Making your large deductible workers’ compensation program

2. Making your large deductible workers’ compensation program significantly better

3. $1,000,000 Excess Insurance $999,999 Statutory Workers’ Comp $250,001 $250,000 Business High Deductible Retained Layer $0

5. 3 Disadvantages • No tax deduction for retained risk • LoC with after-tax dollars • Volatility

7. Risk Management Tax Savings Cash Flow

8. 93% 91% 93% $3M - $7M Over 10 years 83% 92%

9. Unrelated Risk AEX Captive Direct Premiums

10. Captive Captive Owner Dividends Liquidation Captive Risk Pay losses Operating Company AEX Invest Assets Stocks Bonds Other

11. A valid captive requires “Risk Distribution” Risk distribution is a spreading of risk that allows the insurer to reduce the possibility that a single costly claim will exceed the amount available to the insurer for the payment of such a claim.

12. Multiple Subsidiaries Unrelated Risk Business Unrelated risk Captive Sub Sub Sub Sub Sub Sub Sub Sub Sub Sub Sub Sub

13. $1,000,000 $999,999 Statutory Workers’ Comp Excess Insurance $250,001 $250,000 Business High Deductible Retained Layer $100,001 $100,000 AEX Pooling $0

14. Quota Share % X Premium Quota Shared Premium Unrelated Premium AEX Premium $0.50 $3 x $18 = $18 Captive $1.00 $3 $3 $1.50 Total Premium = $18 $1.00 Captive $6 x $18 = $18 $6 $2.00 $6 $3.00 (Trust Account) $1.50 Captive $9 x $18 = $18 $3.00 $9 $9 $4.50

15. Captive AEX Captive Captive

16. Virtual Pool

17. Criteria Minimum $400,000 Loss Pick Cash Flow

18. Protections Frequency layer = predictable 125% cap Retrospective adjustment

19. Expected: $1m Losses in Pool AEX

20. 2012 Policy year Settlement 2013 2014 2015 2016

21. Captive AEX  Claims Administrator

22. Solutions • Tax deduction for retained risk • LoC with pre-tax dollars • Reduced Volatility

23. Expected: $1m Losses in Pool AEX

24. LOC Collateral LOC Collateral Captive Funded with after tax dollars Funded with pre-tax dollars

25. Unrelated Risk AEX Captive Direct Premiums • Prior year’s retained risk (any line) • Excess work comp layer (e.g., 150 x/s 100) • Load charge for captive • Other types of insurance (GL, auto, E&S)

26. Safe Harbor Industry

28. Objections? • Answers • Already take tax deduction • Need a captive • AEX is an “overlay” • Don’t disrupt existing high deductible program • Share risks with others? • Sharing is in frequency layer • Black Swan event? • Excludes risks >125% expected loss pick • IRS approval? • IRS has approved similar arrangements

29. Cost • AEX Service Cost • 0 -$2M: 6% of AEX premiums • $2M-$4M: 3% • Above $4M: 1% • Minimum annual service fee of $30,000 • Captive Management

30. Participation Criteria Large Deductible or SIR Program Minimum $400,000 Loss Pick in AEX Layer Cash Flow

31. Submission Criteria 5 Years Loss/Exposure Data

32. Next Step Karl Huish Zeb Holt karl_huish@artexrisk.com zeb_holt@artexrisk.com (480) 553-6227 (630) 285-3796

33. Section 831(b) Captive Solution $1.2M annual premium Taxed only on investment income (C corp rates) Basic Captive Diagram Shareholders Insurance Premiums Captive Business Insurance Coverage

34. Insured Risk Workers Comp ● Property ● Auto ● General Liability Hidden Risks Uninsured Risk Deductibles Exclusions Operating Risks A/R Concentration Construction Defect Credit Default Disability Administrative Actions D & O / E & O Legal Defense Reimburse Mold and Pollution Product Warranty

35. Tax Law and Captives 1. Insurance Risk 2. Operate as an insurance company 3. Risk shifting and risk distribution

36. Ownership Options ParentCompany Shareholders Key Employees Family Estate Plan Trust Captive