Employee Benefits in Captives

1. Employee Benefits in Captives

2. Speakers: • George O’Donnell, Senior Vice President, Benefit Funding Strategies, Aon Consulting • Brian Quinn, Director & Chief Underwriting Officer, Granite Management Limited • Molly Seaburg, Risk Manager – Microsoft Business Risk Management, Microsoft Corporation • Christina Reisinger, Director Risk Management, Cephalon, Inc. Moderator: • Philip Barnes, Managing Director, Aon Insurance Managers (Bermuda) Ltd.

3. Where We Are Today: Overview of US and Global Captive Benefits Activity

4. Employee Benefit Risks – What are They? Types of EB Risks: • Death/Term Life • Disability / Income Replacement • Personal Accident / Accidental Death & Dismemberment • Medical / Active Health • Post-Retirement Health • Risk riders of pension policies in some Continental European countries, e.g. Germany, Belgium, Switzerland, Denmark

5. U.S. Activity (Dept. of Labor Approval)

6. Growth in U.S. / Dept. of Labor Approvals x 2000 01 02 03 04 05 06 07 08 09 10 Between 2005 and 2010, over 300% increase in cumulative number of DOL-approved transactions

7. Global Benefits Activity • Currently at least 30 companies have reinsured global employee benefit programs through captives • Virtually all such arrangements are in non-US captive domiciles • Multi-national pooling is the precursor to “captivation”

8. Why? The Reasons Behind the Transactions

9. Rational for EB in Captive The risk profile of employee benefits is characterised by high and stable frequency with low average severity … … and a CAT-tail … Implying that for most corporations employee benefit risk can be fully retained . . . . . . Except for the CAT-tail

10. The Numbers Can Sometimes be Compelling . . . An Example

11. Strategic/Financial/Risk ManagementAdvantages of Captive Program • Reduce insurance costs worldwide • Integrated central control and coordination • Improved underwriting flexibility • Timely and detailed global reporting • Globally aligned risk retention strategy • Benefits represent an attractive risk • Acceleration of cash flows • Interest on risk premiums / reserves • Diversify risks assumed by captive • Support/improve captive tax efficiencies through 3rd party business

12. Structure How Captive Benefits Arrangements Work

13. Benefit Claims Employees Direct Premium Fronting Carrier Employer Dividends Reinsurance Premium Captive Reinsurance Claims U.S. Captive Transactions

14. U.S. Dept. of Labor Requirements CAPTIVE REQUIREMENTS • US nexus • Financially sound • Authorized to reinsure benefits PROTECTION OF PARTICIPANTS • Indemnity reinsurance (front is primarily liable) • Fronting carrier has Best’s “Excellent” rating • Immediate and objectively determinable benefit enhancement • Notification to participants REASONABLENESS OF THE TRANSACTION • Reasonable premiums • Similar to formulae used by other carriers • No commissions paid by plan INDEPENDENT CERTIFICATION • Independent fiduciary must review and approve the transaction

15. Examples of Benefit Plan Enhancements Benefit Enhancements - - A Sampling of the Possibilities • Beneficiary Assistance / Counseling • Travel Assistance Program • Will preparation and legal services - - access to on-line will and forms, plus discounted legal fees • Employer-paid plan providing benefit up to three times the basic life insurance benefit, subject to a schedule of amounts • Portability provision for life coverages - - continue at group rates upon employment termination • Improve Accelerated Death Benefit, e.g., from 50% ($100,000 max) to 75% ($250,000 max), 6 mos. to 12 mos.

16. Captive Multinational Network Carrier#1 Carrier#2 Carrier#3 Carrier#4 Carrier#5 Carrier#6 NL D UK USA Singapore UK Global Captive Arrangements Company

17. International Employee BenefitsThe GM Story Brian Quinn - GRANITE Management Limited

18. General Motors - 2010 Highlights Successfully transitioned to four brands in North America, with combined sales of Chevrolet, Buick, GMC, and Cadillac surpassing sales with eight brands a year ago Announced investments of more than $2.3 billion in the U.S. and Canada, adding more than 9,100 jobs Paid back the loan portion of support from the U.S. and Canadian governments Achieved first quarterly profit as a new company and positive operating cash flow, both important milestones Making progress in restructuring operations in Europe Opel/Vauxhall’s Plan for the Future has reached a significant milestone with a European-wide tentative labor agreement GMIO, continuing its strong growth, recently recorded its 1 millionth sale this year in China, more than two months earlier than its 1 millionth sale last year The new GM has a cleaner, healthier balance sheet Solidly positioned in China, Brazil, and other growing markets

