A Captive Primer: What they are and how they work Presented by Jerry D. Messick CEO Elevate Captives, LLC 1103 Sovereign Row, Ste. D Oklahoma City, OK 73108 Direct: 405.443.2002 Mobile: 405.550.2651 Email: jm@elevatecaptives.com Educate – Evaluate – Elevate 1

Presentation Objectives History of captives & what they are How captives are used & what makes a good prospect The Captive Wrap Program™ Risk Management & TCOR Key Ingredients of an Insurance Company Reinsurance Various captive structures & expense with a focus on Delaware Single Captive Platform Multi-Captive Platform Start-up vs. Annual Expense Summary of the captive process Notes:________________________________________________________________ _____________________________________________________________________ 2

History of Captives Captives first used in 1700’s in Europe Three main markets: Europe (Isle of Man, Guernsey, etc.) Offshore (Bermuda, Cayman, Nevis, etc.) USA (Delaware, Vermont, Oklahoma, etc.) 30+ states currently have captive legislation Why captives now for the small-mid sized companies? Notes:________________________________________________________________ _____________________________________________________________________ 3

The Captive Wrap Program™ Notes:________________________________________________________________ _____________________________________________________________________ 4

Continuum of Risk Unfunded Self Insurance Deductible Plan/Stop Captive Deductible Plan/Stop Loss or Excess Retro Plan/ Experience Rated Guaranteed Cost/ Fully Insured P&C Benefits Equivalent Term Notes:________________________________________________________________ _____________________________________________________________________ 5

What is a Captive? An insurance company you (the insured) own and control Can be domiciled on or offshore Ownership typically defined by the captive structure NOT intended to totally replace a commercial insurance program Various captive structures include: Risk Retention Groups Associations or trade groups Groups of homogenous risk Pure (Single Parent) Reinsurance of another insurance carrier (captive or commercial) Enterprise Risk Captive (most elect 831(b)) Notes:________________________________________________________________ _____________________________________________________________________ 6

What Makes for a Good Captive? Clear understanding of your own risks & loss history A belief (based on facts) that the program would be profitable over time Sufficient risk to support the captive premium – rule of thumb is 10:1 sales to premium – captive cannot create NOL Good analytics for quality underwriting standards & pricing Expert captive design, management & efficient operations Owners committed to paying appropriate premiums for multiple years – Captives are NOT short-term options Notes:________________________________________________________________ _____________________________________________________________________ 7

Key Ingredients What is a Captive Insurance Company? Legitimate Business Reason (Real Risk) Must Have Distribution CANNOT be just for Tax Benefit!! Must Have Transfer Legitimate Asset Investment Pay Claims Legitimate Governance Quality Reinsurance Credible Service Providers Conservative Parental Guarantees or Loan backs Adequate Capital Domicile Credibility Notes:________________________________________________________________ _____________________________________________________________________ 8

How is a Captive Used? Deductible reimbursement & Difference in Conditions (DIC) Raise deductibles and retentions to retain more profit and cut commercial insurance premiums DIC - covers exclusions and deductibles in your commercial policies, as well as excess verdicts above your commercial limits Risk that is too expensive in the commercial market & uninsured exposure Key Contract/Key Employee Business Litigation Product Recall Employee Related Practice Liability/D&O Supply Chain Risk Business Interruption Provide efficient and effective asset management Notes:________________________________________________________________ _____________________________________________________________________ 9

Enterprise Risk Management (ERM): Total Cost of Risk (TCOR) Overview: TCOR is the in-depth evaluation of exposure, loss, underwriting and use of capital to reduce risk. The idea of TCOR has been around since the 1940’s. Traditionally defined: Cost of insurance Cost of the losses that are retained instead of transferring out, or as part of your organization—for example, risks the policy doesn't cover, or a company's deductible Cost for administration of the risk management department (whether you think you have one or not) TCOR goes beyond just insurance…it’s hiring and retaining the best internal resource, cost of third party service providers (attorneys, CPA’s, etc), payroll perpetuation planning, reputational risk, supply chain risk, and technology or social media risk Notes:________________________________________________________________ _____________________________________________________________________ 10

Key Factors to Determine Insurance Transfer & Distribution Adequate Capital Statutory capital vs. risk capital By end of year, 3:1 premium to surplus ratio Risk Transfer Must involve shifting of risk (not just a bank account) Must involve significant chance of a significant economic loss (use of independent, outside actuary) Risk Distribution Unrelated Risk Model At least 50% unrelated risk - Revenue Ruling 2002-89 At least seven unrelated entities (Group Captive) - Revenue Ruling 2002-91 Brother-Sister Model 12 or more insureds - Revenue Ruling 2002-90 Each risk must have between 5% and 15% of the overall exposure Limits on the types of corporate entities that can be counted Notes:________________________________________________________________ _____________________________________________________________________ 11

Reinsurance Purpose Structure $650k excess of $300k is yours $300k excess of $50k is reinsurers $50k is yours Purpose Protect captive against catastrophic loss Preserve Capital Risk Transfer Risk Distribution Structure Cost is 6% of Ceded Premium (which is 51% of Gross Premium) On $1M limit, reinsurance pays $300,000 (see diagram) Only 10% cash is held as a deposit in trust account Your Captive 51% of Premium Reinsurance Captive Participants Stop Loss Reinsurance Policy with AM Best A-rated carrier Captive Participants Notes:________________________________________________________________ _____________________________________________________________________ Captive Participants 12

831(b) Tax Election For Actual Insurance Company’s Only $1.2M or less in NET premiums written Underwriting profit not taxed – ONLY taxed on investment income May be onshore or offshore (offshore requires 953(d) election) Administrative expenses not deductible (except those having to do with managing investments) Claims not deductible Net operating loss not allowed to carry over Due to attribution in a control group, structure is critical Investments are allowed like any type of captive Most effective in low frequency/ high severity risk models In our opinion, the 831b election has been seriously abused by promoters that are exclusively pushing the tax benefits of the captive. They are not focused on the insurance and risk management aspects of the captive. This will not hold up. Notes:________________________________________________________________ _____________________________________________________________________ 13

Captive Structures Educate – Evaluate – Elevate Notes:________________________________________________________________ _____________________________________________________________________ 14

Single Parent (Pure) Captive If necessary, Reinsurance Program Captive Individual or Company Typical Coverage Examples Loss of Key Contract/Employee Reputational Cover Difference in Conditions Builders Risk General Liability Prop/Auto Ded EPLI/D&O Business Litigation Code Change Products/Comp Ops Use Examples Reimburse retentions Insure low frequency – high severity coverage Insure risk of multiple divisions or subsidiaries of the operating business If standalone, statutory capital in DE is $250,000 If a Series, statutory capital in DE is $50,000 Notes: _______________________________________________________________ _____________________________________________________________________ 15

The Series LLC Captive Why a Series Model? Speed of Implementation Typically more cost effective: Mgmt Fee Audit/Actuarial Fee Premium Tax Lower barrier to entry – the cell may use the sponsor’s statutory capital until it “grows its own” Great for business affiliates $250,000 in Statutory Capital Notes:________________________________________________________________ _____________________________________________________________________ 16

For more information, contact: Mike Spaan, CEO, InLight Risk Management Email: mspaan@inlightrm.com Direct: 405.443.2012 Or Jerry Messick, CEO, Elevate Captives Email: jm@elevatecaptives.com Direct: 405.769.8659 Notes:________________________________________________________________ _____________________________________________________________________ 20