Making your large deductible workers’ compensation program significantly better

High Deductible Retained Layer Statutory Workers’ Comp Business Excess Insurance $250,001 $250,000 $0 $1,000,000 $999,999

3 Disadvantages 1.No tax deduction for retained risk 2.LoC with after-tax dollars 3.Volatility

Risk Management Tax Savings Cash Flow

93% 91% 93% 83% 92% $3M - $7M Over 10 years

AEX Captive Unrelated Risk Direct Premiums

Captive Operating Company AEX Captive Invest Assets Captive Owner Dividends Liquidation Risk Pay losses StocksBondsOther

A valid captive requires “Risk Distribution” Risk distribution is a spreading of risk that allows the insurer to reduce the possibility that a single costly claim will exceed the amount available to the insurer for the payment of such a claim.

Multiple Subsidiaries Unrelated Risk Sub Business Captive Unrelated risk

High Deductible Retained Layer Business Excess Insurance $250,001 $250,000 $0 $1,000,000 $999,999 AEX Pooling $100,001 $100,000 Statutory Workers’ Comp

AEX (Trust Account) Total Premium = $18 $9 $6 Premium $3 x $18 = $18 $6 x $18 = $18 $9 x $18 = $18 Quota Share % X Premium Quota Shared Premium Unrelated Premium $1.00 $1.50 $1.00 $2.00 $3.00 $1.50 $3.00 $4.50 $9 $6 $3 $0.50 Captive

AEX

Captive Virtual Pool

Criteria 1.Minimum $400,000 Loss Pick 2.Cash Flow

Frequency layer = predictable 125% cap Retrospective adjustment Protections

Expected: $1mLosses in PoolAEX

Settlement Policy year

  Claims Administrator AEXCaptive

Solutions 1.Tax deduction for retained risk 2.LoC with pre-tax dollars 3.Reduced Volatility

Expected: $1mLosses in PoolAEX

Captive LOC Collateral Funded with after tax dollars Funded with pre-tax dollars

AEX Captive Unrelated Risk Direct Premiums Prior year’s retained risk (any line) Load charge for captive Other types of insurance (GL, auto, E&S) Excess work comp layer (e.g., 150 x/s 100)

Safe HarborIndustry

Already take tax deduction Need a captive Don’t disrupt existing high deductible program AEX is an “overlay” Share risks with others? Sharing is in frequency layer Black Swan event? Excludes risks >125% expected loss pick IRS approval? IRS has approved similar arrangements Objections? Answers

Cost AEX Service Cost 0 -$2M: 6% of AEX premiums $2M-$4M: 3% Above $4M: 1% Minimum annual service fee of $30,000 Captive Management

Participation Criteria Large Deductible or SIR Program Minimum $400,000 Loss Pick in AEX Layer Cash Flow

Submission Criteria 5 Years Loss/Exposure Data

Next Step Karl Huish Zeb Holt (480) (630)

Section 831(b) Captive Solution $1.2M annual premium Taxed only on investment income (C corp rates) Shareholders Captive Business Basic Captive Diagram Insurance Premiums Insurance Coverage

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 Legal Defense Reimburse Mold and Pollution Product Warranty Hidden Risks

1. Insurance Risk 2. Operate as an insurance company 3. Risk shifting and risk distribution Tax Law and Captives

Ownership Options Captive Shareholders Family Key Employees Estate Plan Trust Parent Company