© 2004 Towers Perrin November 2004 John Yonkunas Primer on the Structure and Ownership of Captives

© 2004 Towers Perrin 2 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.

© 2004 Towers Perrin 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 Insurance Company Types of Captives 3

© 2004 Towers Perrin 4 Categories of Captives Ownership & Control  Single Parent  Cell Captive  Group/Risk Retention Group Transaction & Regulation  Direct  Fronted/Reinsurance Structure  Stock/Mutual  Reciprocal Domicile  Offshore  Onshore

© 2004 Towers Perrin 5 Ownership & Control Categories

© 2004 Towers Perrin 6 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 May be highly leveraged and rely on Parent Financial Position

© 2004 Towers Perrin 7 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

© 2004 Towers Perrin 8 Cell Captive Reinsures the risk of cell owner Includes predictable exposures No unusual or uninsurable coverages Assets Controlled by Sponsor/Owner Ownership/Governance Limited No Direct Capital – Indirect Capital for “gap” exposure Legal segregation of assets and liabilities Entrepreneurial in nature

© 2004 Towers Perrin 9 Transaction Categories

© 2004 Towers Perrin 10 Captives are Established to Either Insure or Reinsure Risk … direct insurance CorporationCaptive Premiums Coverage Corporation Insurance Company Captive … reinsurance Premiums Coverage Fronting Fee Reinsurance

© 2004 Towers Perrin 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 11

© 2004 Towers Perrin 12 Authorization Varies by Type of Captive Group SingleCellNon- RRG RRG DirectNon-Admitted Indemnification NANA*Admitted Insurance ReinsuranceNon-Admitted NA *Some Non-RRG groups offer direct insurance coverage as a non-admitted foreign carrier.

© 2004 Towers Perrin 13 Structure Categories

© 2004 Towers Perrin 14 Structure Category Stock/Mutual  Stockholders/Members  Board of Directors  Officers  Taxable at Captive level

© 2004 Towers Perrin 15 Structure Category Reciprocal  Subscribers  Subscriber Advisory Committee  Attorney-in-Fact  Subscriber Savings Accounts - Assigned Surplus  Taxable at Captive and Subscriber levels

© 2004 Towers Perrin 16 Captive Domicile

© 2004 Towers Perrin 17 Off-Shore Implications Non-Taxable in U.S. U.S. Owners may be subject to tax exposure Exposure to FET and Supplies Lines Tax Non-Insurable Coverage Money & Meeting outside the U.S. Non-Admitted/Foreign Status Subject to Infrastructures of Domicile

© 2004 Towers Perrin 18 On-Shore Implications Captive Exposed to U.S. FIT Exposed to State/Domicile Premium Tax Money in U.S.; Meetings in Domicile Subject to Infrastructure of U.S.

© 2004 Towers Perrin 19 Common Structures Taxable U.S. ParentOff-Shore or On-Shore Stock Company; Direct or Fronting Non-Taxable U.S. ParentOff-Shore Stock or On-Shore Reciprocal; Direct Non-U.S. ParentOff-Shore Stock Company; Direct Non-RRG GroupOff-Shore or On-Shore Stock Company; Fronted RRGOn-Shore Stock or Reciprocal; Direct