1. Actuarial Considerations In Connection with Captive Insurance Companies September, 2007 George Levine KPMG LLP

2. 1 Scope of Actuarial Involvement with Captives 1. Captive Feasibility Study 2. Captive Formation Process 3. Process Reviews 4. Loss Reserve Review 5. Actuarial Opinion on Reserves.

3. 2 1. The Captive Feasibility Study Define Objectives – Financial and Business Forecast Ultimate Retained Loss Costs Perform NPV/Cash Flow Analysis of Alternatives Develop Program and Optimal Ownership Structure of Captive Domicile Analysis Analyze Tax Issues Deductibility of Captive Premium Tax Treatment of Captive Income

4. 3 2. The Captive Formation Process Business Plan Forecasts of Annual Expected Losses Program Structure (Premiums, Limits, Capitalization) Pro forma Captive Financial Statements

5. 4 2. The Captive Formation Process, continued Financial Impact to Parent Cash Flow Requirements to Prefund Premium Capitalization of Captive – Cash or LOC Cost of Capital Eliminated through Intercompany Loans from Captive to Parent Accrual of Liabilities (Case Reserves and IBNR)

6. 5 3. Process Reviews Underwriting Risk Cash Flow/Recording Risk (Payments to TPAs) Monitoring Loss Payments/Expense Payments Timing Risk Collectibility of Insurance/Reinsurance Risk Interest Rate Risk (If Discounting) Risks may have Sarbanes-Oxley 404 Implications

7. 6 Claims Data Sorted by Insured Reports produced generating loss triangles, etc. to estimate accruals Claims Limited to Self-Insured Retention Claims recorded into General Ledger Bills received from TPA Claims are received or estimated Injured Party Receives Payment Insurance Company/TPAIndemnified Party Transactional Data Systems Captive Systems Claims data placed into Actuarial Data Base Claims data delivered to actuary Claims paid to TPA RECONCILIATION 3. Process Reviews, continued Cash Flow/Recording Risk: Captive Claim Payment Process Claims Billed to Self-Insurer

8. 7 3. Process Reviews, continued Timing Risk Timing of Payments Timing of Analysis At which valuation date should review be performed? Valuation Date – For Example, 12/31/XX, or 9/30/XX and Roll-forward Audit date is often six months after year end

9. 8 4. The Actuarial Reserving Process Information Available Losses From Third-Party Administrator, Client’s Parent, or Captive Manager Timing – What Valuation to Use Premiums Exposure Data Financial Statements Unaudited Statements Audited Statements (internal)

10. 9 4. The Actuarial Reserving Process, continued Unique Issues for Captives Availability of Data Quality of Data Reconciliation of Paid Data for Timing Differences Small Size of Organization Solvency of Reinsurer or Fronting Insurer Complex Programs

11. 10 4. The Actuarial Reserving Process, continued Some Generally Accepted Loss Methodologies Chain-Ladder Methods Use of Industry Data Bornhuetter-Ferguson Methods Loss Limitations: Large Losses Berquist-Sherman Type Adjustments

12. 11 4. The Actuarial Reserving Process, continued Actuarial Deliverables Depend Upon Domicile’s Requirements Statement of Actuarial Opinion Vermont Requirement – With audited financial statements, six months after fiscal year end Actuarial Report/Workpapers

13. 12 4. The Actuarial Reserving Process, continued Limitations of Captive Reviews Timing of Reviews – At Year End or Before Year End (discussed before) Gross or Net of Insurance? Range of Reserves – Where to Carry Reserves

14. 13 4. The Actuarial Reserving Process, continued What is a Range of Reasonable Reserve Estimates? Range Defined in Actuarial Standard of Practice # 36 – Section 3.6.4 Range of Estimates that could be produced by appropriate actuarial methods or alternative sets of assumptions that the actuary judges to be reasonable

15. 14 5. Actuarial Opinion on Reserves Actuarial Opinion Requirements by Domicile Bermuda Actuarial Opinion from Loss Reserve Specialist Cayman Islands No formal Opinion Requirement, unless Authority Requests a Review, then Report Vermont Actuarial Opinion and Workpapers on Site of Company

16. 15 5. Actuarial Opinion on Reserves, continued Actuarial Standard of Practice # 36 Five Types of Opinions (Section 3.3.2) Reasonable (If carried reserves are within a range of reasonable reserves) Deficient or Inadequate (Not Reasonable) Redundant or Excess Provision (Not Reasonable) Qualified No Opinion

17. 16 Presenter’s contact details George Levine KPMG LLP www.kpmg.com The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2007 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 15444PHL