Protected Cell Company

1. Protected Cell Company THE PROTECTED CELL COMPANY (PCC) (Incorporated in Guernsey] and SEGREGATED ACCOUNT COMPANY (SAC) (Incorporated in Bermuda] This presentation is simply to illustrate the workings of a Protected Cell company And does not purport to be definitive on all aspects of the PCC

2. A PCC and SAC explained It is a single legal entity It is a company made of individual ‘protected cells’ or ‘segregated accounts’. It has a ‘core’ capital. Each cell or account will have its own additional capital. The assets of one cell or account are statutorily protected from the creditors of another. PCC - creditors of one cell can attach the assets of that cell and the ‘core’ capital. SAC – creditors of one account can only attach assets of that account and have no recourse to the ‘core’. The Directors have a duty to inform any party that contracts with a cell that is doing business with that particular cell. Its major advantage over the captive is that it is a simplified and more cost effective way of entering the alternative risk market. Each Cell has a separate series of redeemable preference shares to enable dividends to be declared on its underwriting performance.

3. The Protected Cell Company (PCC) A customer enacts an Insurance policy with a Local Insurer or, where possible, directly with a cell of the PCC The PCC is financed as per a normal Insurer under the PCC’s Jurisdiction rules Each cell is additionally financed usually by preference shares to enable dividends to be paid. Additional finance could be in the form of subordinated loans or other assets Each Cell assets and liabilities are insulated from any other Cell Contingent Payment Customer Fronting Insurer Premium Cell Cell Cell Cell Cell Retrocessionaire(s) PCC Cell Cell Cell Equity Dividends PCC Owner

4. PCC Cell for smaller Companies • To establish a Captive usually requires a substantial premium and capital to justify the regulatory, legal and operational expenses • For smaller companies the costs are inherently prohibitive. • Nevertheless many smaller companies wish to have the advantages of a captive and not be trapped into the traditional Insurance market. • A solution is to take a cell of an existing PCC • Each cell’s assets and liabilities are segregated • The Legislation has been written to ensure that no cross contamination of risks occurs • Thus if one cell becomes insolvent it cannot claim on the assets of another cell.

5. Cell Types • Life Insurance • Non-Life Insurance • Reinsurance • Pensions • Investments • Catastrophe Bonds • Securitisations • Transformer Contracts • Collateralised Debt Obligations • The PCC concept is highly innovative and although the above covers a large cross section of what is possible, there are many more possibilities. CPL is able to work with clients to analyse their needs and construct a solution appropriate to their circumstances.

6. PCC for Catastrophe Bonds • Catastrophe Bonds are High Risk Insurance contracts • The example shown is the risk of a hurricane devastating property • The Insured enacts a contract with the cell of the PCC at a premium of say $50m • The coverage is $500m • The PCC turns to the Capital Markets to obtain funding • The Capital Market are much larger than the Reinsurance market. • If there is no claim the capital markets receive the premium plus the interest plus the returned capital • In the event of a claim the Insured receives the coverage of $500m and the capital markets lose their capital • Other contract structures can be devised so that no capital is lost but premiums and coverage changes. Insured Premium $50m Claim PCC Cell Capital/Premium /Interest Capital $500m Capital Markets

7. PCC and Securitisation Mortgage payers • Securitisation occurs when the cash flows on an asset, in this case, mortgage payments, are repackaged and sold to third parties • Securitisation enables a company to improve its capital position, possibly allowing additional investment, without totally divesting of the business • The PCC Cell is used to purchase the mortgage cash flows • Investors fund the PCC to obtain an alternative investment class with a potential higher yield • The diagram is highly simplified as there will be additional parties to the transaction such as, a credit enhancing agency and an Investment Bank to establish securities to distribute to Investors. • Other assets suitable for securitisation include almost all forms of loan and almost all forms of receivables such as credit cards Loans Mortgage payments Mortgage Lender Cash flows Purchase price PCC CELL Interest Payments Investment Investors

8. PCC as Transformer Company • A cell of the PCC is able to transact business under both Insurance and Bank documentation • A cell therefore becomes an ideal candidate to transform Bank products into Insurance products and vice versa • The example transforms an Insurance contract into a derivative. • Company is in a jurisdiction that doesn’t permit derivatives • Company buys Insurance from a local company to cover it’s risk • Local Insurance company buys reinsurance from a cell of the PCC • PCC buys a derivative as its asset to cover it’s liability. Local Insurer Premiums Contingent Payments Insurance Documentation PCC CELL Bank Documentation Premiums Contingent Payments Bank/ Derivative

9. PCC and Collateral Debt Obligations Obligors • In a similar fashion to securitisations structured finance can be used in a PCC to present Investors with an alternative asset class • Collateral Debt Obligations (CDOs) structures bundle credit risk and issue securities to Investors Credit Payments Bank Cash flows Purchase price Securities are issued to Investors normally tranched according to risk AAA has the lowest risk and lowest interest rate Equity is unrated and has the highest risk and hence the highest interest rate AAA PCC CELL AA A Interest Payments Investment BBB BB Equity unrated Investors Similar structures exist for Collateralised Loan Obligations (CLOs) And Collateralised Bond Obligations (CBOs)