce. These reductions are expected to result in a reduction of approximately $1.6 million in annualized payroll costs and are expected to have a positive impact on the Company’s cash flow and pre-tax earnings. These staffing reductions impacted each of the Company’s principal departments, although the primary areas affected were policy administration and claims processing. These reductions were undertaken in an effort to help offset the loss of affiliated outsourcing services revenue resulting primarily from reductions in the amounts of homeowners, worker’s compensation and, to a lesser extent, automobile outsourcing services provided to BIG. See “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” above. Since the beginning of 2002 (and including the reductions described above), the Company’s total workforce has been reduced by approximately 21%. The annualized payroll expense savings related to this reduction is currently expected to total approximately $3.3 million. The Company will continue to consider further staffing reductions in the future, depending upon the demand for its services and other factors. No assurances can be given, however, as to whether any additional reductions will be undertaken, or if so, when and upon what terms and conditions.

     Due to the changes in BIG’s business, the Company is considering other expense reduction measures as well, including possible reductions in the amount of space it leases. No assurances can be given, however, as to whether any such measures can or will be implemented. If the Company is unable to replace the loss of affiliated outsourcing services revenues or reduce its expenses accordingly, it could have a material adverse affect on the Company’s business, financial condition and results of operations.

     Pursuant to the December 2001 sale of Geotrac, the Company entered into a Flood Zone Determination Service Agreement pursuant to which Geotrac will provide the Company with flood zone determination services for up to ten years at pricing management of the Company currently considers to be favorable. The start date for when the Agreement’s new pricing goes into effect has been changed by the parties to May 17, 2002. The fair value of $2,189,090 assigned to this service agreement will be amortized over the 10-year contract period commencing May 17, 2002 using a method that approximates the Company’s projected annual requirements of flood zone determinations.

     As previously reported, on January 30, 2002, the Board of Directors of the Company appointed a Special Committee, consisting of the Company’s five independent directors, to evaluate possible strategic alternatives for the Company. On April 24, 2002, the Board of Directors approved the following compensation for members of the Special Committee, retroactive to the formation of the Special Committee in January 2002. Each member will be paid a flat fee of $1,000 per meeting attended. In addition, the Chairman of the Committee, John S. McMullen, will be paid a monthly fee of $5,000. The Board intends to reevaluate the monthly fee payable to Mr. McMullen at its meeting scheduled for June 2002.

     The Company has also set September 24, 2002 as the date for the 2002 Annual Meeting of Shareholders. Proposals of shareholders pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (‘‘Rule 14a-8’’), that are intended to be presented at the 2002 Annual Meeting of Shareholders must be received by the Company no later than July 1, 2002 to be included in the Company's proxy materials for that meeting. Further, a shareholder who otherwise intends to present business at the 2002 Annual Meeting must comply with the requirements set forth in the Company’s Amended and Restated Bylaws. Among other things, to bring business before an annual meeting, a shareholder must give written notice thereof, complying with the Amended and Restated Bylaws, to the Secretary of the Company generally not less than 60 days nor more than 90 days prior to the date of the annual meeting of shareholders. Under the Amended and Restated Bylaws, if the Company does not receive notice of a shareholder proposal submitted otherwise than pursuant to Rule 14a-8 (i.e., a proposal a shareholder intends to present at the 2002 Annual Meeting of Shareholders but does not intend to have included in the Company’s proxy materials) on or prior to July 27, 2002 (assuming a September 24, 2002 meeting date), then the notice will be considered untimely and the Company will not be required to present such proposal at the 2002 Annual Meeting. If the Board of Directors of the Company nonetheless chooses to present such proposal at the 2002 Annual Meeting, then the persons named in proxies solicited by the Board for the Annual Meeting may exercise discretionary voting power with respect to such proposal.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     a) Exhibits

Exhibit Number	Description
10.1	Insurance Administration Services Agreement, effective March 1, 2002, by and between Insurance Management Solutions, Inc. and Island Insurance Companies, LTD.

     b) Reports on Form 8-K

      The Company filed two reports on Form 8-K during the three months ended March 31, 2002:

     (1)  On January 14, 2002, the Company filed a report on Form 8-K to report that on December 28, 2001 the Company consummated the transactions contemplated by a stock purchase agreement (as amended, the “Stock Purchase Agreement”), dated as of September 20, 2001, by and among the Company, Geotrac, Geotrac Holdings, Inc., Daniel J. White, the Daniel J. White Trust, the Sandra A. White Trust, and, solely for purposes of a non-competition covenant, BIG. Pursuant to the Stock Purchase Agreement, Geotrac Holdings, Inc., a Delaware corporation formed by Daniel J. White and his spouse, Sandra A. White, purchased all the issued and outstanding capital stock (the “Shares”) of the Company’s Geotrac subsidiary. The purchase price paid for the Shares was $19.0 million in cash, plus 524,198 shares of Common Stock, $.01 par value, of the Company beneficially owned by Daniel J. White and Sandra A. White. Pursuant to the Stock Purchase Agreement, certain of the parties also entered into additional agreements as of the closing of such sale, including a Flood Zone Determination Service Agreement pursuant to which Geotrac will provide the Company with flood zone determination services for up to ten years.

     (2)  On March 13, 2002, the Company filed a report on Form 8-K to report the following events: (i) on January 30, 2002, the Board of Directors of the Company appointed a Special Committee, consisting of the Company’s five independent directors, to evaluate possible strategic alternatives for the Company; (ii) effective February 1, 2002, Robert G. Menke resigned as a director of the Company to pursue personal interests; and (iii) on March 14, 2002, the Company and BIG amended an existing Credit and Security Agreement (including related loan documentation) to extend the short-term secured $5.0 million line of credit, previously established by the Company in favor of BIG, until May 31, 2002.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 10, 2002	INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. (Registrant)
	By: /s/ David M. Howard
	David M. Howard President and Chief Executive Officer (Principal Executive Officer)
	By: /s/ Anthony R. Marando
	Anthony R. Marando Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit Number	Description
10.1	Insurance Administration Services Agreement, effective March 1, 2002, by and between Insurance Management Solutions, Inc. and Island Insurance Companies, LTD.

