Captive Insurance The Middle Market Solution A captive is an insurance company that insures the risks of its owner, affiliated businesses, or a group of companies. It issues policies, collects premiums, and pays claims.

Where do your premium dollars go?

Examples of Corporate Captives ParentCaptive Exxon-MobilAncon Insurance Company Archer Daniels MidlandAgrinational Insurance Company VerizonExchange Indemnity Company AT&TGateway Rivers Insurance Company University of MichiganVeritas Insurance Corporation Phillips PetroleumSooner Insurance Company Starwood HotelsWestel Insurance Company Johnson & JohnsonMiddlesex Assurance Company CBS CorporationCentral Fidelity Insurance Company BoeingAstro Limited Catholic Church DiocesesNational Catholic Risk Retention Group, Inc. 90% of S&P 500 Companies Use Captives 4

5 States Encourage Captive Growth “My administration continues to recognize how critical the captive insurance industry is to Vermont and the need to continue investing in our infrastructure and innovating in our regulation,” “The captive insurance industry creates valuable jobs and revenues to our state, and provides more than 1,400 full and part-time jobs for Vermonters.” Jim Douglas, Governor of Vermont May 27, signs-legislation-to-build-on-vermonts-lead-in-the-captive-insurance-industry.html

The Purposes in Forming a Captive Include:

IRC §831(b) Middle Market Solution $1.2 million annual premium Taxed only on investment income (C corp rates) 7

831(b) Captive Pro-forma Year 1Year 2Year 3Year 4Year 5Year 10 Premium Expenses Claims $ Available* Net Benefit 1,200,000 (65,000) (120,000) 1,096, ,200 1,200,000 (42,000) (120,000) 2,304,936 1,147,736 1,200,000 (42,000) (120,000) 3,610,371 1,869,971 1,200,000 (42,000) (120,000) 5,020,241 2,696,641 1,200,000 (42,000) (120,000) 6,524,900 3,636,100 1,200,000 (42,000) (1,400,000) 14,807,961 10,265,161 *Available for claims, surplus, and distributions to shareholders; Assumes 40% personal/corporate tax rate, 8% investment return. For discussion purposes only. Actual results may vary significantly.

Ownership Options Captive ShareholdersFamily Key Employees Estate Plan Trust

*Segregated cells allow a candidate to benefit from a captive at smaller level Who is an Ideal Client? Good candidates generally meet one or more of the following criteria*: $10+ million gross revenue Pre-tax profits of $1 million to $50 million Substantial self-insured / uninsured business risk 50+ employees

Hidden Risks Insured Risk Workers Comp Property Auto General Liability Uninsured Risk Deductibles Exclusions Operating Risks A/R Concentration Construction Defect Credit Default Disability Administrative Actions D&O/E&O Litigation Defense Mold and Pollution Product Warranty 11

How Do We Price the Premiums? ISO Rates ( Underwriters Actuaries Market quotes from independent carriers

Captive $ 1,200,000 Premiums Sub Case #1: Manufacturer $50 million gross revenue Traditional insurance Self insured risk Parent Company Owner 13

Quota Share Insurance $ 1,200,000 Premiums Business Captive Partner 1 33% Partner 2 33% Partner 3 33% Case #2: Developer Builder ($170 million gross revenue) Residential/commercial construction Unable to purchase construction defect or mold insurance Partner 1 Captive Partner 2 Agreement Partner 3 Captive

Business Quota Share Arrangement Case #3: Trucking Company $2,400,000 Premiums $1.2 MM Premiums Captive 1 LLC Child Trust #1 99% Mom / Dad 1% Captive 2 LLC Child Trust #2 99% Mom / Dad 1% $1.2 MM Premiums Self Insured Risk (SIR): Litigation Defense Deductible Coverage EPLI 15

Case #4: Physician Owns other businesses Self Insured Risk (SIR): Employment Practices Litigation Defense Reimbursement Loss of License 16 $ 1,200,000 Premiums Insurance Policies Property Mgmt Co. Physicians Medical Practice Surgery Center Physicians Captive

Case #5: Group Captive Group Captive Premiums Insurance Policies Business 1 Business 2 Business 3 Business 4 Business 5 Business 6 Business 7 17

Cell 3 Cell 8 Cell Captives Captive Cell 2 Cell 1 Cell 5 Cell 7 Cell 4 Cell 6

Estate Planning With a Captive (Including Life Insurance) Mom / Dad Business Mom / Dad 1% 1.2 MM P&C Premiums Child Trust 99% LLC Captive 500K Life Insurance Premiums Annually Life Insurance Life insurance purchased pre-tax Death benefit outside estate Captive provides cash flow for annual life premiums

