1. Employee Benefits A spectrum of opinion www.bermudacaptive.bmJUN 2 - 4, 2014

2. Employee Benefits a Spectrum of Opinion Moderator: Brian Quinn, Managing Director, Granite Management Speakers: Jim Long, VP Client Relationships, Maxis Paul Sprague, Director Chemical Ins. Co. Ltd., a BASF Company Diane Nendick, Global Benefits Manager, Microsoft George O’Donnell, Technical Director, Aon

3. Employers that have used captives for U.S. EB Currently 21 companies have received approval from the U.S. DoL Many more pending Regulations tightening

4. Insured EB Funding Mechanisms F ULLY I NSURED S TOP L OSS M ULTINATIONAL P OOLING C APTIVE R EINSURANCE S ELF I NSURED L EAST F INANCIALLY E FFICIENT M OST F INANCIALLY E FFICIENT

5. A Fronting Insurer’s Perspective Maxis Network

6. Implementation: Company and fronting insurer key issues Situs: Solvency 2/FATCA/other issues Coverage's: Life/LTD/Medical/Voluntary/Stop Loss New Horizons: DB buyouts, Ret Med, PCC’s for smaller groups Success? How to define in years 1 -5? Fronting Insurers Issues

7. Expenses: Local fronting & Central coordination charges Collateral: Cost of capital/reserve relief Limits on ceded risk: Government imposed or insurer ‘rules’ Structure: AP in advance/Quarterly in arrears/Other? Risk Management: Stop Loss and Cat Re? Fronting Insurers Issues

8. A Risk Manager’s Perspective BASF Case Study

9. US Benefit Risks – How BASF May Involve the Captive –BASF will postpone utilizing captive for ERISA-regulated benefits Reason: ERISA & DOL impose significant requirements, e.g.: –DOL exemption –Prohibition against commissions –Independent fiduciary to review and monitor the arrangement –Time and cost to administer –Major area of initial focus: Medical Stop Loss Indemnifies the employer, not employees DOL does not consider Medical Stop Loss an “employee benefit” BASF Case Study (Cont’d)

10. –Rationale for Medical Stop Loss + Captive Exposure to “catastrophic” medical claims has increased with the Patient Protection and Affordable Care Act (“Obamacare”) –Elimination of liability caps for plans –Increased availability of health coverage will accelerate trend for large claims –Although BASF can absorb health benefit risk, BASF desires to establish formal risk funding mechanism BASF already owns the risk so Medical Stop Loss will dampen year over year volatility rather than reduce costs Including Medical Stop Loss with uncorrelated P&C risks can smooth the captive financial results over long term BASF Case Study (Cont’d)

11. Strategy for non-US Insurable Employee Benefits –The company is conducting a feasibility study to involve Bermuda captive –Goal is to replace “out of date” pooling arrangements with more efficient captive program –Operational advantages may include streamlining of the administrative process, greater oversight of loss analysis and risk mitigation practices –Financial advantages may include cost of financing employee benefits, and cash flow –Employee advantages may include security of highly rated partners, competitive premiums and plan designs BASF Case Study (Cont’d)

12. A Human Resource Manager’s Perspective Microsoft Case Study

13. Background: Microsoft promoted multinational pooling to international subsidiaries to optimize their international benefits spend We had three preferred pooling networks (Generali, Insurope and IGP) Pool performance had been very strong the last few years; however, we believed there were additional cost savings and advantages to using a captive Captive arrangement existed for some US Benefits Advantages we identified for using a captive: Local subsidiary should make significant further savings on international benefits spend (remove insurer profits and reduce need for broker) Improved corporate governance, visibility and centralized control of benefit pricing and plan design Potential to earn greater investment income by captive on premiums and reserves that are held by captive Diversifies the risk of our existing captives and supports corporate initiative to move toward captive-centric framework Increases captive leverage with reinsurance market Reasons for change