E-1 EX-10.1 3 g75939ex10-1.txt MARCH 1, 2002 ISLAND INSURANCE COMPANIES AGREEMENT EXHIBIT 10.1 INSURANCE ADMINISTRATION SERVICES AGREEMENT THIS INSURANCE ADMINISTRATION SERVICES AGREEMENT ("Agreement") is effective as of the 1st day of March, 2002 ("Effective Date"), by and between INSURANCE MANAGEMENT SOLUTIONS, INC. ("IMS"), a corporation organized and existing under the laws of the State of Florida with its principal place of business located at 360 Central Avenue, St. Petersburg, Florida 33701, and ISLAND INSURANCE COMPANIES, LTD. (herein referred to as "Customer") having their principal place of business at 1022 Bethel Street, Honolulu, HI 96806-1520. WHEREAS, Customer wishes to engage the services of IMS to administer certain of the Customer's obligations for the lines of business ("Authorized Lines of Business") in the state(s) ("Authorized States") set forth in SCHEDULE A; WHEREAS, IMS wishes to provide such insurance administration services as set forth herein. NOW THEREFORE, IN CONSIDERATION OF the mutual covenants and agreements hereinafter set forth, the parties hereto do covenant and agree as follows: ARTICLE I. DEFINITIONS Unless the context clearly requires otherwise, the following terms when used in this Agreement shall have the meanings set forth below: A. "Affiliate" is any company which controls, is controlled by, or under common control with, a party, and "control" is defined as owning 50% or more of such entity. B. "Authorized Lines of Business" means the lines of business expressly set forth in SCHEDULE A of this Agreement. C. "Authorized States" means the states expressly set forth in SCHEDULE A of this Agreement. D. "Business Day" means any day other than a Saturday, Sunday or other day which is a bank holiday for Florida State banks or an IMS paid holiday (New Year's Day, Memorial Day, Independence Day, Thanksgiving Day, day after Thanksgiving, Christmas Eve (after 12 P.M. Eastern Standard Time) and Christmas Day). E. "Change of Control" means (a) a sale, transfer or pledge, or the issuance of fifty (50%) percent or more of the voting stock of a party hereto to any third party that is not an Affiliate of such party; or (b) a sale, transfer or pledge of a substantial portion of the material assets of a party, or any merger or consolidation of a party with another entity or entities. F. "Insurance Administration Services" means the services set forth in this Agreement and EXHIBIT I hereto in the Authorized States in accordance with the terms of the Agreement, and all applicable laws and regulations. G. "Insurance Program" means the Customer's insurance products within the Authorized Line(s) of Business to be offered within the Authorized States. H. "Technical Information" means and shall include (without limitation) computer programs, databases, designs, algorithms, processes, structures, data formats, business methods, know how, and research and development information. 1 ARTICLE II. TERM The term of the Agreement shall commence on the Effective Date and shall have a minimum operating term ("Minimum Operating Term") of Thirty-six (36) full calendar months following the Effective Date. However, the term of this Agreement shall automatically extend for an additional operating term ("Extended Operating Term") of twelve (12) calendar months at the end of the Minimum Operating Term, or at the end of any Extended Operating Term, unless terminated earlier pursuant to the termination provisions within Article VIII. ARTICLE III. RESPONSIBILITIES OF IMS A. IMS shall dedicate the human, equipment and computer resources commercially reasonably required to provide Customer with the Insurance Administration Services, during the term of this Agreement, for the Insurance Program within Authorized States specified in SCHEDULE A. B. IMS shall designate an employee ("Account Manager") of sufficient status and authority to act as liaison with Customer to facilitate IMS' performance of the Insurance Administration Services under this Agreement. The Account Manager shall provide written and/or oral communication of the status of administration of the Insurance Administration Services as agreed to by and between Account Manager and Customer. C. IMS shall, based on accepted industry standards and in accordance with generally accepted insurance and accounting practices as designated by the applicable regulatory bodies and the National Flood Insurance Program ("NFIP"), maintain complete and orderly records and policy and/or claims files as may be required as a result of IMS performing the Insurance Administration Services on behalf of Customer. These files shall be retained by IMS, in a format or media defined by IMS which shall be in compliance with applicable laws and regulations, for a minimum of four (4) years or the period specified by the applicable statutes regulating the preservation of records. Customer may request that its records be returned to it at its expense at the expiration of the minimum four (4) year period; provided, however, IMS shall be entitled to retain copies thereof. ARTICLE IV. RESPONSIBILITIES OF CUSTOMER A. During the term of this Agreement, Customer shall provide to IMS, in a timely manner, any and all data, information and other items reasonably required to enable IMS to perform the Insurance Administration Services specified in EXHIBIT I of this Agreement. Customer represents and warrants to IMS that it owns and possesses all property rights to its corporate and subsidiary logos and hereby grants and warrants to IMS a limited, non-transferable, non-assignable, license to use Customer's corporate and subsidiary logos (and any other copyrighted or trademarked property of Customer that may be provided to IMS under this Agreement) while performing the Insurance Administration Services. Customer acknowledges and agrees that delays in delivery of required documentation, data and/or information by Customer will result in a similar delay in fulfilling Insurance Administration Services, and that such a delay in performing the Insurance Administration Services shall not be deemed a breach of the Agreement. B. CUSTOMER ACKNOWLEDGES AND AGREES THAT IMS ASSUMES NO INSURANCE RISK FOR THE BUSINESS PROCESSED UNDER THIS AGREEMENT. C. Customer shall designate manager level employee(s) of sufficient status and binding decision making authority to act as liaisons with IMS and to facilitate Customer's role as IMS performs the Insurance Administration Services specified in EXHIBIT I of this Agreement. 2 ARTICLE V. CUSTOMER ACCESS TO RECORDS / CONFIDENTIAL INFORMATION A. At Customer's expense, Customer will be permitted reasonable access (as set forth herein) to all records and information maintained by IMS on behalf of Customer (excluding, specifically, proprietary Technical Information) reasonably necessary to: (i) audit the completeness and accuracy of the Insurance Administration Services provided under this Agreement and reports produced for Customer pursuant to this Agreement; (ii) verify the accuracy and validity of all billings and charges to Customer under this Agreement; and (iii) verify IMS' overall compliance with the material terms of this Agreement and applicable laws and regulations. Access to IMS' records, for the foregoing purposes, will be provided during normal business hours upon ten (10) Business Days prior written notice to IMS by Customer for so long as IMS is required to maintain such records under this Agreement; except in the case of regulatory inquiry, in which case access will be granted on any Business Day with twenty four (24) hours of prior written notice to IMS. At Customer's expense, Customer will be permitted to copy those IMS records subject to audit in accordance with this Article. Upon reasonable written request by Customer, and at Customer's expense, IMS will promptly mail or fax to Customer supporting documentation concerning any specific transaction processed by IMS under the terms of this Agreement. IMS will provide reasonably adequate workspace for Customer to conduct audits in accordance with this Article. Further, Customer or its representatives shall take precautions, when conducting audits under this Article, not to disrupt IMS' ongoing business activities. B. The recipient ("Recipient") of confidential data and/or information pursuant to this Agreement shall maintain the confidentiality of all data and/or information which is the property of the other party ("Disclosing Party"), whether originally supplied by the Disclosing Party, or whether generated by the Disclosing Party in the course of performing or facilitating the Insurance Administration Services under this Agreement and which is directly accessible to the Recipient or is in the possession of Recipient in the implementation, facilitation and/or performance of the Insurance Administration Services. During any term of this Agreement, Recipient may acquire, know, or have within its possession, information (including, but not limited to, Technical Information) and/or data of the Disclosing Party concerning commercial and trade affairs, rating and underwriting rules and guidelines, the identity of clients, the identity of insureds and beneficiaries, claims, benefits, rates and Agents, financial information, the Proprietary System (as defined at Article VII (A) herein), the Third Party Proprietary System (as defined in Article VII (B) herein) and business practices of the Disclosing Party ("Confidential Information"). Confidential Information which is provided in tangible form must be clearly marked "Confidential", "Proprietary" or the substantial equivalent thereof, or if orally disclosed must be clearly identified as "Confidential" or "Proprietary" at the time of the disclosure (except for IMS' Technical Information, the identity of Customer's clients, the identity of Customer's insureds and beneficiaries, claims, benefits, and Agents, which will be deemed "Confidential Information" under this Agreement, regardless of whether marked as such). Except as required by law, Recipient shall keep Disclosing Party's Confidential Information confidential and shall only use the Confidential Information in performing or facilitating the Insurance Administration Services under this Agreement. Recipient shall not disclose the Confidential Information without Disclosing Party's prior written permission except to Recipient's employees who require the information to perform or facilitate the Insurance Administration Services under this Agreement. Each party hereto, as a Recipient, warrants to the other that appropriate measures shall be taken by Recipient to safeguard the confidentiality of the Confidential Information, with a level of care at least equal to the level of care with which Recipient safeguards its own confidential or proprietary information. All employees, agents or representatives of Recipient and any third parties who are given access to the Confidential Information shall be under written obligation to Recipient to maintain such information in confidence. 3 IMS and Customer agree that any Recipient shall have no obligation with respect to any information or data which: a) is already rightfully known to Recipient through means other than Disclosing Party; or b) is or becomes publicly known through no wrongful act of Recipient; or c) is rightfully obtained by Recipient from a third-party without similar restriction and without breach of this Agreement; or d) is independently developed by Recipient without breach of this Agreement. Disclosing Party shall retain title to all Confidential Information (whether tangible or intangible) delivered thereby pursuant to this Agreement. Recipient shall not copy, reproduce or use any Confidential Information without written authorization of Disclosing Party, except as may be reasonably required to accomplish the Insurance Administration Services under this Agreement. Upon written request of Disclosing Party Recipient shall promptly return, or destroy with specific written permission of the Disclosing Party, all tangible copies containing Confidential Information, except those copies kept in the regular course of business, or that are required to be kept pursuant to any state or federal administrative, regulatory or statutory mandates. The obligations under this Paragraph (B) shall survive the termination of this Agreement. Notwithstanding the foregoing, this Article shall not prevent the disclosure of Confidential Information to the extent legally required by any court or regulatory entity having jurisdiction over the parties. For purposes of Article V (B), Recipient and Disclosing Party shall include within their meaning all respective subsidiaries, agents, or Affiliates of the Recipient and Disclosing Party. ARTICLE VI. EXPENSES AND FEES A. In consideration of IMS providing Insurance Administration Services described herein, Customer shall pay IMS, as applicable, miscellaneous fee ("Miscellaneous Fee"), servicing fee ("Service Fee") and claim administration fee ("Claim Administration Fee") for each Authorized Line of Business, as specified in SCHEDULE B. The performance by IMS of any service or function that is outside of the scope of the Insurance Administration Services shall require the payment by Customer of additional consideration (in addition to the Service Fees) as mutually agreed between IMS and Customer. B. Except for the Service Fee, which is based upon a percentage of the adjusted net written premium and the Claim Administration Fee, the Miscellaneous Fees specified in Section IV of SCHEDULE B hereto may be increased (up to a maximum of five percent (5%) per year from the prior year) effective as of each anniversary of the Effective Date by the percentage increase in the United States Consumer Price Index for all Urban Users (CPI-U) as reported by the United States Bureau of Labor Statistics for the most recently completed calendar year that IMS is performing services on behalf of the Customer. In the event that a vendor supplying a service or product to IMS, which service or product is used by IMS to provide the Insurance Administration Services to Customer, increases its rates charged to IMS, IMS may increase the Service Fees, Claim Administration Fees, and Miscellaneous Fees set forth in Schedule B to incorporate such increased costs and will provide Customer with documentation verifying the increase. C. Customer shall reimburse IMS for travel, living and out-of-pocket expenses incurred by IMS personnel in the performance of training relative to the Insurance Administration Services to be performed under this Agreement. D. Customer agrees to pay any and all tariffs and taxes that are now or may become applicable to the Insurance Administration Services rendered hereunder, including, but not limited to, sales, use, and personal property taxes, or any other form of tax based on Insurance Administration Services performed, equipment used by IMS solely for Customer, and the communicating or storage of data used by IMS solely for Customer, but excluding taxes on the net income of IMS. 4 E. Subject to the terms of this Agreement, all fees and expenses to be payable by Customer to IMS or any third party under this Agreement shall be paid within thirty (30) calendar days after Customer's receipt of IMS' monthly statement for all services provided to Customer under this Agreement. IMS will calculate the fees owed to IMS by Customer and will send a statement to Customer within two (2) weeks of the last day of the month for which fees are owed. Customer's failure to pay all fees and expenses when due shall be considered a material breach of this Agreement. Further, if Customer fails to pay any fees and expenses due IMS as herein provided, Customer shall pay to IMS in addition to all sums otherwise due, interest which shall accrue at 1.5% per month on such delinquency from the date the fees or expenses became past due. Failure or forbearance to exercise any of its rights and privileges hereunder shall not constitute the forfeiture or waiver of such rights and privileges on the part of IMS. F. Prior to renewal of this Agreement for any Extended Operating Term, IMS may modify SCHEDULE B in its discretion to reflect any increase in the cost of providing the Insurance Administration Services (including, but not limited to statutory, regulatory, or judicial changes that require IMS to incur additional cost or expenses in performing the Insurance Administration Services) or to remain competitive with the rates currently being charged within the industry for like services. Any modification of SCHEDULE B shall be proposed to Customer at least twelve (12) months prior to the expiration of any term of this Agreement. ARTICLE VII. LICENSE, TRADE SECRET AND PROPRIETARY RIGHTS A. IMS from time to time may use its own proprietary computer software products and account servicing methods and procedures ("Proprietary System"), which are identified, described or referenced in EXHIBIT I hereto, in the performance of the Insurance Administration Services. During any term of this Agreement, IMS grants a personal, non-transferable, non-assignable, non-exclusive license to Customer to use portions of