Effective Strategies for Presenting to a Board

1. GrGreat Ideas for Presenting to a Board for Presenting to a Board • Tracey LeMay, Masonicare • Art Salvadori, Crowe LLP • PaulDeeley, CapVisor Associates • George M Levine, KPMG LLP

2. Introduction: • Why have a Board Meeting? • What is a Board Meeting? • Captive Owner’s Perspective • Responsibilities: • Auditor • Investment Professional • Actuary

3. Introduction: Why Have a Board Meeting? Basics: • Who attends? • What is discussed? • Who is responsible for what? • How to encourage participation and engagement.

4. Introduction –Why Have a Board Meeting (cont.) • Forming a Captive Insurance Company.pdf • From https://portal.ct.gov/CID/Financial-Division/Captive-Insurance/Captive-Insurance-Regulation: • (1) Background: • 2008 creation of captive insurance companies, regulated by state’s insurance department; 2011 Law Amended; 2012 first 2 captives formed • (2) Phase I, Conduct Pre-Feasibility Analysis: • Select service providers; Conduct Meeting with Captive Manager and Regulator; select name of the captive • (3) Phase II, Once Conceptual Understanding of Prospective Strategy and Program has been achieved: • (4) Phase III, Once a Captive has received Certificate of Authority: Annual Board of Directors Meeting must be held in the State of Connecticut

5. 2. Captive Owner’s Perspective

6. My Captive Board Meetings Identifying What’s Important... As we meet twice a year...making sure we always cover the basics as well as the strategy Keeping directors who are non-insurance professionals informed and on target Anticipating where they may need more agenda time Making sure that the meetings are always informative, interesting, and thought-provoking

7. My Captive Board Meetings Getting “The Mix” Right... • Making sure that unaudited financials are reviewed in detail • Emphasizing, with good examples, how the claim adjustment process is working • Showing how “claim lessons learned” are improving parent organization performance • Making sure that the agenda is not too crowded...encouraging questions and comments

8. My Captive Board Meetings Enhancing Fiduciary Awareness... • Emphasizing the role of captive governance as a compliance tool • Assisting directors in understanding the importance of their independence • Encouraging inquiry and debate at board meetings...eliminating the no-surprises, “canned-and-planned” scripted meeting

9. My Captive Board Meetings Eyes Fixed on the Goals... • Eyes on: solvency and financial integrity • Eyes on: reserving consistency • Eyes on: our reinsurance partners • Eyes on: our commitment to being a high-reliability organization • Eyes on: what matters...which is preserving capital to meet the actuary’s adverse case scenario

10. 3. Responsibilities: • Auditor • Investment Professional • Actuary

11. Auditor Responsibilities Who does the auditor report to? • Audit Committee • Finance Committee • Board of Directors • “Dotted line” to management but does not report to management Engagement letter (details obligations) Audit committee structure • Reports to Board of Directors • Led by Audit Committee Chair • Recommends approval of audit report Management (owner of Company financial statements) Auditor (owner of audit opinion)

12. Auditor Communications Typically 1 or 2 Meetings per year: • Planning Meeting • Year End Results Meeting Auditor Communications (Required): • Required by AICPA Professional Standards • Audit Plan (Team members, timeline, etc…) • Type of Audit Opinion (unmodified, qualified) • Auditors’ Responsibilities • Application of Existing Accounting Policies • Use of Estimates and Specialists • Adjusted or unadjusted journal entries • Internal control or management issues noted • Auditor Independence

13. Auditor Communications Auditor Communications (Value Added): • What Services Were Provided (audit, tax, state letters, etc..) • Special Audit Procedures around high risk areas • Consideration of Fraud in Planning an audit • Auditors’ Highlights • What’s new? • Changes to financial statements from prior years • Major impacts to financial results • Key regulatory permitted practices • Analytics, key ratios, surplus, etc…. • Accounting Pronouncements in the Pipeline • Best Practices or Management Letter Comments • Tax Ideas, Thought Leadership or Other Executive Session????? (most value added) MOST IMPORTANT: INVITE YOUR AUDITORS!

