1. 1050 N. Lindbergh Blvd. | St. Louis, Missouri 63132 | 314.983.1200 1551 Wall St., Ste. 280 | St. Charles, Missouri 63303 | 636.255.3000 1000 Broadway, Ste. 300 | Highland, IL 62249 888.279.2792 | www.bswllc.com Captive Insurance Companies Marty Doerr, CPA 314.983.1350 | mdoerr@bswllc.com Bill Goddard, CPCU 314.983.1253 | bgoddard@bswllc.com © 2010 Brown Smith Wallace All Rights Reserved October 13, 2010

2. 2 Captive Insurance Company © 2010 Brown Smith Wallace All Rights Reserved  What is a Captive Insurance Company? o Insurance company formed to insure the risks of its owners  What do Captives typically insure? o Risks that are difficult or expensive to insure in traditional market Earthquake/Flood Environmental Professional Liability Warranties Product Liability Terrorism Cyber Liability Worker’s Compensation Employment Practices Liability Contamination Trademark Defense Deductibles

3. 2 Captive Insurance Company © 2010 Brown Smith Wallace All Rights Reserved  Typical Captive Structure Parent Company Operating Sub Captive Insurance Company

4. 3 Insurance Advantages o Optimization of risk management process o Ability to smooth insurance costs between hard and soft markets o Access to reinsurance markets o Insurance coverage for difficult risk at reasonable price o Retained profits can be used for future losses Tax Advantages o 831(b) – Internal Revenue Code Underwriting profits are tax free if premium is less than $1.2 million o Accelerated tax deductions for reserves for losses o Premiums paid to captive are tax deductible for the insured company Wealth Transfer Advantages  Captive accumulates earnings  Captive can be owned by next (or following) generation  Captive underwriting profits are tax free © 2010 Brown Smith Wallace All Rights Reserved

5. 4 Qualifying as an Insurance Company IRS has been working with the Captive Concept for over 35 years Challenges have been litigated and guidelines are fairly clear Captive must: o Insure insurance risks (not investment or business risks) o Actually be shifting the risk to the captive (“risk shifting”) o Appropriately distribute the risks among sufficient number of insured's © 2010 Brown Smith Wallace All Rights Reserved For Federal Income Tax Purposes

6. It is the position of the IRS that a captive insuring the risks of its parent does not achieve the requisite risk shifting unless there is sufficient unrelated business (see below) Two ways to satisfy risk distribution requirements for favorable treatment under IRS safe harbors: o Insures 12 or more brother/sister companies (case law – 6 brother/sister companies are sufficient). o Insure 50% or more unrelated third parties (case law – 30% unrelated risk is sufficient). Qualifying as an Insurance Company 5 © 2010 Brown Smith Wallace All Rights Reserved

7. 7 20102011201220132014 INCOME Premiums written1,100,000 Less: Premium ceded00000 Net written premium1,100,000 Less: Change in Unearned Premium(1,100,000)0000 Net Earned Premium01,100,000 Less: Losses0(400,000) Underwriting Profit0700,000 General and Administrative Expenses: Captive manager25,00026,00027,04028,12229,246 Audit and tax30,00031,20032,44833,74635,096 Actuarial25,00026,00027,04028,12229,246 Legal Services7,5007,8008,1128,4368,774 Feasibility Study35,0000000 Premium Taxes7,500 Miscellaneous7,5005,000 Total General and Administrative Expenses137,500103,500107,140110,926114,863 Investment Income066,00086,040106,500127,320 Net Income before Income Taxes(137,500)662,500678,900695,574712,457 Federal Income Tax0(22,440)(29,254)(36,210)(43,289) Net Income(137,500)640,060649,646659,364669,169 Assumptions 0% Premium growth; coverages will be reduced if necessary to remain at constant premium level 4% annual increase in expenses 3% Net Investment Yield ABC Insurance Company Pro Forma © 2010 Brown Smith Wallace All Rights Reserved Income Statement

8. 7 20102011201220132014 ASSETS Cash1,212,500100,000 Investments02,175,0002,831,4603,497,7814,174,028 Premiums Receivable00000 Other Assets00000 Total Assets1,212,5002,275,0002,931,4603,597,7814,274,028 LIABILITIES Taxes Payable022,44029,25436,21043,289 Net Loss Reserves0400,000 Unearned Premium Reserves1,100,000 Total Liabilities1,100,0001,522,4401,529,2541,536,2101,543,289 CAPITAL Paid in Capital and Surplus250,000 Earned Surplus(137,500)502,5601,152,2061,811,5712,480,739 Total Equity112,500752,5601,402,2062,061,5712,730,739 Total Liabilities and Capital1,212,5002,275,0002,931,4603,597,7814,274,028 ABC Insurance Company Pro Forma © 2010 Brown Smith Wallace All Rights Reserved Balance Sheet

9. Captive Evaluation Cross functional process – tax, insurance, legal, senior management Corporate structure – Do you have a sufficient number of insurers to qualify for risk distribution (or 3 rd party businesses) Administrative issue –Do we have the expertise in house or do you need an outside advisor Financing Captive Minimum capital required - $250,000 Retained Earnings – grow over years What to do with retained earnings Dividend to captive owners Loan back to captive owner Invest in business Invest in other ventures How do you get started in your company 8 © 2010 Brown Smith Wallace All Rights Reserved

10. Economic Value Analysis – Go or No Go If Go – services to get captive operational o Domicile choice o Coverages to be insured o Calculate premium for selected coverages o Obtain advice with respect to structure to ensure conformity with Federal tax law o License captive with chosen domicile Ongoing operational o Annual audit o Annual meeting o Tax returns/advice o Issue Policies Next Step 9 © 2010 Brown Smith Wallace All Rights Reserved