the Proprietary System as necessary for IMS to perform the Insurance Administration Services under this Agreement. Further, no provision within this Agreement shall be interpreted as prohibiting IMS from selling or licensing its Proprietary System to any other customer or prospective customer of IMS. B. IMS, from time to time, may also use proprietary third party computer software products and third party account servicing methods and procedures ("Third Party Proprietary System"), which are identified, described or referenced in EXHIBIT I hereto in the performance of the Insurance Administration Services. No provision within this Agreement shall be interpreted as prohibiting IMS or the Third Party Proprietary System vendor from selling or licensing the Third Party Proprietary System, or modifications and enhancements to the Third Party Proprietary System, to any other customer or prospective customer of IMS, so long as Customer's Confidential Information is not disclosed. C. Other than the limited rights to use the Proprietary System and the Third Party Proprietary System, as provided in Article VII (A) and (B) above, this Agreement grants to Customer no right to possess or reproduce, download, reverse engineer, or obtain any other interest in, the Proprietary System or the Third Party Proprietary System, or their specifications in any tangible or intangible medium. Customer may not mortgage, hypothecate, sell, assign, pledge, lease, transfer, license, or sublicense the Proprietary System or the Third Party Proprietary System, nor allow any person, firm, entity or corporation to transmit, copy, reproduce, download, reverse engineer, or obtain any other interest in the Proprietary System or the Third Party Proprietary System, or their specifications in whole or in part. In the event Customer shall come into possession of any source or object code associated with the Proprietary System or the Third Party Proprietary System, Customer shall immediately notify IMS and return the source or object code associated with Proprietary System or the Third Party Proprietary System in its possession and all copies of any kind thereof to IMS. 5 D. Customer covenants and agrees not to disclose or otherwise make the Proprietary System or the Third Party Proprietary System available to any person other than employees, insurance sales agents ("Agents") or representatives of the Customer required to have access or use of the Proprietary System or the Third Party Proprietary System to facilitate IMS' or Customer's performance under this Agreement. Customer agrees to obligate each such employee, Agents, or representative to a level of care sufficient to protect the Proprietary System and the Third Party Proprietary System from unauthorized disclosure. E. The obligations of Customer under this Article shall survive termination of this Agreement, regardless of the reason for termination. ARTICLE VIII. TERMINATION A. Either party may terminate this Agreement at the end of the Minimum Operating Term or at the end of any Extended Operating Term, provided the terminating party gives the other party at least three (3) months prior written notice of such termination. B. This Agreement shall also terminate: a) at the election of the Customer, upon written notice to IMS, if IMS becomes insolvent, if it makes an assignment for the benefit of its creditors, if a petition for relief under the United States Bankruptcy Code is filed by or against it and it is not dismissed within thirty (30) days of being filed, or if a trustee, receiver or other custodian of its assets is appointed; b) at the election of IMS, upon written notice to Customer, if Customer becomes insolvent, if it makes an assignment for the benefit of its creditors, if a petition for relief under the United States Bankruptcy Code is filed by or against it and it is not dismissed within thirty (30) days of being filed, or if a trustee, receiver or other custodian of its assets is appointed (including, but not limited to, any proceeding pursuant to any state or federal action governing insurer insolvency); c) at the election of the Customer, if IMS materially breaches any provision of this Agreement and fails to cure such breach within sixty (60) days after written notice thereof is given to IMS by the Customer; d) at the election of IMS, if Customer materially breaches any provision of this Agreement and fails to cure such breach within sixty (60) days after written notice thereof is given to Customer by IMS (except for Customer's failure to pay any and all fees and expenses due under Article VI of this Agreement, in which case Customer must cure such breach within thirty (30) days after written notice thereof is given to Customer by IMS); e) at the election of IMS, upon written notice to Customer, in the event of a Change of Control of Customer unless (i) Customer has provided IMS not less than sixty (60) days advance written notice of the proposed Change of Control and (ii) IMS has agreed in writing to such Change of Control. The initiation under this Agreement of any dispute resolution procedure shall not prevent a party from terminating this Agreement in accordance with this Article VIII. C. On expiration or termination of this Agreement, IMS shall return to Customer all of Customer's Confidential Information, either in electronic or hard copy form, in IMS' possession and delete any electronic copies thereof related to the Insurance Administration Services provided by IMS during the term of this Agreement; Customer shall do the same and cause Customer's agents and representatives (including, but not limited to, any third party given access to the Confidential Information) to do the same relative to IMS' Confidential Information. Customer shall pay IMS (in accordance with SCHEDULE B then in effect) any and all Service Fees, Claim Administration 6 Fees, Miscellaneous Fees and third party fees due IMS for Insurance Administration Services performed pursuant to this Agreement. If Customer requires assistance in converting Customer's data to a new format, or requires assistance from IMS relative to Customer's transition to an alternative claim administration arrangement, then IMS shall provide such services at the then current rates charged by IMS for the services specified in Section IV of SCHEDULE B. These obligations under this Paragraph (C) shall survive any termination of this Agreement. ARTICLE IX. WARRANTIES AND COVENANTS IMS covenants that IMS will comply in all material respects with the law of the state or states covered by this Agreement and with the rules and regulations of all regulatory authorities having jurisdiction over IMS' activities, and shall, whenever necessary, maintain at its own expense all required licenses to transact business in such states. IMS warrants to Customer that (a) IMS owns or otherwise has the right to use the Proprietary System used to perform the Insurance Administration Services, and the rights to such Proprietary System granted hereunder will not knowingly infringe upon a third party's copyright or patent rights; (b) IMS is duly authorized to transact the business of servicing insurance companies; and (c) the express warranties provided here and elsewhere in this Agreement are IMS' only warranties and no other warranty, express or implied, including any warranty of merchantability, fitness or fitness for a particular purpose, will apply to the provision of Insurance Administration Services under this Agreement. ARTICLE X LIABILITY, LIMIT OF LIABILITY, INDEMNITIES AND REMEDIES A. The parties shall assume the following obligations and liabilities as specified below and subject to the limitations on liability set forth in Article X, (B) below: a) IMS shall indemnify, defend and hold harmless Customer, its officers, directors, employees and controlling persons from any liability, cost, loss, fine, penalty, claim, demand, damage or expense, including reasonable attorney's fees, incurred directly as a result of any act, error or omission by the IMS, or incurred directly as a result of any material breach of IMS' obligations under this Agreement, or the material breach of any representation or warranty made by IMS to Customer pursuant hereto; b) Customer shall indemnify, defend and hold harmless IMS, its officers, directors, employees and controlling persons from any liability, cost, loss, fine, penalty, claim, demand, damage or expense, including reasonable attorney's fees, incurred directly as a result of any act, error or omission by the Customer, or directly as a result of any material breach of Customer's obligations under this Agreement, or the material breach of any representation or warranty made by Customer to IMS pursuant hereto; c) Customer agrees that in the event IMS is in violation of any code, statute or law(s) due to the acts or omissions of Customer, or the servants, employees, representatives, adjusters, or Agents of Customer, then Customer shall assume the responsibility and liability for such acts or omissions and shall indemnify and hold IMS harmless for any such liability; B. Except for: (i) fees and expenses payable to IMS under Article VI of this Agreement; (ii) acts of fraud, or willful misconduct; and (iii) violations of Article VII of this Agreement, each party's maximum liability ("Maximum Liability") to the other party for any cause whatsoever, during any one calendar year shall be limited to direct damages incurred by that party and shall not exceed the amount of compensation paid by the Customer under SCHEDULE B of this Agreement for the six (6) months immediately preceding the breach or cause of liability. Further, IMS shall not be liable for any lost profits, business goodwill, or other consequential, punitive, special or incidental damages incurred by Customer. 7 C. If data is processed in error due directly to an error or defect in the Insurance Administration Services provided by IMS, then upon IMS receiving notice of such error or defect, IMS shall reprocess such data without charge to Customer. D. All parties agree to promptly give the others notice upon being notified or becoming aware of any and all allegations or claims, which could give rise to a claim under this Article. ARTICLE XI. GENERAL AGREEMENTS A. This Agreement and all matters arising hereunder shall be governed by and determined in accordance with the laws of the State of Florida without giving effect to any choice of law provisions. B. The parties shall not be liable or deemed to be in default hereunder for any delay or failure in performance under this Agreement or interruption of the Insurance Administration Services resulting, directly or indirectly, from acts of God (including but not limited to weather catastrophes such as floods, hurricanes, tornadoes, windstorms, ice storms, blizzards and hail storms), civil or military authority, labor disputes, shortages of suitable parts, materials, labor or transportation or any similar cause beyond the reasonable control of the parties. C. Any and all notices, designations, consents, offers, acceptances, or any other communication provided for herein shall be given in writing by hand delivery, by overnight carrier, by registered or certified mail or by facsimile transmission and shall be addressed as follows: As to Customer: Island Insurance Companies, Ltd. 1022 Bethel Street Honolulu, HI 96806-1520 Fax Number: (808) 564-8177 Attention: Harvey Y.F. Lee, Assistant Vice President As to IMS: Insurance Management Solutions, Inc. 801 94th Avenue North St. Petersburg, Florida Fax Number: (727) 803-2076 Attention: David Howard, President Notices sent by hand delivery shall be deemed effective on the date of actual hand delivery. Notices sent by overnight carrier shall be deemed effective on the next Business Day after being placed into the hands of the overnight carrier. Notices sent by registered or certified mail shall be deemed effective on the fifth Business Day after being deposited into the post office. Notices sent by facsimile transmission shall be deemed to be effective on the day when sent if sent prior to 4:30 p.m. (the time being determined by the time zone of the recipient), otherwise they shall be deemed effective on the next Business Day. D. This Agreement, and the exhibits, schedules and appendices attached hereto, contain all of the prior oral and/or previously written agreements, representations, and arrangements between the parties hereto. There are no representations or warranties other than those set forth herein. No change or modification of this Agreement, including the exhibits, schedules and appendices hereto, shall be valid unless the same shall be in writing and signed by all of the parties hereto. All exhibits, schedules, appendices, addendum of any kind, or attachments to this Agreement shall be made a part of this Agreement and shall be subject to all terms and conditions of this Agreement. Articles V (B), VII, and VIII (C) shall survive any termination of this Agreement. 8 E. Words of a gender used in this Agreement shall be held to include any other gender, the words in a singular number held to include the plural, when the sentence so requires. Article headings are intended for purposes of description only and shall not be used for purposes of interpretation of this Agreement. F. Should any part of this Agreement for any reason be declared invalid, such decision shall not effect the validity of any remaining portion, which remaining portion shall remain in full force and effect as if the Agreement had been executed with the invalid portion thereof eliminated. It is, therefore, declared the intention of the parties hereto that each of them will have executed the remaining portion of this Agreement without including therein any such part, parts or portion which may, for any reason, be hereafter declared void. G. If either party should bring a Court action alleging breach of this Agreement or seeking to enforce, rescind, renounce, declare, void or terminate this Agreement or any provisions thereof, the prevailing party shall be entitled to recover all of its legal expenses, including reasonable attorneys' fees and costs (including legal expenses for any appeals taken), and to have the same awarded as part of the judgment in the proceeding in which such legal expenses and attorneys' fees were incurred. H. Customer shall not assign this Agreement or any of its rights hereunder without the prior written consent of IMS. I. The parties agree not to disclose the terms and conditions of this Agreement to any third party, except (i) as required in the normal conduct of Customer's business, or (ii) as required by law or regulation including, without limitation, any Federal securities law, or regulation. ARTICLE XII. DISPUTE RESOLUTION PROCEDURES A. The parties will attempt in good faith to promptly resolve any material dispute regarding this Agreement by negotiations between senior management ("Senior Management") of the parties. Senior Management of each party will meet within ten (10) calendar days of notice ("Notice of Dispute") by a party of the existence of a material dispute, at a mutually agreed time and place, to resolve the material dispute. Senior Management, who shall have the authority to settle the dispute, shall prepare and exchange memoranda stating the issues in the material dispute and their positions. If the material dispute is not resolved to the mutual satisfaction of the parties within seven (7) calendar days of the meeting of Senior Management, then the parties may attempt to resolve the controversy using mediation. B. If the matter has not been resolved pursuant to the aforesaid mediation procedure within thirty (30) calendar days of the issuance of a party of a Notice of Dispute, or if either party will not participate in mediation, then either party may initiate arbitration upon fifteen (15) calendar days written notice to the other party. Notwithstanding the foregoing, all deadlines specified above may be extended upon mutual written agreement of the parties. C. Except for the right of either party to apply to a court of competent jurisdiction for review of the award of arbitration, for a temporary restraining order, preliminary injunction or other equitable relief to preserve the status quo, or disputes relating to breach of the confidentiality, non-disclosure or trade secret provisions of this Agreement, all claims, disputes, controversies and other matters relating to breach of this Agreement, and which cannot be resolved by the parties shall be settled by arbitration in accordance with this Agreement. 