An Introduction to Captives Galen Buisson, BancorpSouth Insurance Services Marc LaPointe, USA Risk Group

The Captive Marketplace $8.354 Billion in Premiums for % of the commercial market Over 70% of the Fortune 500 have captives Captives paid 92.7 cents per hundred in premium versus $1.01 for the commercial market in 2011 Source: Programbusiness.com/A.M. Best

What is a Captive? A limited purpose insurance company A risk-bearing vehicle A corporate asset Usually, a wholly-owned subsidiary of a parent company The concept is at least 70 years old

Why Form a Captive? Economic reasons Coverage reasons Program control Reinsurance access Building a corporate asset Strategic corporate tool

Types of Captive Structures Single Parent Captive – owned by a parent Group Captive – sharing risks with others Rent-a-Captive – renting of a shell and capital Cell Captive – many corporate shells from a single captive Series LLC – A variation on the Cell Captive Special Purpose Captive – Catch all structure

Component Captive Parts Performing an initial feasibility study Creating a business plan Choosing a Captive Manager Choosing a domicile Obtaining a license Providing initial capital Beginning operations Monitoring performance

Partners in the Process Insurance broker Captive manager Domicile regulator Legal representation Actuarial Accounting Claim handling / TPA “Fronting” insurer Reinsurance relationships

Capital Requirements and Costs Feasibility study - $25,000 minimum one time cost. Varies with complexity Surplus contribution – Statutory minimum ($250K to $1M) plus additional capital at the discretion of the commissioner of insurance. General rule for every $3 of Net Premium you need $1 of capital Operating costs - $35,000 to $100,000 annually plus any fronting/reinsurance costs Claim adjusting costs – vary by type of claim Taxes as applicable (premium/Federal)

Surplus Versus Premiums Initial capital (surplus) provides the basis for the amount of premium that the captive can write. This is usually between 3 and 5 times the amount of the surplus. $250,000 surplus can underwrite $750,000 to $1,250,000 in annual net premium More premium volume requires more surplus Adverse loss activity can deplete surplus

An Economics Example Premium: $5,000,000 - Fronting Cost (7.5%) $ 375,000 - Operating Cost $75,000 - Reinsurance Cost $1,250,000 - Claim Costs* $1,300,000 Annual Profit** $2,575,000 * includes adjusting charges ** less applicable taxes

Considerations Captive is a long-term insurance strategy Captive is a regulated entity A captive does not replace the need for loss prevention/control. It does not hide or eliminate bad losses A captive is subject to an annual actuarial study to assure its ability to pay claims

Considerations (Con’t) A captive is a business and exists to: Make a profit Risk Management Tool Favorable tax treatment requires a captive be: Formed for business purpose Meets IRS Safe Harbor Rule Not all businesses are suitable for captives Frictional operating costs must be considered in low premium captives

Sound Captive Strategies Taking a long-term view Maintaining a carefully controlled underwriting approach Participating in underwriting profits Building a Strategic Asset Controlling the overall insurance program by leveraging the captive

Summary A captive can be a very meaningful tool in ACHIEVING COST SAVINGS and CONTROLLING CORPORATE INSURANCE PROFILES while BUILDING A MEANINGFUL CORPORATE ASSET. Most of the world’s major corporations have established captives for these reasons.

The largest independent captive manager in the world One of the top 5 captive managers Offices in 4 US states and licensed managers in 11 US states International Offices in Bermuda, Malta and Cayman Islands

BancorpSouth Insurance Services, Inc. is one of the 5 largest bank owned brokerage houses in the United States Offices throughout the Southeastern United States and 660 employees Marine and Captive Expertise in-house

Your Panelists Marc Lapointe - Senior Vice-President of USA Risk Group. Mr. Lapointe has over 20 years of captive experience and is the global production manager for USA Risk. He is also the author of the Arizona captive statute and founder of CaptiveGuru.com. Galen Buisson - Director of Special Risks for BancorpSouth Insurance Services. Mr. Buisson has over 30 years of captive experience with multi-national conglomerates and marine captive experience. He has provided captive solutions to Fortune 500 companies in the US, Latin America as well as various other countries.