19. General International Limited (GIL) General Motors’ Bermuda domiciled reinsurance captive • GIL Mission Statement • “The primary focus of GIL is to provide insurance and reinsurance services and savings/financial efficiencies to General Motors’ affiliates, employees and suppliers worldwide when corporate programs or local retentions are not viable options.”

20. GIL Financials In 2009 GWP US$ 90M Predominantly employee benefits Funds under management US$129M Shareholders’ equity US$ 70M Pre tax Return on Average Equity 41.6% Total Corporate Return (on GIL equity) 119.8%

21. The GM International Employee Benefit (IEB) Project Captive reinsurance first considered in the late ’90s 3 passively managed multinational pooling arrangements Scant knowledge of its global risk benefit exposures Self-insured programs in the U.S. • Commenced the IEB project in 2000 • Managed jointly by the captive and GM HR

22. GM Corporate Goals for IEB Project Ensure that GM units are paying appropriate premiums for level of claims incurred Monitor all costs charged to GM units Reinsure 100% of Employee Benefit programs Improve financial efficiency Maximize investment returns Improve understanding of global programs and exposures Stable source of “unrelated” premium income per IRS

23. Insured Employee Benefit Funding Mechanisms

24. Managing The Risk Why take the “Risk” into the company Risk taken when benefit promise was made Need to “manage the risk” Insurance companies will manage it for a price Captive reinsurance can manage and cap the cost No insurance company will subsidize a benefit promise over time

25. Captive Reinsurance vs. the Market • The GM program has always beaten the market • Target premiums to equal claims plus admin cost • Why can units sometimes get cheaper quotes? • Buy-in the risk but in time; • Price will increase to cover costs plus profit • Can’t units change every year to get cheapest quote • Disruption to employees • Budgeting uncertainty and volatility • Market fatigue • Loss of control • Relationships

26. GM Results to Date To date global structural cost/premium savings of approximately 35% have been achieved for GM Reported savings of $35M in 2009

27. International Employee Benefits - Growth of GM project • Total premium savings since inception - $117M

28. Lessons learned by GM Move quickly as there is no need to delay Each country is different but the goal is the same The amount of premium you think you have is probably understated Need to gain confidence of local leadership Question all frictional costs Be creative and demand creativity from your global partners/fronting insurers

29. IEB Captive Reinsurance - Advantages Significantly reduced employee benefit cost Enhanced knowledge and control of local programs Superior corporate governance Central knowledge and control FAS reporting Excellent stable source of captive business IRS requirements Captive metrics and IRR Enhances relationship between HR and Finance divisions

30. What Next? Captive reinsurance arrangements are merely the beginning Shift focus from negotiating to claims management Analyze claims and identify abuses Implement controls to reduce/eliminate abuses Unit HR and Finance departments responsible for risk/claim management Educate employees Analyze the big cost drivers (i.e. special clinics)

31. Microsoft Corporation Molly A. Seaburg Risk Manager, SMSG

32. Agenda An overview of our company MSFT from the Risk Manager’s perspective What led us to decide to reinsure employee benefits to one of our captives The key stakeholders in the process, and how we addressed their respective concerns Our experience so far Our future plans for “captivating” benefit programs

33. Company Overview Microsoft Corporation is the worldwide leader in software services, and solutions that help people and businesses realize their full potential. Founded in 1975 in Albuquerque, NM Moved to Washington in 1979 Incorporated June 25, 1981 Currently employ >88,000 employees worldwide >53,000 in the US Currently have subsidiaries in 112 countries Annual revenue for FY09 was $58.4 billion

34. Microsoft – Redmond Campus

35. Company Overview Microsoft Corporation – Where are we going? Software – YES Online Services Includes MS Exchange, Sharepoint, Amalga, Xbox Live, & Bing Windows Azure Operating system for cloud computing Storage, computing and networking infrastructure services Accessibility that is easy and secure and accessible on any device from any location Kinect formally Project Natal for Xbox 360 Body recognition, sensors, verbal recognition

36. Microsoft from a Risk Manager Perspective MSFT From the Risk Manager’s Perspective A great deal to contemplate with all different risks For Risk Management, this implies a philosophy of the basics: Risk ID, Assessment, Response, Financing, & Monitoring Treasurer Challenge What can Risk Management do to prolong the life cycle of the MS dollar? What can Risk Management do to increase shareholder value?