9 D. Notice requesting arbitration ("Arbitration Notice"), or any other notice made in connection therewith, shall be made in writing by one party and sent by certified mail, return receipt requested, to the other party. The Arbitration Notice shall state in particular all issues to be resolved in the view of the complaining party, shall appoint the arbitrator selected by the complaining party and shall set a tentative date for the arbitration hearing, which date shall be no sooner than forty-five (45) calendar days and no later than ninety (90) calendar days from the date that the Arbitration Notice is mailed. Within twenty (20) calendar days of receipt of the complaining party's Arbitration Notice, the respondent shall notify the complaining party of the location for conducting arbitration and the name of its appointed arbitrator. When the two arbitrators have been appointed, they shall agree on a third independent arbitrator and shall appoint such person by written notice to the parties signed by both arbitrators within thirty (30) calendar days from the date of the appointment of the second arbitrator. If the two arbitrators fail to agree upon the appointment of an independent arbitrator at the end of thirty (30) calendar days following the appointment of the second arbitrator, then the independent arbitrator shall be appointed by the American Arbitration Association ("AAA"), or its successor, in accordance with its then prevailing commercial arbitration rules then in effect. The three (3) arbitrators shall constitute the arbitration board ("Board"). E. The members of the Board shall be active or retired (i) lawyers or professionals familiar with insurance and/or (ii) active or former officers or management employees of insurance and/or data processing firms and/or software development companies. The person selected by the two respective arbitrators appointed by the parties shall be the umpire or chief arbitrator and must be a licensed attorney. F. Arbitration shall be conducted in accordance with the Commercial Rules of the American Arbitration Association ("AAA") then in effect except as modified herein. G. The parties agree that all then current employees of each with material relevant information will be voluntarily produced, at the employer's expense, for all proper discovery and arbitration hearings. H. The cost of the arbitration relative to the arbitrators and the AAA ("Costs") shall be borne equally pending the arbitrators' award. Each party shall bear its own expenses for attorneys' fees. The prevailing party in any arbitration proceeding hereunder shall be entitled, in addition to such other relief as may be granted, to recover the portion of the Costs incurred by that party in connection with arbitration under the Agreement prior to the award. I. The parties agree that the Board shall be required to render its decision in writing within thirty (30) calendar days of the conclusion of the arbitration proceedings, unless such time shall be extended by mutual written agreement of the parties. J. With respect to any matter brought before the Board, the Board shall make a decision having regard to the intentions of the parties, the terms of this Agreement, and custom and usage of the insurance and data processing industry. Such decisions shall be in writing and shall state the findings of fact and conclusions of law upon which the decision is based, provided that such decision may not (i) award consequential, punitive, special, incidental or exemplary damages, or (ii) include a suspension of this Agreement or any provisions hereof. The decision shall be based exclusively upon the evidence presented by the parties at a hearing in which evidence shall be allowed. Said decisions may be reviewable and vacated, modified or corrected, in whole or in part, by appropriate courts of competent jurisdiction for clear abuses of discretion or errors at law by the Board. If the decision is not vacated, modified, or corrected in whole or in part upon an appeal, such decision shall be final and binding upon all parties to the proceeding and may be entered by either party in any court having competent jurisdiction. 10 IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Agreement to be effective as of the 1st day of March, 2002. "IMS" INSURANCE MANAGEMENT SOLUTIONS, INC. By: /s/ D.M. Howard ----------------------------------- As its: President/CEO ------------------------------- Date: 04/10/02 --------------------------------- "CUSTOMER" ISLAND INSURANCE COMPANIES, LTD. By: /s/ Raymond M. (unreadable) ----------------------------------- As its: Vice President ------------------------------- Date: 03/22/02 --------------------------------- 11 SCHEDULES: SCHEDULE "A" - AUTHORIZED STATES AND INSURANCE PROGRAM SCHEDULE "B" - FEE SCHEDULE EXHIBITS: EXHIBIT 1 - WYO FLOOD INSURANCE SERVICES 12 SCHEDULE A AUTHORIZED STATES AND INSURANCE PROGRAM IMS shall provide Insurance Administration Services as described in EXHIBIT I for the following authorized line(s) of business ("Authorized Line of Business") in the following authorized state(s) ("Authorized States"): 1. AUTHORIZED LINE OF BUSINESS: WYO Flood Insurance 2. AUTHORIZED STATES: The States of Hawaii and such other states as may be mutually agreed upon in writing by Customer and IMS. 13 SCHEDULE B FEE SCHEDULE * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 24b-2. 14 EXHIBIT I INSURANCE ADMINISTRATION SERVICES (WYO FLOOD) WHEREAS, The Federal Emergency Management Agency ("FEMA") and the Federal Insurance Administration ("FIA") administer the National Flood Insurance Program ("NFIP") and Customer is an insurance company duly licensed to write flood insurance in the state or states to which this Agreement pertains and is approved by FIA to act as a Write Your Own Company ("WYO Company") under the Write Your Own Flood Insurance Program ("WYO Flood Program"), a program offered under the NFIP; and WHEREAS, Customer wishes to engage the services of IMS to administer certain of the Customer's obligations as a WYO Company in the state(s) ("Authorized States") set forth in SCHEDULE A. 1) DEFINITIONS. Capitalized terms not otherwise defined in the Agreement or in this Exhibit shall be construed as otherwise generally understood in the insurance and data processing industry. 2) POLICY ADMINISTRATION. IMS shall administer Customer's WYO Flood Program policies ("WYO Policies") performing the services listed hereunder in accordance with the NFIP, as amended, and all implementing regulations as well as Customer's Write Your-Own Arrangement ("Arrangement") with FEMA. The same standards by which Customer is bound shall be those by which IMS is bound to Customer. a) Underwriting. - Review WYO Policy application for completeness/contact Agent as applicable; - Create WYO Policy file; - Underwriting based on NFIP guidelines. b) Data Entry. (subject to the 120 Day Internet Access Milestones specified in Schedule B) - New WYO Policy business; - WYO Policy changes; - Mortgagee changes; - WYO Flood insurance Agent changes; - Endorsements; - Cancellations. c) WYO Policy Issuance. - WYO Policy for new business, renewals and endorsements where declaration page issuance is required; - WYO Policy Renewal processing; - WYO Policy automated rating; - WYO Policy print declarations and related WYO Policy forms. d) Billing & Collection. - Print invoices, reminders, cancellation notification, return WYO Policy premium disbursements; - Mortgage activity processing; - EFT processing; - Process cancellations for non-payment. e) Customer Service. - Provide a dedicated customer service support call center; - Respond to Customer's WYO Policyholder and WYO flood insurance sales Agent telephone inquires; 16 - Process requests for WYO Policy changes; - Respond to correspondence related to WYO Policy and WYO Policy claim administration services; - Track and respond to complaints related to WYO Policy and/or WYO Policy claim administration services; IMS customer service hours of operation 8:00 a.m. to 8:00 p.m. Eastern Standard Time ("EST"). f) Bureau Reporting. - Process and balance WYO Policy premium and WYO Policy loss data; - Edit and correct invalid data; - Prepare and mail Bureau transmittals; - To the best of IMS knowledge, provide on-going regulatory changes; - Maintain WYO Policy history files. g) Accounting Administration/Premium. - Posting, balancing, and control of WYO Policy premium receivable; - Accounting and payment of Customer's WYO flood insurance Agents WYO Policy commissions; - Issuance, control and accounting for disbursements for WYO Policy premium refunds, WYO Policy commissions. h) Financial Accounting. - Issuance, control and accounting for disbursements for general expenses; - Day-to-day management of short term cash; - Provide reasonable and customary financial management reports. i) Treasury. - Receive and post WYO Policy payments; - Issuance, control and accounting for disbursements of WYO Policy premium related expenses; - Bank reconciliation of WYO Policy premium disbursements; - OCR WYO Policy payment processing; - Mortgagee billing. j) Agency Administration. - Agent of record assignment and control; - 1099 reporting; - Maintain WYO flood insurance Agent files. k) Print & Distribution Services. - Automated document library; - Electronic document assembly; - Electronic document archival/retrieval; - Automated finishing/insertion facility; - Mail pre-sort facility; - Mailing WYO Policy, WYO Policy billings and WYO Policy renewals (including postage and supplies); - Document Imaging. l) System Administration. - Availability of Proprietary System to Customer and Customer's WYO Policy claim vendor; - Process daily, weekly, monthly, and annual cycles; - Internet processing capabilities subject to Internet use limitations specified in Schedule B. 17 3) CASH MANAGEMENT. a) Banking Arrangement. IMS and Customer shall establish a banking arrangement that complies with the Arrangement and other WYO Flood program requirements, and which will provide for the establishment of an NFIP restricted account ("Restricted Account") with Customer as custodian, and a FEMA letter of credit ("Letter of Credit"), with additional accounts as needed to facilitate WYO Flood Program operations, all in conformity with FEMA/FIA guidelines. Customer shall grant specific IMS' employees check-signing authority on any Restricted Account and the authority to initiate appropriate drawdowns against Customer's Letter of Credit, in order for IMS to act on Customer's behalf in making disbursements for Customer liabilities established by the Arrangement, the WYO Flood Program, and this Agreement. All such authorizations shall be in writing and may be revoked, amended or modified at any time by Customer upon thirty (30) days advanced written notice to IMS. Notwithstanding the foregoing, IMS shall not draw down on Letter of Credit for an amount that exceeds $50,000.00 without prior approval from the Chief Financial Officer of Customer, which approval shall not be unreasonably withheld and shall be given within 24 hours of the request being made by IMS. b) Premium Remittance -IMS shall establish procedures, as determined by FIA, for a timely deposit and remittance of funds to the U.S. Treasury via authorized automatic clearinghouse mechanism. Gross premium collected by IMS, for WYO Flood program business written under this Agreement, shall be remitted to the FIA by IMS net of the established NFIP Expense Allowance. ("Allowance") , which Allowance expenses to be paid under the Allowance include Carrier's operating and administrative expenses. c) Financial Data - IMS shall maintain supporting documentation for all bank accounts over which it has authority. On a monthly basis, IMS shall prepare financial data, reflecting all debits and credits with respect to WYO Flood Program business administered under this Agreement, including agents' commissions and IMS' Service Fees paid. d) WYO Flood Program Reimbursements - Any WYO Flood Program reimbursements made pursuant to the Arrangement, including, but not limited to, those for the unallocated loss adjustments expenses, the allocated loss adjustments, and for approved special allocated loss adjustments expenses, shall be payable to IMS upon receipt by Customer. e) Marketing Goals - Customer shall maintain responsibility for any risk, or shall be entitled to any reward, that may be associated with achieving or failing to achieve any marketing goal set by the FIA or FEMA. 4) CLAIM ADMINISTRATION. IMS shall provide Claims administration in accordance with the Arrangement, the Financial Control Plan and the Agreement, which claim administration processing services are outlined below. Any litigation costs not reimbursed by FEMA would be the responsibility of the Customer. IMS may also rely on the information and direction contained in the WYO Flood Program Claims Manual, the FEMA Adjuster Manual, the Flood Insurance Agent's Manual, the Standard Flood Insurance Policy, the WYO Operational Overview, and/or other WYO Flood Program instructional material. a) Claim Management Facilitation. - Twenty-four (24) hour reporting capability, first notice of loss, coverage for verification and WYO Policy claim; - Investigation of WYO Policy claim; - Fast track unit; - Reinspection and audit; - Claims handling standards/best practices; - Claim check issuance; - Management reports; 18 - WYO Policyholder satisfaction surveys; - Special Investigation Unit ("SIU") services; - Salvage & subrogation claim processing; - Litigation support. b) Catastrophe Preparation and Response. - Preparedness by developing media reference guides and notices, adjuster workshops, and training manuals; provide storm tracking; reserve equipment and supplies; establish procedures; - Response in case of a catastrophic event by establishing and staffing satellite service centers; automating the distribution of claims to adjusters; internal examinations/external reinspections; - Recovery by providing management reports, audit/reinspection program, SIU and oversight operations. 5) ADJUSTING FIRM. IMS' Colonial Catastrophe Claims Service will be the authorized adjusting firm ("Adjusting Firm") for all claims adjusting work on behalf of Customer. However, Customer may designate a different Adjusting Firm with thirty (30) days written notice to IMS. 6) DISASTER RECOVERY PLAN. IMS shall perform its' full range Disaster Recovery Plan on an annual basis. Customer has the right to observe the Disaster Recovery Plan at its own expense, provided that it has requested in writing to participate within thirty (30) days of planned execution. 7) STATISTICAL REPORTING. IMS shall maintain Customer's data within IMS' policy, claims and general ledger systems. IMS shall prepare and submit to FIA, monthly financial and statistical reports, reconciliation reports, certifications, and statistical tapes on Customer's behalf, in accordance with WYO Flood Program Accounting Procedures and the Transaction Record Reporting and Processing Plan ("TRRP Plan"). 8) SPECIAL SERVICES. a) Audit - At Customer's expense and at IMS' premises, IMS shall conduct a biennial audit of any and all WYO Flood Program business written by Customer pursuant to this Agreement. IMS shall select an independent auditor and IMS shall present the expense estimate for the biennial audit to Customer. Within fifteen (15) days of receiving the estimate, Customer shall have the option of selecting their own independent auditor to conduct the audit or proceed with the independent auditor selected by IMS. b) Zone Determination Services - IMS shall provide flood zone determinations to the Customer (or Customer's agents) to assist in writing a WYO Policy to be placed with the Customer and administered by IMS. c) Rating Software - From the Effective Date of this Agreement up to the one (1) year anniversary of the date that IMS provides internet access (which shall include deployment of the internet access into live production) to any of Customer's insurance sales agents for the Authorized Line of Business within the Authorized States, IMS will make available to Customer and/or Customer's insurance sales agents, rating software (which by definition is a Proprietary System) for the ability to provide quotations, prepare new business applications, endorsements and cancellation of the WYO Policy. d) Training - Upon Customer's request and excluding travel expenses, IMS will provide four (4) training sessions per calendar year to Customer and/or Customer's Agents. Customer will provide the training facility. Additional requests for training will be charged at One Hundred and Twenty Five Dollars ($125) per day plus reasonable per diem and travel expenses incurred. 19 e) Marketing Material. IMS will make available to Customer its marketing or promotional materials, which IMS may customize and produce for Customer at Customer's expense. f) Agency Rollover Services. Within a reasonable time of Customer's request, IMS will provide rollover services to those Customer agents that wish to roll over 500 or more WYO Policies in their book of business to Customer. In the event that there are several Agents within a concentrated geographical area wishing to roll over 500 or more WYO Policies to Customer, IMS will provide rollover service to all Agents within that area at the same time. Due to the potential size of the project, IMS will need Customer to provide a full listing of Agents, location and size of business. IMS will create a schedule to perform this service. g) Additional Fees & Services. Additional services not specified in this Agreement may be provided by as mutually agreed upon in writing between the Customer and IMS in writing. 20 -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.1

