Primer on the Structure and Ownership of Captives

1. Primer on the Structure and Ownership of Captives John Yonkunas

2. Captive Defined A closely held insurance company controlled by its owners… ... offering insurance products or reinsurance support to its owners as the principal beneficiaries... ...and the owners-policyholders actively participate in decisions influencing underwriting, operations and investments.

3. Types of Captives • Pure Single Parent • Related Business Single Parent • Unrelated Business Single Parent • Captive of Insurer • Association Captive • Multi-Owner Captive • Healthcare Captive • Life Insurer Single Parent • Rent-a-Captive • Risk Retention Group • Self Insurance Groups • Reciprocals • Agency Captive • Special Purpose Vehicles • Protected Cell Captive • Producer Owned Insurance Company 3

4. Categories of Captives • Ownership & Control • Single Parent • Cell Captive • Group/Risk Retention Group • Transaction & Regulation • Direct • Fronted/Reinsurance • Structure • Stock/Mutual • Reciprocal • Domicile • Offshore • Onshore

5. Ownership & Control Categories

6. Single Parent • Insures the risk of the parent and sister companies • Includes predictable exposures & working layer • Offers unusual or uninsurable coverages • Punitive Damage • Terrorism • Business Risks • Assets Controlled by Treasury • Loan-Backs • Commercial Paper • May be highly leveraged and rely on Parent Financial Position

7. Group • Insures the risk of the members/policyholders • Includes predictable exposures for casualty coverages at low retentions • Does not typically offer unusual or uninsurable coverages • Assets Managed by Investment Manager • Moderately Leveraged • Higher Regulatory Scrutiny • Risk Retention Group – Federally authorized licensed carrier

8. Cell Captive • Reinsures the risk of cell owner • Includes predictable exposures • No unusual or uninsurable coverages • Assets Controlled by Sponsor/Owner • Ownership/Governance Limited • No Direct Capital – Indirect Capital for “gap” exposure • Legal segregation of assets and liabilities • Entrepreneurial in nature

9. Transaction Categories

10. … direct insurance Premiums Corporation Captive Coverage … reinsurance Premiums Fronting Fee Insurance Company Captive Corporation Reinsurance Coverage Captives are Established to EitherInsure or Reinsure Risk

11. Carrier Captive Owner/ Policyholder Insurance Reinsurance Excess Excess Excess Agreement Agreement Deductible/SIR Indemnification DED/SIR DED/SIR Agreement Captives as part of an integrated and complex risk financing program 11

12. Authorization Varies by Type of Captive *Some Non-RRG groups offer direct insurance coverage as a non-admitted foreign carrier.

13. Structure Categories

14. Structure Category • Stock/Mutual • Stockholders/Members • Board of Directors • Officers • Taxable at Captive level

15. Structure Category • Reciprocal • Subscribers • Subscriber Advisory Committee • Attorney-in-Fact • Subscriber Savings Accounts - Assigned Surplus • Taxable at Captive and Subscriber levels

16. Captive Domicile

17. Off-Shore Implications • Non-Taxable in U.S. • U.S. Owners may be subject to tax exposure • Exposure to FET and Supplies Lines Tax • Non-Insurable Coverage • Money & Meeting outside the U.S. • Non-Admitted/Foreign Status • Subject to Infrastructures of Domicile

18. On-Shore Implications • Captive Exposed to U.S. FIT • Exposed to State/Domicile Premium Tax • Money in U.S.; Meetings in Domicile • Subject to Infrastructure of U.S.

19. Common Structures