37. Captive Centric Framework Microsoft’s captives were established and operated consistent with this philosophy 3.5 captives Bermuda – est. 1998 Branch in VT – est. 2008 Vermont – est. 2000 Arizona – est. 2008 Why so many?

38. Benefits & Captives Benefits and Captives – How we got there Foot in the door And so it began… Internal Meetings with HR, Tax and LCA (2008) Commissioned feasibility analyses on big picture Re-evaluated – established timeline Finally decided in July 2009 to proceed with reinsuring Long-Term Disability (LTD) in the Bermuda branch

39. Stakeholders Key Internal Stakeholders / Issues & Answers Human Resources Why does Risk want to do this? How will this affect our relationship with our current carrier? How will this affect plan design? How will this be communicated to employees? Will this mean more work for us?

40. Stakeholders Key Internal Stakeholders . . . (Cont’d) Finance Capital requirements for reinsurance collateral? Letter of Credit, Reg 114 Trust, or Funds Withheld? Accounting?

41. Stakeholders Key Internal Stakeholders . . . (Cont’d) Legal ERISA attorney briefings Contract attorneys provided input on reinsurance contract Risk Management Coordination of events Tracking of timeline and deliverables Creating smooth transitions – being the backstop

42. Stakeholders Key Stakeholders / Fronting Carrier Commitment / cooperation of fronting carrier greatly expedites the process Prudential has extensive experience as a fronting carrier, and was always committed to achieving success Carrier provides initial drafts of reinsurance agreements, which were reviewed / modified in response to comments by MSFT and its advisors

43. Stakeholders Key Stakeholders / Independent Fiduciary Milliman has rendered fiduciary opinions in several previous transactions MSFT’s transaction was very similar to preceding EXPO transactions, and did not pose any unusual issues A favorable fiduciary opinion was issued quickly

44. Experience So Far Our Experience so Far . . . So far, so good Preliminary meetings with fronting carrier, treasury controller, captive managers, risk management Reporting – clean and timely We’ll keep you posted

45. Our Future Plans Our Future Plans . . . Review of additional lines of domestic benefits Currently reviewing the reinsurance of our international benefits into the captive Multiple countries Multiple lines Timing – phases/waves

46. Cephalon, Inc Christina Reisinger Director Risk Management

47. Cephalon Story • Cephalon is a global biopharmaceutical company dedicated to discovering, developing and bringing to market medications to improve the quality of life of individuals around the world. Since its inception in 1987, Cephalon has brought first-in-class and best-in-class medicines to patients in several therapeutic areas. • Cephalon has the distinction of being one of the world's fastest-growing biopharmaceutical companies, now among the Fortune 1000 and a member of the S&P 500 Index, employing approximately 4,000 people worldwide. The company sells numerous branded and generic products around the world. In total, Cephalon sells more than 150 products in nearly 100 countries

48. A Decade of Solid Growth *2010 estimates depict the midpoint of guidance ranges provided in press release issued 5/4/10.

49. Cephalon’s Captive Program In addition to ERISA benefits Cephalon places the following programs in their Captive: Buy-Down Program Workers’ Compensation and Auto Worldwide Product Liability Quota Share Excess Liability Worldwide Clinical Trials

50. What About Federal Government Requirements? • Pre-approval of DOL if benefit regulated by ERISA • Fronting carrier must reinsure to captive • Fronting carrier rated at least “A minus” by Best (DOL initially required “A”; the DOL has relaxed it position) • Captive must have a US presence (either domicile or branch) • HR involvement: • “Benefit enhancement” • Independent fiduciary review/approval • Employee Communication