                                                                    EXHIBIT 10.1
                  INSURANCE ADMINISTRATION SERVICES AGREEMENT


         THIS INSURANCE ADMINISTRATION SERVICES AGREEMENT ("Agreement") is
effective as of the 1st day of March, 2002 ("Effective Date"), by and between
INSURANCE MANAGEMENT SOLUTIONS, INC. ("IMS"), a corporation organized and
existing under the laws of the State of Florida with its principal place of
business located at 360 Central Avenue, St. Petersburg, Florida 33701, and
ISLAND INSURANCE COMPANIES, LTD. (herein referred to as "Customer") having
their principal place of business at 1022 Bethel Street, Honolulu, HI
96806-1520.

         WHEREAS, Customer wishes to engage the services of IMS to administer
certain of the Customer's obligations for the lines of business ("Authorized
Lines of Business") in the state(s) ("Authorized States") set forth in SCHEDULE
A;

         WHEREAS, IMS wishes to provide such insurance administration services
as set forth herein.

         NOW THEREFORE, IN CONSIDERATION OF the mutual covenants and agreements
hereinafter set forth, the parties hereto do covenant and agree as follows:

ARTICLE I.        DEFINITIONS

Unless the context clearly requires otherwise, the following terms when used in
this Agreement shall have the meanings set forth below:

A.       "Affiliate" is any company which controls, is controlled by, or under
         common control with, a party, and "control" is defined as owning 50%
         or more of such entity.

B.       "Authorized Lines of Business" means the lines of business expressly
         set forth in SCHEDULE A of this Agreement.

C.       "Authorized States" means the states expressly set forth in SCHEDULE A
         of this Agreement.

D.       "Business Day" means any day other than a Saturday, Sunday or other
         day which is a bank holiday for Florida State banks or an IMS paid
         holiday (New Year's Day, Memorial Day, Independence Day, Thanksgiving
         Day, day after Thanksgiving, Christmas Eve (after 12 P.M. Eastern
         Standard Time) and Christmas Day).

E.       "Change of Control" means (a) a sale, transfer or pledge, or the
         issuance of fifty (50%) percent or more of the voting stock of a party
         hereto to any third party that is not an Affiliate of such party; or
         (b) a sale, transfer or pledge of a substantial portion of the
         material assets of a party, or any merger or consolidation of a party
         with another entity or entities.

F.       "Insurance Administration Services" means the services set forth in
         this Agreement and EXHIBIT I hereto in the Authorized States in
         accordance with the terms of the Agreement, and all applicable laws
         and regulations.

G.       "Insurance Program" means the Customer's insurance products within the
         Authorized Line(s) of Business to be offered within the Authorized
         States.

H.       "Technical Information" means and shall include (without limitation)
         computer programs, databases, designs, algorithms, processes,
         structures, data formats, business methods, know how, and research and
         development information.


                                       1



ARTICLE II.       TERM

The term of the Agreement shall commence on the Effective Date and shall have a
minimum operating term ("Minimum Operating Term") of Thirty-six (36) full
calendar months following the Effective Date. However, the term of this
Agreement shall automatically extend for an additional operating term
("Extended Operating Term") of twelve (12) calendar months at the end of the
Minimum Operating Term, or at the end of any Extended Operating Term, unless
terminated earlier pursuant to the termination provisions within Article VIII.

ARTICLE III.      RESPONSIBILITIES OF IMS

A.       IMS shall dedicate the human, equipment and computer resources
         commercially reasonably required to provide Customer with the
         Insurance Administration Services, during the term of this Agreement,
         for the Insurance Program within Authorized States specified in
         SCHEDULE A.

B.       IMS shall designate an employee ("Account Manager") of sufficient
         status and authority to act as liaison with Customer to facilitate
         IMS' performance of the Insurance Administration Services under this
         Agreement. The Account Manager shall provide written and/or oral
         communication of the status of administration of the Insurance
         Administration Services as agreed to by and between Account Manager
         and Customer.

C.       IMS shall, based on accepted industry standards and in accordance with
         generally accepted insurance and accounting practices as designated by
         the applicable regulatory bodies and the National Flood Insurance
         Program ("NFIP"), maintain complete and orderly records and policy
         and/or claims files as may be required as a result of IMS performing
         the Insurance Administration Services on behalf of Customer. These
         files shall be retained by IMS, in a format or media defined by IMS
         which shall be in compliance with applicable laws and regulations, for
         a minimum of four (4) years or the period specified by the applicable
         statutes regulating the preservation of records. Customer may request
         that its records be returned to it at its expense at the expiration of
         the minimum four (4) year period; provided, however, IMS shall be
         entitled to retain copies thereof.

ARTICLE IV.       RESPONSIBILITIES OF CUSTOMER

A.       During the term of this Agreement, Customer shall provide to IMS, in a
         timely manner, any and all data, information and other items
         reasonably required to enable IMS to perform the Insurance
         Administration Services specified in EXHIBIT I of this Agreement.
         Customer represents and warrants to IMS that it owns and possesses all
         property rights to its corporate and subsidiary logos and hereby
         grants and warrants to IMS a limited, non-transferable,
         non-assignable, license to use Customer's corporate and subsidiary
         logos (and any other copyrighted or trademarked property of Customer
         that may be provided to IMS under this Agreement) while performing the
         Insurance Administration Services. Customer acknowledges and agrees
         that delays in delivery of required documentation, data and/or
         information by Customer will result in a similar delay in fulfilling
         Insurance Administration Services, and that such a delay in performing
         the Insurance Administration Services shall not be deemed a breach of
         the Agreement.

B.       CUSTOMER ACKNOWLEDGES AND AGREES THAT IMS ASSUMES NO INSURANCE RISK
         FOR THE BUSINESS PROCESSED UNDER THIS AGREEMENT.

C.       Customer shall designate manager level employee(s) of sufficient
         status and binding decision making authority to act as liaisons with
         IMS and to facilitate Customer's role as IMS performs the Insurance
         Administration Services specified in EXHIBIT I of this Agreement.


                                       2



ARTICLE V.        CUSTOMER ACCESS TO RECORDS / CONFIDENTIAL INFORMATION

A.       At Customer's expense, Customer will be permitted reasonable access
         (as set forth herein) to all records and information maintained by IMS
         on behalf of Customer (excluding, specifically, proprietary Technical
         Information) reasonably necessary to: (i) audit the completeness and
         accuracy of the Insurance Administration Services provided under this
         Agreement and reports produced for Customer pursuant to this
         Agreement; (ii) verify the accuracy and validity of all billings and
         charges to Customer under this Agreement; and (iii) verify IMS'
         overall compliance with the material terms of this Agreement and
         applicable laws and regulations.

         Access to IMS' records, for the foregoing purposes, will be provided
         during normal business hours upon ten (10) Business Days prior written
         notice to IMS by Customer for so long as IMS is required to maintain
         such records under this Agreement; except in the case of regulatory
         inquiry, in which case access will be granted on any Business Day with
         twenty four (24) hours of prior written notice to IMS.

         At Customer's expense, Customer will be permitted to copy those IMS
         records subject to audit in accordance with this Article. Upon
         reasonable written request by Customer, and at Customer's expense, IMS
         will promptly mail or fax to Customer supporting documentation
         concerning any specific transaction processed by IMS under the terms
         of this Agreement.

         IMS will provide reasonably adequate workspace for Customer to conduct
         audits in accordance with this Article. Further, Customer or its
         representatives shall take precautions, when conducting audits under
         this Article, not to disrupt IMS' ongoing business activities.

B.       The recipient ("Recipient") of confidential data and/or information
         pursuant to this Agreement shall maintain the confidentiality of all
         data and/or information which is the property of the other party
         ("Disclosing Party"), whether originally supplied by the Disclosing
         Party, or whether generated by the Disclosing Party in the course of
         performing or facilitating the Insurance Administration Services under
         this Agreement and which is directly accessible to the Recipient or is
         in the possession of Recipient in the implementation, facilitation
         and/or performance of the Insurance Administration Services. During
         any term of this Agreement, Recipient may acquire, know, or have
         within its possession, information (including, but not limited to,
         Technical Information) and/or data of the Disclosing Party concerning
         commercial and trade affairs, rating and underwriting rules and
         guidelines, the identity of clients, the identity of insureds and
         beneficiaries, claims, benefits, rates and Agents, financial
         information, the Proprietary System (as defined at Article VII (A)
         herein), the Third Party Proprietary System (as defined in Article VII
         (B) herein) and business practices of the Disclosing Party
         ("Confidential Information"). Confidential Information which is
         provided in tangible form must be clearly marked "Confidential",
         "Proprietary" or the substantial equivalent thereof, or if orally
         disclosed must be clearly identified as "Confidential" or
         "Proprietary" at the time of the disclosure (except for IMS' Technical
         Information, the identity of Customer's clients, the identity of
         Customer's insureds and beneficiaries, claims, benefits, and Agents,
         which will be deemed "Confidential Information" under this Agreement,
         regardless of whether marked as such). Except as required by law,
         Recipient shall keep Disclosing Party's Confidential Information
         confidential and shall only use the Confidential Information in
         performing or facilitating the Insurance Administration Services under
         this Agreement. Recipient shall not disclose the Confidential
         Information without Disclosing Party's prior written permission except
         to Recipient's employees who require the information to perform or
         facilitate the Insurance Administration Services under this Agreement.
         Each party hereto, as a Recipient, warrants to the other that
         appropriate measures shall be taken by Recipient to safeguard the
         confidentiality of the Confidential Information, with a level of care
         at least equal to the level of care with which Recipient safeguards
         its own confidential or proprietary information. All employees, agents
         or representatives of Recipient and any third parties who are given
         access to the Confidential Information shall be under written
         obligation to Recipient to maintain such information in confidence.


                                       3



         IMS and Customer agree that any Recipient shall have no obligation
         with respect to any information or data which:

         a)       is already rightfully known to Recipient through means other
                  than Disclosing Party; or
         b)       is or becomes publicly known through no wrongful act of
                  Recipient; or
         c)       is rightfully obtained by Recipient from a third-party
                  without similar restriction and without breach of this
                  Agreement; or
         d)       is independently developed by Recipient without breach of
                  this Agreement.

         Disclosing Party shall retain title to all Confidential Information
         (whether tangible or intangible) delivered thereby pursuant to this
         Agreement. Recipient shall not copy, reproduce or use any Confidential
         Information without written authorization of Disclosing Party, except
         as may be reasonably required to accomplish the Insurance
         Administration Services under this Agreement. Upon written request of
         Disclosing Party Recipient shall promptly return, or destroy with
         specific written permission of the Disclosing Party, all tangible
         copies containing Confidential Information, except those copies kept
         in the regular course of business, or that are required to be kept
         pursuant to any state or federal administrative, regulatory or
         statutory mandates. The obligations under this Paragraph (B) shall
         survive the termination of this Agreement. Notwithstanding the
         foregoing, this Article shall not prevent the disclosure of
         Confidential Information to the extent legally required by any court
         or regulatory entity having jurisdiction over the parties.

         For purposes of Article V (B), Recipient and Disclosing Party shall
         include within their meaning all respective subsidiaries, agents, or
         Affiliates of the Recipient and Disclosing Party.

