Series LLC Captive Insurance

1. Series LLC Captive Insurance Regulatory Approach to Special Purpose Captive Insurers Using a Delaware Series Structure Steve Kinion Director, Bureau of Captive and Financial Insurance Products Delaware Insurance Department September 26, 2012 DELAWARE DEPARTMENT OF INSURANCE INSURANCE COMMISSIONER KAREN WELDIN STEWART Bureau of Captive and Financial Insurance Products

2. Delaware CaptivesNumbers of Captives • Captive bureau started in August 2009 with 38 captives, 0 series business units, and six cells • As of September 26, 2012 there are: • 147 active captive insurers with 157 licensed • 205 active series business units with 207 licensed • 10 active cells with 11 licensed • 353 active risk transfer entities DELAWARE DEPARTMENT OF INSURANCE Bureau of Captive and Financial Insurance Products

3. Regulatory Laws • Taxes, Managers, and Meetings • Simplified Premium Tax Scheme • Direct Premium 0.2% Capped at $125,000 • Assumed (Reinsurance) Premiums 0.1% Capped at $75,000 • Place of Business • The captive must have its principal place of business in Delaware. • There is no requirement to retain a Delaware based captive manager. • Required Meetings of Governing Board • A captive is required to have at least one meeting of its governing body in Delaware, but the Delaware corporation law provides that directors may participate in a board meeting by conference telephone or other communications equipment. DELAWARE DEPARTMENT OF INSURANCE Bureau of Captive and Financial Insurance Products

4. Understanding Delaware’s Series Entities DELAWARE DEPARTMENT OF INSURANCE INSURANCE COMMISSIONER KAREN WELDIN STEWART Bureau of Captive and Financial Insurance Products • Delaware Series Entity Choices: • Limited Liability Company (“LLC”) 18 Del.C. 215 • Delaware Statutory Trust (“DST”) 12 Del.C. 3801 et. seq. • A Delaware Series Offers: • Business design flexibility • Governance simplicity • Cost effectiveness • State premium tax advantages

5. Understanding Delaware’s Series Entities • Under the Delaware Series Statute • A limited liability company agreement may establish or provide for the establishment of one or more designated series of members, managers, limited liability company interests or assets • Each series may have its own business purpose or investment objective and may be organized for any lawful business, purpose or activity, whether or not for profit • Each series is authorized to have separate rights, powers, and duties concerning specific property or obligations of the LLC and the related profits and losses DELAWARE DEPARTMENT OF INSURANCE INSURANCE COMMISSIONER KAREN WELDIN STEWART Bureau of Captive and Financial Insurance Products

6. Understanding Delaware’s Series Entities DELAWARE DEPARTMENT OF INSURANCE INSURANCE COMMISSIONER KAREN WELDIN STEWART Bureau of Captive and Financial Insurance Products • Delaware Series Entity Has • the power and capacity to contract • hold title to assets including real, personal and intangible property • grant liens and security interests • sue and be sued • Delaware Series Entity Must • complete an application that is reviewed in the same manner as any other captive • pay an application fee • hold assets separately from other series • be subject to insurer insolvency laws • file an audited financial report

7. Delaware Series Capitalization DELAWARE DEPARTMENT OF INSURANCE INSURANCE COMMISSIONER KAREN WELDIN STEWART Bureau of Captive and Financial Insurance Products • Initial and Sustained Capital • support an adverse deviation in the incurred losses with at least ninety percent (90%) confidence • initial capital requirement shall remain in effect for 12 months after the SBU’s certificate of authority is issued • after the initial 12 months, the SBU must maintain capital and surplus to pay for any actual and contingent losses • measurement of contingent losses is under an adverse scenario which uses a deviation in incurred losses at a 90 percent (90%) confidence level • the Commissioner reserves the discretion to require an SBU to maintain additional capital above the 90th percentile confidence level

8. Understanding Delaware’s Series Entities DELAWARE DEPARTMENT OF INSURANCE INSURANCE COMMISSIONER KAREN WELDIN STEWART Bureau of Captive and Financial Insurance Products • Delaware Series Entity Attributes • Debts, liabilities, obligations, and expenses of a single series are enforceable only against the assets of that series and not against those of the master LLC or another series • The debts, liabilities, obligations, and expenses of the LLC or another series are unenforceable against the single series • The LLC agreement may create classes of members or managers, each associated with a different series, with different rights, powers, and duties and may allow additional classes to be established in the future with different rights, powers, and duties from those assigned to previously established classes

9. Understanding Delaware Captive Regulation DELAWARE DEPARTMENT OF INSURANCE INSURANCE COMMISSIONER KAREN WELDIN STEWART Bureau of Captive and Financial Insurance Products • Series Limited Liability Company or Protected Cell Captive The differences include: • A series captive insurance company (which could be an LLC or another form of legal entity, such as a statutory trust), may enjoy more flexibility to define its governance mechanisms • A series LLC captive can be designed for simpler administration than a protected cell captive • Series entity law protects the assets of one Series Business Unit (“SBU”) from the debts & obligations of other SBUs

10. Understanding Delaware Captive Regulation DELAWARE DEPARTMENT OF INSURANCE INSURANCE COMMISSIONER KAREN WELDIN STEWART Bureau of Captive and Financial Insurance Products • Series Limited Liability Company or Protected Cell Captive (Continued) • SBUs differ from cells in that SBUs exist pursuant to alternative entity laws and not pursuant to the captive insurance statutes that define protected cells. • Favorable treatment of the series structure in Treasury’s proposed tax rules. • Ideal transactions for a series entity captive are: • Each participant in a group captive arrangement to set up its own SBU as the participant. • Ceding a captive’s premiums to multiple series reinsurers or retrocessionaires that could be owned by interested or related parties and offer tax advantages or wealth transfer advantages.

11. Single Parent Structure Series Limited Liability Company or TrustOne Entity One Premium Tax Flexible Governance & Economics Lesser O&M Expenses Separation of Series Freedom of Contract Captive Insurance Company Series LLC (Special Purpose Captive) Series A 831(b) Property Coverage Series B 806 Small Life Insurance Company Series C 501(c)(15) Series D 831(b) Series E Reinsures A, C, and/or D

12. Group Captive Structurewith Series LLC or Trust A Co-Owner B Co-Owner C Co-Owner D Co-Owner E Co-Owner Captive Insurance Company Series LLC Series A Series E Series B Series D Series C DELAWARE DEPARTMENT OF INSURANCE Bureau of Captive and Financial Insurance Products

13. Risk and Investment ConsiderationsFor Series Business Units (“SBUs”) DOI Policy Objectives: • Domicile growth. • 2. No minimum premium tax for SBUs. • 3. Lesser capital & surplus requirement for SBU. Is it a good idea to tie up capital? DELAWARE DEPARTMENT OF INSURANCE INSURANCE COMMISSIONER KAREN WELDIN STEWART Bureau of Captive and Financial Insurance Products

14. Risk and Investment ConsiderationsFor Series Business Units (“SBUs”) DOI Policy Objectives: • Most series limited to writing enterprise risk. Few write third-party liability risk. If they do there is greater regulation and capitalization. • Type of risk property & casualty or life & health. • Asset versus liability matching. DELAWARE DEPARTMENT OF INSURANCE INSURANCE COMMISSIONER KAREN WELDIN STEWART Bureau of Captive and Financial Insurance Products

15. Questions and Answers DELAWARE DEPARTMENT OF INSURANCE INSURANCE COMMISSIONER KAREN WELDIN STEWART Bureau of Captive and Financial Insurance Products