14. Key Principles for Change Key Principles: Financial Savings –Subsidiary - cost savings immediately realized fully by subsidiary in terms of upfront premium reduction –Corporate – optimize international benefit spend for subsidiaries and potentially realize other efficiencies (investment income, diversified risk, and leverage in reinsurance markets) Plan Design –No change to plan design or coverage level –Terms and conditions are equal to or better than previous local insurance contracts –Move all insured Life, Disability and Accident policies into captive where legally permissible –Encourage insured Medical policies to captive (not mandated) –Retirement plans will not be considered for captive Administration –Local insurer is strong in local market and provides quality service and administration –No increase for ongoing administrative efforts by local subsidiaries Scope:  Local provider (if coverage not currently by captive provider)  Terms and conditions equal to or better  Role of local broker Out of Scope:  Changes to plan design or coverage level  Local subsidiary continues to manage relationship with local provider

15. Year 1 Year 2 Year 3 Other pooled Life, Accident and Disability policies moved to captive arrangement Medical policies moved opportunistically Non-pooled countries Life, Accident and Disability policies moved to captive arrangement Medical policies moved opportunistically Implementation Plan Generali existing pool converted to full captive arrangement Medical policies moved opportunistically How we made the change Cross functional Steering Committee Project Core Team: Business Risk Management Global Benefits Captive Manager Joint Business Owners Joint Executive Sponsors Incremental savings over 3 years (actual saving less pre captive average cumulative pooling dividend) Individual subsidiary savings range in terms of % rate reduction Migrated subsidiaries respond 70% favorable to captive project Success measurement

16. Results “Incremental savings over 3 years (actual saving less pre captive average cumulative pooling)” Achieved: Incremental savings almost double our expectation “Individual subsidiary savings range in terms of % rate reduction” Achieved: Minimum individual saving within 1% Maximum individual saving almost double our expectation “Migrated subsidiaries respond 70% favorable to captive project” Achieved: 95% favorable Results (75 “countries” migrated to captive)

17. A Consultants experience

18. Healthcare Restructuring –US healthcare sector = 15% of US economy –Profound healthcare restructuring is underway –Major drivers: Patient Protection and Affordable Care Act (“Obamacare”) Global economic pressures – US health costs are (way!) out of line with US’ trading partners –Emphasis on “Accountable Care” US Captive Benefits Landscape in 2014

19. US Healthcare and Employers: –No caps on employer health plan liability Employers have to re-think risk management for health benefits –Shifting organizational responsibilities within employers – greater role for Risk Management in managing health risk –Increasing recognition of captive’s role –Increasingly sophisticated reinsurance markets for captive health programs –Rev Rul 2014-15 may create new opportunities US Captive Benefits Landscape in 2014 (Cont’d)

20. US Healthcare and Health Providers –New applications for captives: Provider Risk under Accountable Care risk-sharing contracts Participation in health plans marketed by insurance carriers Medical Stop Loss for the provider’s employees –New applications complement traditional applications involving Professional Liability –Rev Rul 2014-15 may impact non-profit organizations US Captive Benefits Landscape in 2014 (Cont’d)

21. EXPRO (Dept. of Labor Approvals) –Advance DOL approval generally required for Life, Long- Term Disability (“LTD”), Accidental Death & Disability (“AD&D”) – Previous expedited review & approval process known as “EXPRO” About 30 captive arrangements were approved under EXPRO EXPRO expired by 2012 US Captive Benefits Landscape in 2014 (Cont’d)

22. Since 2012, Coca-Cola and Intel have obtained individual (non- EXPRO) exemptions from the DOL At least two other individual exemption applications have been submitted to the DOL Others are “in the pipeline” It appears likely that the next DOL approval will be granted under EXPRO US Captive Benefits Landscape in 2014 (Cont’d)

23. Summary –2014 will be a pivotal year for US captive benefits programs Utilization of captives by employers for health benefits Utilization of captives by health providers New tax guidance EXPRO reinstated US Captive Benefits Landscape in 2014 (Cont’d)