ARTICLE VI.       EXPENSES AND FEES

A.       In consideration of IMS providing Insurance Administration Services
         described herein, Customer shall pay IMS, as applicable, miscellaneous
         fee ("Miscellaneous Fee"), servicing fee ("Service Fee") and claim
         administration fee ("Claim Administration Fee") for each Authorized
         Line of Business, as specified in SCHEDULE B. The performance by IMS
         of any service or function that is outside of the scope of the
         Insurance Administration Services shall require the payment by
         Customer of additional consideration (in addition to the Service Fees)
         as mutually agreed between IMS and Customer.

B.       Except for the Service Fee, which is based upon a percentage of the
         adjusted net written premium and the Claim Administration Fee, the
         Miscellaneous Fees specified in Section IV of SCHEDULE B hereto may be
         increased (up to a maximum of five percent (5%) per year from the
         prior year) effective as of each anniversary of the Effective Date by
         the percentage increase in the United States Consumer Price Index for
         all Urban Users (CPI-U) as reported by the United States Bureau of
         Labor Statistics for the most recently completed calendar year that
         IMS is performing services on behalf of the Customer. In the event
         that a vendor supplying a service or product to IMS, which service or
         product is used by IMS to provide the Insurance Administration
         Services to Customer, increases its rates charged to IMS, IMS may
         increase the Service Fees, Claim Administration Fees, and
         Miscellaneous Fees set forth in Schedule B to incorporate such
         increased costs and will provide Customer with documentation verifying
         the increase.

C.       Customer shall reimburse IMS for travel, living and out-of-pocket
         expenses incurred by IMS personnel in the performance of training
         relative to the Insurance Administration Services to be performed
         under this Agreement.

D.       Customer agrees to pay any and all tariffs and taxes that are now or
         may become applicable to the Insurance Administration Services
         rendered hereunder, including, but not limited to, sales, use, and
         personal property taxes, or any other form of tax based on Insurance
         Administration Services performed, equipment used by IMS solely for
         Customer, and the communicating or storage of data used by IMS solely
         for Customer, but excluding taxes on the net income of IMS.


                                       4



E.       Subject to the terms of this Agreement, all fees and expenses to be
         payable by Customer to IMS or any third party under this Agreement
         shall be paid within thirty (30) calendar days after Customer's
         receipt of IMS' monthly statement for all services provided to
         Customer under this Agreement. IMS will calculate the fees owed to IMS
         by Customer and will send a statement to Customer within two (2) weeks
         of the last day of the month for which fees are owed. Customer's
         failure to pay all fees and expenses when due shall be considered a
         material breach of this Agreement. Further, if Customer fails to pay
         any fees and expenses due IMS as herein provided, Customer shall pay
         to IMS in addition to all sums otherwise due, interest which shall
         accrue at 1.5% per month on such delinquency from the date the fees or
         expenses became past due. Failure or forbearance to exercise any of
         its rights and privileges hereunder shall not constitute the
         forfeiture or waiver of such rights and privileges on the part of IMS.

F.       Prior to renewal of this Agreement for any Extended Operating Term,
         IMS may modify SCHEDULE B in its discretion to reflect any increase in
         the cost of providing the Insurance Administration Services
         (including, but not limited to statutory, regulatory, or judicial
         changes that require IMS to incur additional cost or expenses in
         performing the Insurance Administration Services) or to remain
         competitive with the rates currently being charged within the industry
         for like services. Any modification of SCHEDULE B shall be proposed to
         Customer at least twelve (12) months prior to the expiration of any
         term of this Agreement.

ARTICLE VII.      LICENSE, TRADE SECRET AND PROPRIETARY RIGHTS

A.       IMS from time to time may use its own proprietary computer software
         products and account servicing methods and procedures ("Proprietary
         System"), which are identified, described or referenced in EXHIBIT I
         hereto, in the performance of the Insurance Administration Services.
         During any term of this Agreement, IMS grants a personal,
         non-transferable, non-assignable, non-exclusive license to Customer to
         use portions of the Proprietary System as necessary for IMS to perform
         the Insurance Administration Services under this Agreement. Further,
         no provision within this Agreement shall be interpreted as prohibiting
         IMS from selling or licensing its Proprietary System to any other
         customer or prospective customer of IMS.

B.       IMS, from time to time, may also use proprietary third party computer
         software products and third party account servicing methods and
         procedures ("Third Party Proprietary System"), which are identified,
         described or referenced in EXHIBIT I hereto in the performance of the
         Insurance Administration Services. No provision within this Agreement
         shall be interpreted as prohibiting IMS or the Third Party Proprietary
         System vendor from selling or licensing the Third Party Proprietary
         System, or modifications and enhancements to the Third Party
         Proprietary System, to any other customer or prospective customer of
         IMS, so long as Customer's Confidential Information is not disclosed.

C.       Other than the limited rights to use the Proprietary System and the
         Third Party Proprietary System, as provided in Article VII (A) and (B)
         above, this Agreement grants to Customer no right to possess or
         reproduce, download, reverse engineer, or obtain any other interest
         in, the Proprietary System or the Third Party Proprietary System, or
         their specifications in any tangible or intangible medium. Customer
         may not mortgage, hypothecate, sell, assign, pledge, lease, transfer,
         license, or sublicense the Proprietary System or the Third Party
         Proprietary System, nor allow any person, firm, entity or corporation
         to transmit, copy, reproduce, download, reverse engineer, or obtain
         any other interest in the Proprietary System or the Third Party
         Proprietary System, or their specifications in whole or in part. In
         the event Customer shall come into possession of any source or object
         code associated with the Proprietary System or the Third Party
         Proprietary System, Customer shall immediately notify IMS and return
         the source or object code associated with Proprietary System or the
         Third Party Proprietary System in its possession and all copies of any
         kind thereof to IMS.


                                       5



D.       Customer covenants and agrees not to disclose or otherwise make the
         Proprietary System or the Third Party Proprietary System available to
         any person other than employees, insurance sales agents ("Agents") or
         representatives of the Customer required to have access or use of the
         Proprietary System or the Third Party Proprietary System to facilitate
         IMS' or Customer's performance under this Agreement. Customer agrees
         to obligate each such employee, Agents, or representative to a level
         of care sufficient to protect the Proprietary System and the Third
         Party Proprietary System from unauthorized disclosure.

E.       The obligations of Customer under this Article shall survive
         termination of this Agreement, regardless of the reason for
         termination.

ARTICLE VIII.     TERMINATION

A.       Either party may terminate this Agreement at the end of the Minimum
         Operating Term or at the end of any Extended Operating Term, provided
         the terminating party gives the other party at least three (3) months
         prior written notice of such termination.

B.       This Agreement shall also terminate:

         a)       at the election of the Customer, upon written notice to IMS,
         if IMS becomes insolvent, if it makes an assignment for the benefit of
         its creditors, if a petition for relief under the United States
         Bankruptcy Code is filed by or against it and it is not dismissed
         within thirty (30) days of being filed, or if a trustee, receiver or
         other custodian of its assets is appointed;

         b)       at the election of IMS, upon written notice to Customer, if
         Customer becomes insolvent, if it makes an assignment for the benefit
         of its creditors, if a petition for relief under the United States
         Bankruptcy Code is filed by or against it and it is not dismissed
         within thirty (30) days of being filed, or if a trustee, receiver or
         other custodian of its assets is appointed (including, but not limited
         to, any proceeding pursuant to any state or federal action governing
         insurer insolvency);

         c)       at the election of the Customer, if IMS materially breaches
         any provision of this Agreement and fails to cure such breach within
         sixty (60) days after written notice thereof is given to IMS by the
         Customer;

         d)       at the election of IMS, if Customer materially breaches any
         provision of this Agreement and fails to cure such breach within sixty
         (60) days after written notice thereof is given to Customer by IMS
         (except for Customer's failure to pay any and all fees and expenses
         due under Article VI of this Agreement, in which case Customer must
         cure such breach within thirty (30) days after written notice thereof
         is given to Customer by IMS);

         e)       at the election of IMS, upon written notice to Customer, in
         the event of a Change of Control of Customer unless (i) Customer has
         provided IMS not less than sixty (60) days advance written notice of
         the proposed Change of Control and (ii) IMS has agreed in writing to
         such Change of Control.

The initiation under this Agreement of any dispute resolution procedure shall
not prevent a party from terminating this Agreement in accordance with this
Article VIII.

C.       On expiration or termination of this Agreement, IMS shall return to
         Customer all of Customer's Confidential Information, either in
         electronic or hard copy form, in IMS' possession and delete any
         electronic copies thereof related to the Insurance Administration
         Services provided by IMS during the term of this Agreement; Customer
         shall do the same and cause Customer's agents and representatives
         (including, but not limited to, any third party given access to the
         Confidential Information) to do the same relative to IMS' Confidential
         Information. Customer shall pay IMS (in accordance with SCHEDULE B
         then in effect) any and all Service Fees, Claim Administration


                                       6



         Fees, Miscellaneous Fees and third party fees due IMS for Insurance
         Administration Services performed pursuant to this Agreement. If
         Customer requires assistance in converting Customer's data to a new
         format, or requires assistance from IMS relative to Customer's
         transition to an alternative claim administration arrangement, then
         IMS shall provide such services at the then current rates charged by
         IMS for the services specified in Section IV of SCHEDULE B. These
         obligations under this Paragraph (C) shall survive any termination of
         this Agreement.

ARTICLE IX.       WARRANTIES AND COVENANTS

IMS covenants that IMS will comply in all material respects with the law of the
state or states covered by this Agreement and with the rules and regulations of
all regulatory authorities having jurisdiction over IMS' activities, and shall,
whenever necessary, maintain at its own expense all required licenses to
transact business in such states. IMS warrants to Customer that (a) IMS owns or
otherwise has the right to use the Proprietary System used to perform the
Insurance Administration Services, and the rights to such Proprietary System
granted hereunder will not knowingly infringe upon a third party's copyright or
patent rights; (b) IMS is duly authorized to transact the business of servicing
insurance companies; and (c) the express warranties provided here and elsewhere
in this Agreement are IMS' only warranties and no other warranty, express or
implied, including any warranty of merchantability, fitness or fitness for a
particular purpose, will apply to the provision of Insurance Administration
Services under this Agreement.

ARTICLE X         LIABILITY, LIMIT OF LIABILITY, INDEMNITIES AND REMEDIES

A.       The parties shall assume the following obligations and liabilities as
         specified below and subject to the limitations on liability set forth
         in Article X, (B) below:

         a)       IMS shall indemnify, defend and hold harmless Customer, its
                  officers, directors, employees and controlling persons from
                  any liability, cost, loss, fine, penalty, claim, demand,
                  damage or expense, including reasonable attorney's fees,
                  incurred directly as a result of any act, error or omission
                  by the IMS, or incurred directly as a result of any material
                  breach of IMS' obligations under this Agreement, or the
                  material breach of any representation or warranty made by IMS
                  to Customer pursuant hereto;

         b)       Customer shall indemnify, defend and hold harmless IMS, its
                  officers, directors, employees and controlling persons from
                  any liability, cost, loss, fine, penalty, claim, demand,
                  damage or expense, including reasonable attorney's fees,
                  incurred directly as a result of any act, error or omission
                  by the Customer, or directly as a result of any material
                  breach of Customer's obligations under this Agreement, or the
                  material breach of any representation or warranty made by
                  Customer to IMS pursuant hereto;

         c)       Customer agrees that in the event IMS is in violation of any
                  code, statute or law(s) due to the acts or omissions of
                  Customer, or the servants, employees, representatives,
                  adjusters, or Agents of Customer, then Customer shall assume
                  the responsibility and liability for such acts or omissions
                  and shall indemnify and hold IMS harmless for any such
                  liability;

B.       Except for: (i) fees and expenses payable to IMS under Article VI of
         this Agreement; (ii) acts of fraud, or willful misconduct; and (iii)
         violations of Article VII of this Agreement, each party's maximum
         liability ("Maximum Liability") to the other party for any cause
         whatsoever, during any one calendar year shall be limited to direct
         damages incurred by that party and shall not exceed the amount of
         compensation paid by the Customer under SCHEDULE B of this Agreement
         for the six (6) months immediately preceding the breach or cause of
         liability. Further, IMS shall not be liable for any lost profits,
         business goodwill, or other consequential, punitive, special or
         incidental damages incurred by Customer.