Life Insurance Funding Options Straight Captive Life Insurance ILIT Life Insurance Captive Loan ILIT LLC Life Insurance Captive LLC Premium Financing Life Insurance Loan Bank Captive ILIT Collateral Agreement

30 Years of Captive Taxation : IRS Doctrine of “Economic Family” (Although Rejected by Courts) Prevails : Taxpayers’ Revenge (30% Unrelated Risk; Brother/Sister Risk) 2001: IRS Concedes “Economic Family” Doctrine and Admits Brother-Sister Coverage Is Valid Insurance 2002: IRS Issues Three Public “Safe Harbor” Captive Rulings 2005: IRS Ruling Requires Multi-Entity Policyholders; Disregards Single Member LLCs 2008: IRS Rules on Cell Captives 21

Safe Harbor Revenue Ruling Group Captive Premiums Insurance Policies Business 1 Business 2 Business 3 Business 4 Business 5 Business 6 Business 7

Captive Each Sub Comprises 5-15% of Risk Safe Harbor Revenue Ruling Brother / Sister subsidiaries No single Brother / Sister subsidiary can constitute greater than 15% or no less than 5% of the risk Business / Parent Sub

Safe Harbor Revenue Ruling > 50% of risk exposure is derived from unrelated parties. Business 49% of Risk 51% of Risk Parties Captive Unrelated 24

Where is the Captive Formed? Both foreign and domestic captives are acceptable to the U.S. and the IRS Foreign Country Examples: Bermuda, Anguilla, Cayman Islands, BVI Lower cost Lower regulatory and capital requirements Expedited formation Investments stay in U.S. Foreign Captives File U.S. tax return (if 953(d) election made) State in the U.S. Examples: Arizona, Nevada, Vermont, D.C., New York More states adding captive insurance law Note: Whether foreign or U.S., the tax benefits are the same Depending on type of business and insurance risks, the domicile of choice might be domestic or foreign

Leading Captive Domiciles Number of Captives Rank Location Bermuda Cayman Islands Vermont Guernsey British Virgin Islands Luxembourg Barbados Anguilla Turks & Caicos Islands Hawaii South Carolina Utah Isle of Man Nevada District of Columbia Source: Business Insurance, March 8, 2010

Captive statutes No specific captive statutes WA OR CA NV ID AZ MT UT TX WY CO NM OK ND SD NE KS MN IA MO AR LA MI IN WI IL OH KY NC AK TN AL SC MS GA FL WV VA ME RI NY NH V T MA NJ CT PA DC MD DE HI U.S. Domestic Captive Domiciles Alabama Arizona Arkansas Colorado Connecticut Delaware District of Columbia Florida Georgia Hawaii Illinois Kansas Kentucky Louisiana Maine Michigan Missouri Montana Nevada New York Oklahoma Oregon Rhode Island South Carolina South Dakota Tennessee Utah Vermont Virginia West Virginia

Tribeca Benefits Experience: 9 th largest captive manager worldwide IRS compliant / IRS safe harbor Turnkey captive management Industry approved underwriting and policy forms 11 year history Team of CPAs, attorneys, business & insurance professionals Tribeca does not replace any existing professionals

Client Decisions Deliverables The Captive Process What are the benefits from captive insurance (e.g., risk management,. estate plan trust)? Shall I purchase the same amount asset protection, tax savings)? How will a Tribeca Feasibility Study help me make these decisions? Client: Feasibility Study materials (current insurance policies, summary of business operations and financials) Tribeca: Feasibility Study showing benefits, possible coverages, and estimated premium amounts How should the captive’s assets be invested? Where will it be domiciled? Client: Capital Contribution: $100k - $250k Due Diligence on owners of captive Personal financial statement Credit /background check 3 original signed reference letters Proof of residency and citizenship Tribeca: Insurance License Corp formed and domiciled Insurance policies of insurance from my captive in the following year? Client: Monthly bank statements Board of Directors meetings Tribeca: Annual Insurance policies Monthly meetings Quarterly management reports Accounting services including regulation compliance Annual tax return Ongoing consulting Feasibility 2-3 weeks What are my business risks? How can a captive help manage these risks? Formation 2 months Which insurance policies should I purchase through my captive? Who will own the captive (business owner, family, key employees, Function Annually Have there been any changes to my business ? Have there been any changes to my risk?

Contact Tribeca Jeremy R. Huish, J.D., CPA, LL.M. (tax) Tribeca Strategic Advisors, LLC 1635 North Greenfield Road, Suite 115 Mesa, Arizona (480) Disclosure under IRS circular 230: this communication is not intended to and does not comply with the U.S. Treasury department's technical requirements for a formal legal opinion. Consequently, it cannot be used by a taxpayer to avoid any penalty that might be imposed on a taxpayer. Nothing in this communication may be used or referred to in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any person. 30