14. Great Ideas for Presenting to a BoardInvestments CCIA Presenter: Paul Deeley

15. Typical Investment Presentationto the Board • Economic overview • US economic performance over last quarter/year • Fed Policy • Employment/ inflation/ trade/ corporate profits, housing • Global markets status • Euro growth • Asia and emerging markets • Market Overview • Bond Market • Stock Market • International markets • Portfolio Review • Balances (market value vs cost) • Holdings report; Gains/Losses • Performance vs benchmark index

16. What’s Missing? Hindsight vs Foresight A economic, market and portfolio review is important for Board stewardship/oversight of the investment program but… Understanding expected future market risks, anticipation of internal and external changes and are more important for the success of the program AND… Understanding how the portfolio is positioned or will be repositioned for success in the upcoming months is also more important

17. Board Preparations What’s changed or expected to change? Consider impact to the investment program for any changes to: • Underwriting Risks • Financial strength • Liquidity needs • Actuarially-assumed rates of return • Regulatory changes or accounting considerations • Investment risks (current and prospective) • How are ALM (Asset Liability Management) and ERM (Enterprise Risk Management) implemented/affected? Bottom Line…The investment program should be designed around, and evolve based upon, internal and external changes.

18. Topics the Board should review Review: Strategic Asset Allocation Balances and performance Board approval of holdings/trades Looking ahead: New asset classes? RBC Implications? Future positioning relative to market expectations Expected inflows and outflows Liquidity requirements

19. Strategic Asset Allocation Long Term determinants of Return What asset classes are used? Has the allocation been optimized?

20. Portfolio Allocations: Scenario Testing

21. Evaluating Performance Actual Manager Data Source: PSN Enterprise Your Manager,Perhaps BB IntermediateGovt/Credit ,Perhaps YTD I year 3 years 5 years Inception Performance Measurement • Traditional NOMINAL rate of return historical analysis • Deficiencies: • Is the benchmark correct? Who picked it? • Nominal performance is not an indicator of manager “skill” • Provides virtually no basis for expected future performance • More than 75% of the managers beat the Bond index

22. Risk-Adjusted Returns SAME MANAGER DATA AS PREVIOUS PAGE

23. Summary • Improve Investment Program evaluation methods • Optimized Strategic Asset Allocation • Risk-adjusted manager returns • Use forward looking planning: • New asset classes? • Future positioning relative to market expectations • Expected inflows and outflows • Liquidity requirements • Risk on/ Risk off (dependent upon internal and external factors)

24. Actuary • From: Bulletin FS-4C-18 • FINANCIAL REPORTING REQUIREMENTS • ALL CAPTIVE INSURERS DOMICILED IN CT, BRANCH CAPTIVES LICENSED TO TRANSACT BUSINESS IN CT, AND RISK RETENTION GROUPS FORMED AS CAPTIVES, DOING BUSINESS IN THE STATE OF CT • REQUIRED ANNUAL FINANCIAL STATEMENTS: • All companies shall submit a Statement of (Actuarial) Opinion (“SAO”) by a Member of the American Academy of Actuaries or a qualified loss reserve specialist, evaluating the company’s loss reserves and loss expense reserves. • The Statement of Actuarial Opinion shall conform to the Standards of Practice promulgated by the Actuarial Standards Board of the American Academy of Actuaries, the standards of the Casualty Actuarial Society, or the standards of the Society of Actuaries, as applicable, and such additional standards as the commissioner deems appropriate.

25. Captive Board Requirements Other Actuarial professional requirements: • Insurance of an SAO by the appointed actuary is required • Issuance of an actuarial report documenting the actuary’s work and conclusions, for review by the Board is not required, but is required by American Academy of Actuaries Professional Standards

26. RRG Board Requirements NAIC Requirements for Risk Retention Groups: • Issuance of a SAO is required • Issuance of an actuarial report documenting the actuary’s work and conclusions, for review by the Board is required (Documentation that Actuarial Report and Opinions were made available to the Board is now required); and • Presentation of findings to the Board and/or the Audit Committee is required (Documentation is now required in Board/Audit Committee minutes).

27. Actuarial Materials Sample actuarial presentation, year end reserves • Statement of Actuarial Opinion • Range of reasonable reserves, central estimate, vs carried reserves • Change in estimates through the period • Roll forward of reserves—Starting Reserves and Ending Reserve Components • Risk of Material Adverse Deviation Actuarial pricing study is possible as well

28. Disclaimer This presentation contains general information only.  CCIA and its guest speakers are not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Neither CCIA nor its guest speakers shall be responsible for any loss sustained by any person who relies on this presentation.