                                       7



C.       If data is processed in error due directly to an error or defect in
         the Insurance Administration Services provided by IMS, then upon IMS
         receiving notice of such error or defect, IMS shall reprocess such
         data without charge to Customer.

D.       All parties agree to promptly give the others notice upon being
         notified or becoming aware of any and all allegations or claims, which
         could give rise to a claim under this Article.

ARTICLE XI.       GENERAL AGREEMENTS

A.       This Agreement and all matters arising hereunder shall be governed by
         and determined in accordance with the laws of the State of Florida
         without giving effect to any choice of law provisions.

B.       The parties shall not be liable or deemed to be in default hereunder
         for any delay or failure in performance under this Agreement or
         interruption of the Insurance Administration Services resulting,
         directly or indirectly, from acts of God (including but not limited to
         weather catastrophes such as floods, hurricanes, tornadoes,
         windstorms, ice storms, blizzards and hail storms), civil or military
         authority, labor disputes, shortages of suitable parts, materials,
         labor or transportation or any similar cause beyond the reasonable
         control of the parties.

C.       Any and all notices, designations, consents, offers, acceptances, or
         any other communication provided for herein shall be given in writing
         by hand delivery, by overnight carrier, by registered or certified
         mail or by facsimile transmission and shall be addressed as follows:

         As to Customer:            Island Insurance Companies, Ltd.
                                    1022 Bethel Street
                                    Honolulu, HI 96806-1520
                                    Fax Number: (808) 564-8177
                                    Attention: Harvey Y.F. Lee,
                                               Assistant Vice President

         As to IMS:                 Insurance Management Solutions, Inc.
                                    801 94th Avenue North
                                    St. Petersburg, Florida
                                    Fax Number: (727) 803-2076
                                    Attention: David Howard, President

         Notices sent by hand delivery shall be deemed effective on the date of
         actual hand delivery. Notices sent by overnight carrier shall be
         deemed effective on the next Business Day after being placed into the
         hands of the overnight carrier. Notices sent by registered or
         certified mail shall be deemed effective on the fifth Business Day
         after being deposited into the post office. Notices sent by facsimile
         transmission shall be deemed to be effective on the day when sent if
         sent prior to 4:30 p.m. (the time being determined by the time zone of
         the recipient), otherwise they shall be deemed effective on the next
         Business Day.

D.       This Agreement, and the exhibits, schedules and appendices attached
         hereto, contain all of the prior oral and/or previously written
         agreements, representations, and arrangements between the parties
         hereto. There are no representations or warranties other than those
         set forth herein. No change or modification of this Agreement,
         including the exhibits, schedules and appendices hereto, shall be
         valid unless the same shall be in writing and signed by all of the
         parties hereto. All exhibits, schedules, appendices, addendum of any
         kind, or attachments to this Agreement shall be made a part of this
         Agreement and shall be subject to all terms and conditions of this
         Agreement. Articles V (B), VII, and VIII (C) shall survive any
         termination of this Agreement.


                                       8



E.       Words of a gender used in this Agreement shall be held to include any
         other gender, the words in a singular number held to include the
         plural, when the sentence so requires. Article headings are intended
         for purposes of description only and shall not be used for purposes of
         interpretation of this Agreement.

F.       Should any part of this Agreement for any reason be declared invalid,
         such decision shall not effect the validity of any remaining portion,
         which remaining portion shall remain in full force and effect as if
         the Agreement had been executed with the invalid portion thereof
         eliminated. It is, therefore, declared the intention of the parties
         hereto that each of them will have executed the remaining portion of
         this Agreement without including therein any such part, parts or
         portion which may, for any reason, be hereafter declared void.

G.       If either party should bring a Court action alleging breach of this
         Agreement or seeking to enforce, rescind, renounce, declare, void or
         terminate this Agreement or any provisions thereof, the prevailing
         party shall be entitled to recover all of its legal expenses,
         including reasonable attorneys' fees and costs (including legal
         expenses for any appeals taken), and to have the same awarded as part
         of the judgment in the proceeding in which such legal expenses and
         attorneys' fees were incurred.

H.       Customer shall not assign this Agreement or any of its rights
         hereunder without the prior written consent of IMS.

I.       The parties agree not to disclose the terms and conditions of this
         Agreement to any third party, except (i) as required in the normal
         conduct of Customer's business, or (ii) as required by law or
         regulation including, without limitation, any Federal securities law,
         or regulation.

ARTICLE XII.      DISPUTE RESOLUTION PROCEDURES

A.       The parties will attempt in good faith to promptly resolve any
         material dispute regarding this Agreement by negotiations between
         senior management ("Senior Management") of the parties. Senior
         Management of each party will meet within ten (10) calendar days of
         notice ("Notice of Dispute") by a party of the existence of a material
         dispute, at a mutually agreed time and place, to resolve the material
         dispute. Senior Management, who shall have the authority to settle the
         dispute, shall prepare and exchange memoranda stating the issues in
         the material dispute and their positions. If the material dispute is
         not resolved to the mutual satisfaction of the parties within seven
         (7) calendar days of the meeting of Senior Management, then the
         parties may attempt to resolve the controversy using mediation.

B.       If the matter has not been resolved pursuant to the aforesaid
         mediation procedure within thirty (30) calendar days of the issuance
         of a party of a Notice of Dispute, or if either party will not
         participate in mediation, then either party may initiate arbitration
         upon fifteen (15) calendar days written notice to the other party.
         Notwithstanding the foregoing, all deadlines specified above may be
         extended upon mutual written agreement of the parties.

C.       Except for the right of either party to apply to a court of competent
         jurisdiction for review of the award of arbitration, for a temporary
         restraining order, preliminary injunction or other equitable relief to
         preserve the status quo, or disputes relating to breach of the
         confidentiality, non-disclosure or trade secret provisions of this
         Agreement, all claims, disputes, controversies and other matters
         relating to breach of this Agreement, and which cannot be resolved by
         the parties shall be settled by arbitration in accordance with this
         Agreement.


                                       9



D.       Notice requesting arbitration ("Arbitration Notice"), or any other
         notice made in connection therewith, shall be made in writing by one
         party and sent by certified mail, return receipt requested, to the
         other party. The Arbitration Notice shall state in particular all
         issues to be resolved in the view of the complaining party, shall
         appoint the arbitrator selected by the complaining party and shall set
         a tentative date for the arbitration hearing, which date shall be no
         sooner than forty-five (45) calendar days and no later than ninety
         (90) calendar days from the date that the Arbitration Notice is
         mailed. Within twenty (20) calendar days of receipt of the complaining
         party's Arbitration Notice, the respondent shall notify the
         complaining party of the location for conducting arbitration and the
         name of its appointed arbitrator. When the two arbitrators have been
         appointed, they shall agree on a third independent arbitrator and
         shall appoint such person by written notice to the parties signed by
         both arbitrators within thirty (30) calendar days from the date of the
         appointment of the second arbitrator. If the two arbitrators fail to
         agree upon the appointment of an independent arbitrator at the end of
         thirty (30) calendar days following the appointment of the second
         arbitrator, then the independent arbitrator shall be appointed by the
         American Arbitration Association ("AAA"), or its successor, in
         accordance with its then prevailing commercial arbitration rules then
         in effect. The three (3) arbitrators shall constitute the arbitration
         board ("Board").

E.       The members of the Board shall be active or retired (i) lawyers or
         professionals familiar with insurance and/or (ii) active or former
         officers or management employees of insurance and/or data processing
         firms and/or software development companies. The person selected by
         the two respective arbitrators appointed by the parties shall be the
         umpire or chief arbitrator and must be a licensed attorney.

F.       Arbitration shall be conducted in accordance with the Commercial Rules
         of the American Arbitration Association ("AAA") then in effect except
         as modified herein.

G.       The parties agree that all then current employees of each with
         material relevant information will be voluntarily produced, at the
         employer's expense, for all proper discovery and arbitration hearings.

H.       The cost of the arbitration relative to the arbitrators and the AAA
         ("Costs") shall be borne equally pending the arbitrators' award. Each
         party shall bear its own expenses for attorneys' fees. The prevailing
         party in any arbitration proceeding hereunder shall be entitled, in
         addition to such other relief as may be granted, to recover the
         portion of the Costs incurred by that party in connection with
         arbitration under the Agreement prior to the award.

I.       The parties agree that the Board shall be required to render its
         decision in writing within thirty (30) calendar days of the conclusion
         of the arbitration proceedings, unless such time shall be extended by
         mutual written agreement of the parties.

J.       With respect to any matter brought before the Board, the Board shall
         make a decision having regard to the intentions of the parties, the
         terms of this Agreement, and custom and usage of the insurance and
         data processing industry. Such decisions shall be in writing and shall
         state the findings of fact and conclusions of law upon which the
         decision is based, provided that such decision may not (i) award
         consequential, punitive, special, incidental or exemplary damages, or
         (ii) include a suspension of this Agreement or any provisions hereof.
         The decision shall be based exclusively upon the evidence presented by
         the parties at a hearing in which evidence shall be allowed. Said
         decisions may be reviewable and vacated, modified or corrected, in
         whole or in part, by appropriate courts of competent jurisdiction for
         clear abuses of discretion or errors at law by the Board. If the
         decision is not vacated, modified, or corrected in whole or in part
         upon an appeal, such decision shall be final and binding upon all
         parties to the proceeding and may be entered by either party in any
         court having competent jurisdiction.


                                      10



IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Agreement to be effective as of the 1st day
of March, 2002.


"IMS"


INSURANCE MANAGEMENT SOLUTIONS, INC.


By:  /s/ D.M. Howard
   -----------------------------------
As its:  President/CEO
       -------------------------------
Date:  04/10/02
     ---------------------------------


"CUSTOMER"


ISLAND INSURANCE COMPANIES, LTD.


By:   /s/ Raymond M.  (unreadable)
   -----------------------------------
As its:  Vice President
       -------------------------------
Date:  03/22/02
     ---------------------------------


                                      11



SCHEDULES:

SCHEDULE "A" -    AUTHORIZED STATES AND INSURANCE PROGRAM
SCHEDULE "B" -    FEE SCHEDULE

EXHIBITS:

EXHIBIT 1 -       WYO FLOOD INSURANCE SERVICES


                                      12



                                   SCHEDULE A

                    AUTHORIZED STATES AND INSURANCE PROGRAM


IMS shall provide Insurance Administration Services as described in EXHIBIT I
for the following authorized line(s) of business ("Authorized Line of
Business") in the following authorized state(s) ("Authorized States"):

1.       AUTHORIZED LINE OF BUSINESS:

         WYO Flood Insurance

2.       AUTHORIZED STATES:


         The States of Hawaii and such other states as may be mutually agreed
         upon in writing by Customer and IMS.


                                      13



                                   SCHEDULE B

                                  FEE SCHEDULE

* Indicates that material has been omitted and confidential treatment has been
requested therefor. All such omitted material has been filed separately with the
SEC pursuant to Rule 24b-2.

