Exit Alternatives for Captive Owners December 3, 2013 Presented by: Ray Dowling – Dowling Advisors, Inc. Scott Penwell – Rhoads & Sinon LLP Pedro Reis – Cayman Islands Monetary Authority

Agenda –Strategic Reasons for Considering Exit –Exit Alternatives: Pros and Cons –Sale –Novation/Commutation –Loss Portfolio –Legal Considerations –Regulatory Considerations –Q & A 2

Strategic Reasons to Consider Exit –Mergers of two underlying companies with captives and only need one captive moving forward –Soft Market –Reduction of Risk –Cost Prohibitive to Run-off Captive –i.e admin costs are high compared to limited risk in the captive –Reduce Capital Requirements –Eliminate Non Core Troubled Business/Run-off Liabilities –Mergers where the Acquiring Company does not like a particular book of business 3

Click to edit Master title style Pros –Upon completion of sale, risk to the underlying insured is eliminated completely –Eliminate future run-off costs of the entity –If an ongoing entity could potentially price a multiple based on the future profits of the business Cons –Upfront deal costs are likely the highest of all three alternatives –Regulatory Approval Necessary –In many instances the Purchaser has the same future costs to run- off the entity as the Seller would and must price such in its offer 4 Exit Alternatives – Pros/Cons Sale of Captive:

Click to edit Master title style Pros –Limited Regulatory Approval –i.e. Not necessary to get novations of each underlying insured –Limited Administrative Costs –Loss portfolio transfer reinsurance agreements are fairly standard Cons –Still on the underlying risk to the insured if Reinsurer cannot satisfy obligations –Credit exposure to to reinsurance recoverable –Cannot release all capital and dissolve captive since technically still on risk –Potential retroactive accounting implications if GAAP reported entity 5 Exit Alternatives – Pros/Cons Loss Portfolio Transfer Insurance:

Click to edit Master title style Pros –Upon completion of novation/commutation, risk to the underlying insured is eliminated completely –Can dissolve entity and release all capital and eliminate all future run-off admin costs of the captive Cons –Approval necessary from each underlying insured –Upfront admin cost will likely be higher with novation 6 Exit Alternatives – Pros/Cons Novation/Commutation:

Legal Considerations A.Regulatory Dispositions B.Schemes of Restructuring C.Voluntary Plans 7

Legal Considerations i.Sale of Captive a)Documentation – Stock Purchase Agreement b)Buyer & Seller Issues - Pricing - Representations & Warranties - Due Diligence c)Interested Parties i.Fronting Company ii.Captive owner/insured iii.Reinsurers iv.Regulators 8

Legal Considerations ii.Novation/Commutation a)Documentation – Commutation Agreement b)Assignor/assignee issues - Pricing - Due Diligence c)Interested parties i) Fronting Company ii) Reinsurers iii) Regulators 9

Legal Considerations iii.Loss Portfolio Transfer a)Documentation – Sale Agreement b)Buyer/Seller issues - Pricing - Representations & Warranties - Specific Policies c)Interested Parties i) Fronting Company ii) Reinsurers iii) Regulators 10

Legal Considerations 11 iv.Other Structures a)Protected Cell Companies b)Eastern Atlantic Model

Click to edit Master title style –Provide CIMA with detailed information regarding the sale such as: - rationale, BOD resolution - due diligence on new shareholder(s) and new directors, if applicable - changes to the business plan, if any - changes in service providers, if any - future plans for the captive - impact on captive’s financial statements - approval from other domicile, if re-domiciling captive - other information as may be requested. 12 Regulatory Considerations Sale of Captive:

Click to edit Master title style –Provide CIMA with detailed information regarding the transfer such as: - rationale, BOD resolution - business plan change approval request, detailing LPT - information on counterparty, which will be accessed by CIMA - future plans for the captive - impact on captive’s financial statements - LPT agreement - Insurance liabilities remaining in the captive after transfer, if any - other information as may be requested. 13 Regulatory Considerations Loss Portfolio Transfer Insurance:

Click to edit Master title style –Provide CIMA with detailed information regarding the operation such as: - rationale, BOD resolution - business plan change approval request, detailing operation - information on counterparties, which will be accessed by CIMA - future plans for the captive - if operation involves another jurisdiction - impact on captive’s financial statements - novation/commutation agreement - Insurance liabilities remaining in the captive after operation, if any - other information as may be requested. 14 Regulatory Considerations Novation/Commutation: