JUN 8 – 10, 2015 Segregated Accounts and Other Alternative Risk Transfer Structures 1

Today’s Speakers: Phil Stevens, Principal, Rowayton Risk Consulting Jim Bulkowski, Senior Manager, Advisory Services, Ernst & Young LLP; Moderator: Mike Douglas, Director, Business Development, Aon Global Risk Consulting/Captive Insurance Segregated Accounts and Other Alternative Risk Transfer Structures 2

Our Topic Today Discussion of the increasing development and use of Segregated Accounts as a means of alternative risk transfer for a wide variety of covers. 3

4 Agenda Back to the Future – How did we get here? Introduction to Cell Companies What’s In a Name? What IS a Cells Company? Incorporated Cell Captives

Back To the Future – How Did We Get Here? What as the genesis of segregated accounts companies we use today? Rent-A-Captives; Started in Bermuda in the 1970’s; One insurance company that rented Its insurance License to multiple participants; Segregation of assets and liabilities was by Contract Led to the potential for renter “A” to have to be bailed out by other Renters and the Rent-A-Captive owner if insufficient funds in Renter “A’s” rented space. 5

Rent – A Captive CORE CAPITAL CORE CAPITAL PF 1 PF 2 PF etc... PF 3 PF 4 PF 5 PF 6 PF 7 PF 8 PF 9 PF 10 Preferred Shareholder s (Clients) PF 10 PF 1 Bust 6 BAIL OUT! BAIL OUT 6

7 Segregated Account Companies Legislation first introduced in Guernsey in 1997; Conceived a corporate entity in which separately identifiable cells are created for the same or separate cell users under which the assets and liabilities of each cell are legally separated from each other One legal entity – split into the core and multiple cells Legal segregation of cells – each with a specific reference 2 classes of shares – core and cellular Unlimited number of cells PCC’s now utilised in almost 40 different domiciles and very much an established concept

Segregated Cell Captive CORE CAPITAL CORE CAPITAL Cell 1 Cell 2 Cell etc... Cell 3 Cell 4 Cell 5 Cell 6 Cell 7 Cell 8 Cell 9 Cell 10 Preferred Non-Voting Shares (Clients) Cell 10 Cell 1 Bust 6 PROTECTED 8

What’s In a Name? Depending on the domicile: Segregated Account Company (Bda) Segregated Portfolio Company (Cayman) Protected Cell Company (US and Gib & Guernsey) Series LLC’s (Some US Domiciles) Sponsored Cell Captives (Vt) 9

10 What IS a Segregated Cell Company? Externally: One Company/incorporated entity (Statutory Accounts, Tax Treatment) Internally: Complete autonomy of individual cells One cell is not liable for the obligations of another cell or the core. Cells are set up, approved and closed individually. The Core Capitalised with ordinary voting shares by the Sponsor The Cells Capitalised by the owners of the respective cells issuing non-voting redeemable preference shares connected to the cell with a specific cell reference Each cell has an individual cell reference e.g. cell A, cell B, cell C etc This is required by law and all bank accounts/contracts entered into by the cell must refer to this specific cell reference.

Traditional Segregated Cell Structure 11 Shareholder XYZ

12 Typical Cell Uses Pre-loss risk funding for retained risk Retain profitable premiums Used for access to reinsurance Used to provide fronting for certain risks. Agency Captives (PORC’s) Used for Special Purpose Vehicles –ILS –Transformers

13 Cell Uses – Practical Examples Traditional Inland Transit (e.g. Stock Throughput) Punitive Damages (fronting) Difference in Conditions (fronting) A Little Less usual Catastrophe/SPV Professional Indemnity Political Risks Environmental Risk Extended Warranty Bonus Protection (fronting) Wealth Transfer (SEE NEXT SLIDE)

Segregated Cell Used for Wealth Transfer Owners: Parent(s) 831 (b) Segregated Cell Captive (Reinsurer) Insurance Policies Shareholders: Children or Family Trust Investments and Potential Underwriting Profit Dividends Premiums Reinsurance Premiums Commercial Carrier (Insurer) Organization (Insured) Coverage and Claim Payments Claimants Claim Payments 14

Advantages of Cell Captives Almost all the advantages of a wholly owned captive are mirrored in a rent- a-captive / protected cell captive; Lower start up time to form a cell in an existing facility Lower capital requirements than a wholly owned captive Lower administrative costs than a wholly owned captive; Reduces the dependency on commercial markets; Direct access to reinsurance markets; Greater structure and control over risk management and financing; Continuity and breadth of insurance coverage; Reduced volatility on insurance spend; Captures profits otherwise lost to the insurer ; Potential for tax benefits 15

Disadvantages of Cell Captives Cells must be fully funded with premiums and LOC. or reinsurance; Where a cell is fully funded only with premium and LOC – the cell may not be classified as insurance for tax purposes; Captive is not owned by the individual renters and so any decision to pay dividends etc. must be approved by the cell captive owner; Rent-a-Captives have a credit element risk where all renters may be required to bail out a bankrupt cell. – Protected Cell structures avoid this and there is no sharing of risk. 16

Incorporated Cell Captives 17 IC formed by resolution and application to the Companies Registry IC is a legal entity in its own right – separately incorporated and licensed IC can be converted into a standalone company Separate audit required for each IC Slower to form and can be more expensive to set up and administer

ICC Recap Shareholder XYZ  The core can be used as a holding company  Cells can transact with each other  Single Board of Directors, allowing delegation of management responsibilities  The shareholder has ultimate recourse and control as cell can be separated from the ICC structure  Greater accounting and tax certainty – i.e. subsidiary and CFC

ICC – Potential Uses 19 As an alternative to Segregated Cells or Wholly Owned Captive A more cost effective SPV than a full company subsidiary Complete certainty of ownership and liabilities Incubator cells for full blown captives Companies who want a separately incorporated vehicle but don’t want the time/expense of the Board meetings

Questions / Discussion 20