                                      14



                                   EXHIBIT I

                 INSURANCE ADMINISTRATION SERVICES (WYO FLOOD)

         WHEREAS, The Federal Emergency Management Agency ("FEMA") and the
Federal Insurance Administration ("FIA") administer the National Flood
Insurance Program ("NFIP") and Customer is an insurance company duly licensed
to write flood insurance in the state or states to which this Agreement
pertains and is approved by FIA to act as a Write Your Own Company ("WYO
Company") under the Write Your Own Flood Insurance Program ("WYO Flood
Program"), a program offered under the NFIP; and

         WHEREAS, Customer wishes to engage the services of IMS to administer
certain of the Customer's obligations as a WYO Company in the state(s)
("Authorized States") set forth in SCHEDULE A.

1)       DEFINITIONS. Capitalized terms not otherwise defined in the Agreement
         or in this Exhibit shall be construed as otherwise generally
         understood in the insurance and data processing industry.

2)       POLICY ADMINISTRATION. IMS shall administer Customer's WYO Flood
         Program policies ("WYO Policies") performing the services listed
         hereunder in accordance with the NFIP, as amended, and all
         implementing regulations as well as Customer's Write Your-Own
         Arrangement ("Arrangement") with FEMA. The same standards by which
         Customer is bound shall be those by which IMS is bound to Customer.

a)       Underwriting.
         -        Review WYO Policy application for completeness/contact Agent
                  as applicable;
         -        Create WYO Policy file;
         -        Underwriting based on NFIP guidelines.

b)       Data Entry. (subject to the 120 Day Internet Access Milestones
         specified in Schedule B)
         -        New WYO Policy business;
         -        WYO Policy changes;
         -        Mortgagee changes;
         -        WYO Flood insurance Agent changes;
         -        Endorsements;
         -        Cancellations.

c)       WYO Policy Issuance.
         -        WYO Policy for new business, renewals and endorsements where
                  declaration page issuance is required;
         -        WYO Policy Renewal processing;
         -        WYO Policy automated rating;
         -        WYO Policy print declarations and related WYO Policy forms.

d)       Billing & Collection.
         -        Print invoices, reminders, cancellation notification, return
                  WYO Policy premium disbursements;
         -        Mortgage activity processing;
         -        EFT processing;
         -        Process cancellations for non-payment.

e)       Customer Service.
         -        Provide a dedicated customer service support call center;
         -        Respond to Customer's WYO Policyholder and WYO flood
                  insurance sales Agent telephone inquires;


                                      16



         -        Process requests for WYO Policy changes;
         -        Respond to correspondence related to WYO Policy and WYO
                  Policy claim administration services;
         -        Track and respond to complaints related to WYO Policy and/or
                  WYO Policy claim administration services; IMS customer
                  service hours of operation 8:00 a.m. to 8:00 p.m. Eastern
                  Standard Time ("EST").

f)       Bureau Reporting.
         -        Process and balance WYO Policy premium and WYO Policy loss
                  data;
         -        Edit and correct invalid data;
         -        Prepare and mail Bureau transmittals;
         -        To the best of IMS knowledge, provide on-going regulatory
                  changes;
         -        Maintain WYO Policy history files.

g)       Accounting Administration/Premium.
         -        Posting, balancing, and control of WYO Policy premium
                  receivable;
         -        Accounting and payment of Customer's WYO flood insurance
                  Agents WYO Policy commissions;
         -        Issuance, control and accounting for disbursements for WYO
                  Policy premium refunds, WYO Policy commissions.

h)       Financial Accounting.
         -        Issuance, control and accounting for disbursements for
                  general expenses;
         -        Day-to-day management of short term cash;
         -        Provide reasonable and customary financial management
                  reports.

i)       Treasury.
         -        Receive and post WYO Policy payments;
         -        Issuance, control and accounting for disbursements of WYO
                  Policy premium related expenses;
         -        Bank reconciliation of WYO Policy premium disbursements;
         -        OCR WYO Policy payment processing;
         -        Mortgagee billing.

j)       Agency Administration.
         -        Agent of record assignment and control;
         -        1099 reporting;
         -        Maintain WYO flood insurance Agent files.

k)       Print & Distribution Services.
         -        Automated document library;
         -        Electronic document assembly;
         -        Electronic document archival/retrieval;
         -        Automated finishing/insertion facility;
         -        Mail pre-sort facility;
         -        Mailing WYO Policy, WYO Policy billings and WYO Policy
                  renewals (including postage and supplies);
         -        Document Imaging.

l)       System Administration.
         -        Availability of Proprietary System to Customer and Customer's
                  WYO Policy claim vendor;
         -        Process daily, weekly, monthly, and annual cycles;
         -        Internet processing capabilities subject to Internet use
                  limitations specified in Schedule B.


                                      17



3)       CASH MANAGEMENT.

a)       Banking Arrangement. IMS and Customer shall establish a banking
         arrangement that complies with the Arrangement and other WYO Flood
         program requirements, and which will provide for the establishment of
         an NFIP restricted account ("Restricted Account") with Customer as
         custodian, and a FEMA letter of credit ("Letter of Credit"), with
         additional accounts as needed to facilitate WYO Flood Program
         operations, all in conformity with FEMA/FIA guidelines. Customer shall
         grant specific IMS' employees check-signing authority on any
         Restricted Account and the authority to initiate appropriate drawdowns
         against Customer's Letter of Credit, in order for IMS to act on
         Customer's behalf in making disbursements for Customer liabilities
         established by the Arrangement, the WYO Flood Program, and this
         Agreement. All such authorizations shall be in writing and may be
         revoked, amended or modified at any time by Customer upon thirty (30)
         days advanced written notice to IMS. Notwithstanding the foregoing,
         IMS shall not draw down on Letter of Credit for an amount that exceeds
         $50,000.00 without prior approval from the Chief Financial Officer of
         Customer, which approval shall not be unreasonably withheld and shall
         be given within 24 hours of the request being made by IMS.

b)       Premium Remittance -IMS shall establish procedures, as determined by
         FIA, for a timely deposit and remittance of funds to the U.S. Treasury
         via authorized automatic clearinghouse mechanism. Gross premium
         collected by IMS, for WYO Flood program business written under this
         Agreement, shall be remitted to the FIA by IMS net of the established
         NFIP Expense Allowance. ("Allowance") , which Allowance expenses to be
         paid under the Allowance include Carrier's operating and
         administrative expenses.

c)       Financial Data - IMS shall maintain supporting documentation for all
         bank accounts over which it has authority. On a monthly basis, IMS
         shall prepare financial data, reflecting all debits and credits with
         respect to WYO Flood Program business administered under this
         Agreement, including agents' commissions and IMS' Service Fees paid.

d)       WYO Flood Program Reimbursements - Any WYO Flood Program
         reimbursements made pursuant to the Arrangement, including, but not
         limited to, those for the unallocated loss adjustments expenses, the
         allocated loss adjustments, and for approved special allocated loss
         adjustments expenses, shall be payable to IMS upon receipt by
         Customer.

e)       Marketing Goals - Customer shall maintain responsibility for any risk,
         or shall be entitled to any reward, that may be associated with
         achieving or failing to achieve any marketing goal set by the FIA or
         FEMA.

4)       CLAIM ADMINISTRATION. IMS shall provide Claims administration in
         accordance with the Arrangement, the Financial Control Plan and the
         Agreement, which claim administration processing services are outlined
         below. Any litigation costs not reimbursed by FEMA would be the
         responsibility of the Customer. IMS may also rely on the information
         and direction contained in the WYO Flood Program Claims Manual, the
         FEMA Adjuster Manual, the Flood Insurance Agent's Manual, the Standard
         Flood Insurance Policy, the WYO Operational Overview, and/or other WYO
         Flood Program instructional material.

a)       Claim Management Facilitation.
         -        Twenty-four (24) hour reporting capability, first notice of
                  loss, coverage for verification and WYO Policy claim;
         -        Investigation of WYO Policy claim;
         -        Fast track unit;
         -        Reinspection and audit;
         -        Claims handling standards/best practices;
         -        Claim check issuance;
         -        Management reports;


                                      18



         -        WYO Policyholder satisfaction surveys;
         -        Special Investigation Unit ("SIU") services;
         -        Salvage & subrogation claim processing;
         -        Litigation support.

b)       Catastrophe Preparation and Response.

         -        Preparedness by developing media reference guides and
                  notices, adjuster workshops, and training manuals; provide
                  storm tracking; reserve equipment and supplies; establish
                  procedures;

         -        Response in case of a catastrophic event by establishing and
                  staffing satellite service centers; automating the
                  distribution of claims to adjusters; internal
                  examinations/external reinspections;

         -        Recovery by providing management reports, audit/reinspection
                  program, SIU and oversight operations.

5)       ADJUSTING FIRM. IMS' Colonial Catastrophe Claims Service will be the
         authorized adjusting firm ("Adjusting Firm") for all claims adjusting
         work on behalf of Customer. However, Customer may designate a
         different Adjusting Firm with thirty (30) days written notice to IMS.

6)       DISASTER RECOVERY PLAN. IMS shall perform its' full range Disaster
         Recovery Plan on an annual basis. Customer has the right to observe
         the Disaster Recovery Plan at its own expense, provided that it has
         requested in writing to participate within thirty (30) days of planned
         execution.

7)       STATISTICAL REPORTING. IMS shall maintain Customer's data within IMS'
         policy, claims and general ledger systems. IMS shall prepare and
         submit to FIA, monthly financial and statistical reports,
         reconciliation reports, certifications, and statistical tapes on
         Customer's behalf, in accordance with WYO Flood Program Accounting
         Procedures and the Transaction Record Reporting and Processing Plan
         ("TRRP Plan").

8)       SPECIAL SERVICES.

         a)       Audit - At Customer's expense and at IMS' premises, IMS shall
                  conduct a biennial audit of any and all WYO Flood Program
                  business written by Customer pursuant to this Agreement. IMS
                  shall select an independent auditor and IMS shall present the
                  expense estimate for the biennial audit to Customer. Within
                  fifteen (15) days of receiving the estimate, Customer shall
                  have the option of selecting their own independent auditor to
                  conduct the audit or proceed with the independent auditor
                  selected by IMS.

         b)       Zone Determination Services - IMS shall provide flood zone
                  determinations to the Customer (or Customer's agents) to
                  assist in writing a WYO Policy to be placed with the Customer
                  and administered by IMS.

         c)       Rating Software - From the Effective Date of this Agreement
                  up to the one (1) year anniversary of the date that IMS
                  provides internet access (which shall include deployment of
                  the internet access into live production) to any of
                  Customer's insurance sales agents for the Authorized Line of
                  Business within the Authorized States, IMS will make
                  available to Customer and/or Customer's insurance sales
                  agents, rating software (which by definition is a Proprietary
                  System) for the ability to provide quotations, prepare new
                  business applications, endorsements and cancellation of the
                  WYO Policy.

         d)       Training - Upon Customer's request and excluding travel
                  expenses, IMS will provide four (4) training sessions per
                  calendar year to Customer and/or Customer's Agents. Customer
                  will provide the training facility. Additional requests for
                  training will be charged at One Hundred and Twenty Five
                  Dollars ($125) per day plus reasonable per diem and travel
                  expenses incurred.


                                      19



         e)       Marketing Material. IMS will make available to Customer its
                  marketing or promotional materials, which IMS may customize
                  and produce for Customer at Customer's expense.

         f)       Agency Rollover Services. Within a reasonable time of
                  Customer's request, IMS will provide rollover services to
                  those Customer agents that wish to roll over 500 or more WYO
                  Policies in their book of business to Customer. In the event
                  that there are several Agents within a concentrated
                  geographical area wishing to roll over 500 or more WYO
                  Policies to Customer, IMS will provide rollover service to
                  all Agents within that area at the same time. Due to the
                  potential size of the project, IMS will need Customer to
                  provide a full listing of Agents, location and size of
                  business. IMS will create a schedule to perform this service.

         g)       Additional Fees & Services. Additional services not specified
                  in this Agreement may be provided by as mutually agreed upon
                  in writing between the Customer and IMS in writing.


                                      20