November, 2003 Captive Primer Presented by John Yonkunas Captives – Alternative or Obstacle

2 Risk Financing Continuum Unfunded Self Insurance Captive Deductible Plan Retro Plan Guaranteed Cost

3 Captive Defined A closely held insurance company controlled by its owners…... offering insurance products or reinsurance support to its owners as the principal beneficiaries......and the owners-policyholders actively participate in decisions influencing underwriting, operations and investments.

4 Historical Growth of Captives Worldwide Source: Captive Insurance Company Reports and Best’s Captive Directory

5 4,837 Captives Worldwide (Year-End 2002 Figures) Guernsey 408 Luxembourg 280 Ireland 209 Isle of Man 173 Singapore 51 Switzerland 41 All other 40 Total 1,202 Bermuda 1,426 Cayman 642 BVI 269 Barbados 207 Turks & Caicos 74 Bahamas 25 U.S. Vermont 454 Hawaii 102 Colorado 20 Georgia 16 Illinois 14 South Carolina 12 Tennessee 10 Arizona 10 New York 9 Other U.S. states/domiciles 140 Other 205 Total 3,635 WESTERN HEMISPHERE DOMICILES EASTERN HEMISPHERE DOMICILES Source: Best’s Captive Directory

New Captive Formations by Domicile Domicile Cayman Islands Bermuda Vermont Guernsey British Virgin Islands South Carolina Barbados Ireland Hawaii Others Total 2002 Captive Formations Source: Best’s Captive Directory

7 Number of Captives by Type Type of Captive Pure Captive Connected Business 3 rd Party Business Association Captive Multi-Owner Captive Risk Retention Groups Rent-a-Captives (incl. Agency, Sponsored, and PCC) Number of Captives 2003 vs Source: Best’s Captive Directory

Pure Single Parent Related Business Single Parent Unrelated Business Single Parent Captive of Insurer Association Captive Multi-Owner Captive Healthcare Captive Life Insurer Single Parent Rent-a-Captive Risk Retention Group Self Insurance Groups Reciprocals Agency Captive Special Purpose Vehicles Protected Cell Captive Producer Owned Rented Captive Types of Captives

9 Categories of Captives Ownership & Control  Single Parent  Group/Risk Retention Group  Rent-A-Captive/Protected Cell Captive Transaction – Offshore & Onshore  Direct  Fronted Structure  Stock/Mutual  Reciprocal

10 Ownership & Control Categories 10

11 Single Parent Insures the risk of the parent and sister companies Includes predictable exposures & working layer Offers unusual or uninsurable coverages  Punitive Damage  Terrorism  Business Risks Assets Controlled by Treasury  Loan-Backs  Commercial Paper Highly Leveraged

12 Group Insures the risk of the members/policyholders Includes predictable exposures for casualty coverages at low retentions Does not typically offer unusual or uninsurable coverages Assets Managed by Investment Manager Moderately Leveraged Higher Regulatory Scrutiny Risk Retention Group – Federally authorized licensed carrier

13 Rent-a-Captive Reinsures the risk of members - Fronted Includes predictable exposures No unusual or uninsurable coverages Assets Controlled by Sponsor/Owner Ownership/Governance Limited No Direct Capital – Indirect Capital for “gap” exposure Protected Cell Captive – legal segregation of assets and liabilities

14 Rent-a-Captive Insurance and Reinsurance Transactions AGENT Fronting Company Rent-a-Captive INSURED INSURANCE AGREEMENTS INSURANCE AGREEMENTS SHAREHOLDER AGREEMENTS SHAREHOLDER AGREEMENTS REINSURANCE AGREEMENTS REINSURANCE AGREEMENTS Insurance Premiums Insurance Policy & Claim Payments Insurance Premiums Primary Layer Reinsurance Premiums Primary Claim Recovery Preferred Dividends

15 Transaction Categories 15

16 Captives are Established to Either Insure or Reinsure Risk … direct insurance CorporationCaptive Premiums Coverage Corporation Insurance Company Captive … reinsurance Premiums Coverage Fronting Fee Reinsurance

Insurance Agreement Captive Agreement Reinsurance Carrier Deductible/SIR Indemnification Agreement Excess DED/ SIR Excess DED/ SIR Owner/ Policyholder Captives as part of an integrated and complex risk financing program 17

18 Structure Categories 18

19 Structure Category Stock/Mutual  Stockholders/Members  Board of Directors  Officers  Taxable at Captive level Reciprocal  Subscribers  Subscriber Advisory Committee  Attorney-in-Fact  Subscriber Savings Accounts - Assigned Surplus  Taxable at Captive and Subscriber levels

20 Captive Trends 20

21 Trend 1: Continued Strong Interest in Captives New captive formations Expansion of existing captives Effects of hard market Fronting insurance capacity diminishing and fees increasing Higher reinsurance rates

22 Trend 2: Unrelated Business Captives are increasingly insuring risks unrelated to the owners for: Risk diversification Tax deductibility Profit potential Examples Suppliers or independent contractor P/C risks Customers (warranty, credit life) Employee benefits

23 Trend 3: Employee Benefits Opportunity areas U.S.: disability, life, deferred compensation, SERPs, retiree medical Non-U.S.: reinsurance of multinational pooling, internationally mobile employees Columbia Energy’s DOL ruling and ADM’s recent application for an exemption