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JUN 8 – 10, 2015

Segregated Accounts and Other Alternative Risk Transfer Structures

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Today’s Speakers:• Phil Stevens, Principal, Rowayton Risk Consulting

• Jim Bulkowski, Senior Manager, Advisory Services, Ernst & Young LLP;

Moderator:• Mike Douglas, Director, Business Development, Aon

Global Risk Consulting/Captive Insurance

Segregated Accounts and Other Alternative Risk Transfer Structures

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Our Topic Today

Discussion of the increasing development and use of Segregated Accounts as a means of alternative risk transfer for a wide variety of covers.

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Agenda

• Back to the Future – How did we get here?• Introduction to Cell Companies• What’s In a Name?• What IS a Cells Company?• Incorporated Cell Captives

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Back To the Future – How Did We Get Here?

What as the genesis of segregated accounts companies we use today?

• Rent-A-Captives;

• Started in Bermuda in the 1970’s;

• One insurance company that rented Its insurance License to multiple participants;

• Segregation of assets and liabilities was by Contract

• Led to the potential for renter “A” to have to be bailed out by other Renters and the Rent-A-Captive owner if insufficient funds in Renter “A’s” rented space.

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Rent – A Captive

CORE CAPITALCORE

CAPITAL PF1

PF2

PFetc...

PF3

PF4

PF5

PF6

PF7

PF8

PF9

PF10

Preferred Shareholder s (Clients)

PF10

PF1

Bust6

BAIL OUT! BAIL OUT!

BAIL OUT! BAIL OUT

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Segregated Account Companies

• Legislation first introduced in Guernsey in 1997;

• Conceived a corporate entity in which separately identifiable cells are created for the same or separate cell users under which the assets and liabilities of each cell are legally separated from each other

• One legal entity – split into the core and multiple cells

• Legal segregation of cells – each with a specific reference

• 2 classes of shares – core and cellular

• Unlimited number of cells

• PCC’s now utilised in almost 40 different domiciles and very much an established concept

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Segregated Cell Captive

CORE CAPITALCORE

CAPITAL Cell1

Cell2

Celletc...

Cell3

Cell4

Cell5

Cell6

Cell7

Cell8

Cell9

Cell10

Preferred Non-Voting Shares (Clients)

Cell10

Cell1

Bust6

PROTECTED PROTECTED

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What’s In a Name?

Depending on the domicile:

• Segregated Account Company (Bda)• Segregated Portfolio Company (Cayman)• Protected Cell Company (US and Gib & Guernsey)• Series LLC’s (Some US Domiciles)• Sponsored Cell Captives (Vt)

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What IS a Segregated Cell Company?

Externally:• One Company/incorporated entity• (Statutory Accounts, Tax Treatment)

Internally:• Complete autonomy of individual cells• One cell is not liable for the obligations of another cell or the core. Cells are set up,

approved and closed individually.

The Core• Capitalised with ordinary voting shares by the Sponsor

The Cells• Capitalised by the owners of the respective cells issuing non-voting redeemable

preference shares connected to the cell with a specific cell reference• Each cell has an individual cell reference e.g. cell A, cell B, cell C etc• This is required by law and all bank accounts/contracts entered into by the cell must

refer to this specific cell reference.

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Traditional Segregated Cell Structure

Shareholder XYZ

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Typical Cell Uses

• Pre-loss risk funding for retained risk

• Retain profitable premiums

• Used for access to reinsurance

• Used to provide fronting for certain risks.

• Agency Captives (PORC’s)

• Used for Special Purpose Vehicles– ILS– Transformers

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Cell Uses – Practical Examples

Traditional• Inland Transit (e.g. Stock Throughput)• Punitive Damages (fronting)• Difference in Conditions (fronting)

A Little Less usual • Catastrophe/SPV• Professional Indemnity• Political Risks• Environmental Risk• Extended Warranty• Bonus Protection (fronting)• Wealth Transfer (SEE NEXT SLIDE)

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Segregated Cell Used for Wealth Transfer

Owners:Parent(s)

831 (b)Segregated Cell Captive

(Reinsurer)

Insurance Policies

Shareholders:Children or Family

Trust

Investments and Potential Underwriting

Profit

Dividends

PremiumsReinsurance

Premiums

Commercial Carrier (Insurer)

Organization (Insured)

Coverage and Claim

Payments

Claimants

Claim Payments

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Advantages of Cell Captives

• Almost all the advantages of a wholly owned captive are mirrored in a rent-a-captive / protected cell captive;

• Lower start up time to form a cell in an existing facility

• Lower capital requirements than a wholly owned captive

• Lower administrative costs than a wholly owned captive;

• Reduces the dependency on commercial markets;

• Direct access to reinsurance markets;

• Greater structure and control over risk management and financing;

• Continuity and breadth of insurance coverage;

• Reduced volatility on insurance spend;

• Captures profits otherwise lost to the insurer ;

• Potential for tax benefits

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Disadvantages of Cell Captives

• Cells must be fully funded with premiums and LOC. or reinsurance;

• Where a cell is fully funded only with premium and LOC – the cell may not be classified as insurance for tax purposes;

• Captive is not owned by the individual renters and so any decision to pay dividends etc. must be approved by the cell captive owner;

• Rent-a-Captives have a credit element risk where all renters may be required to bail out a bankrupt cell. – Protected Cell structures avoid this and there is no sharing of risk.

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Incorporated Cell Captives

• IC formed by resolution and application to the Companies Registry• IC is a legal entity in its own right – separately incorporated and licensed

• IC can be converted into a standalone company• Separate audit required for each IC• Slower to form and can be more expensive to set up and administer

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ICC Recap - 2006

Shareholder XYZ

Shareholder XYZ

The core can be used as a holding company

Cells can transact with each other

Single Board of Directors, allowing delegation of management responsibilities

The shareholder has ultimate recourse and control as cell can be separated from the ICC structure

Greater accounting and tax certainty – i.e. subsidiary and CFC

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ICC – Potential Uses

• As an alternative to Segregated Cells or Wholly Owned Captive

• A more cost effective SPV than a full company subsidiary

• Complete certainty of ownership and liabilities

• Incubator cells for full blown captives

• Companies who want a separately incorporated vehicle but don’t want the time/expense of the Board meetings

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Questions / Discussion