General Session: Captive Case Studies

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2 General Session: Captive Case Studies Moderator: Hugh Rosenbaum, Towers Watson Speakers: Clarence Batts, AZO Services Management Eric Dethlefs, Cassatt RRG Holding Co. Andrew Bradley, Intercona Re (Nestlé)

3 Captive Case Studies: The Privately-Held Middle Market Captive Clarence CB Batts, CPA Chief Financial Officer AZO Services Management, Inc. February 4,

4 PURPOSE Address the following: Are captives a viable option for the small to medium sized, closely held companies, either in a hard or soft market scenario? 4

5 AGENDA Company Overview & Highlights The Risks Closely Held? Captive? The Captives & Unique Program Structure 5

6 COMPANY OVERVIEW Headquarters: Kalamazoo, Michigan The Insureds: Family owned and operated companies, since 1911 Excavation and construction Aggregate production Waste collection and disposal Landfill operation 6

7 COMPANY HIGHLIGHTS South Side Landfill, Indianapolis area since Buffer Golf Course created to form a buffer between the landfill and residents Landfill Gas to Recycled Energy 7

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10 COMPANY HIGHLIGHTS The Definition of Small, Medium and Large Businesses... Small businesses are those companies with fewer than 50 employees. Medium-sized businesses are those companies with between 50 and 499 employees. Larger businesses are companies with 500 or more employees. AZO: Currently about 650 employees When captive companies began we were medium-sized: 250 employees 10

11 INSURABLE EXPOSURES Traditional General Liability Fleet Aviation Umbrella 11

12 INSURABLE EXPOSURES (Cont) MEDICAL Self-Funded Plan End of Plan Run-out of claims (A) ACA (Obamacare) Exposure (B) Stop-Loss Cover (C) 12

13 THE BIG RISKS UNIQUE Pollution Legal Liability Closure Post-Closure Post-Post-Closure NOT IF BUT WHEN AND HOW MUCH 13

14 CLOSELY-HELD? CAPTIVE? Family trip in 1995 to Cayman Buy a bank? A captive is what we need Why form a captive? Why not? 14

15 THE CAPTIVES Philosophy the Soap Box Define Insurance Black s Law Dictionary, 7 th Ed. insurance, n. 1. An agreement by which one party (the insurer) commits to do something of value for another party (the insured) upon the occurrence of some specified contingency; esp., an agreement by which one party assumes a risk faced by another party in return for a premium payment. Many claims are cost of doing business, NOT an insurable RISK Insurance is for catastrophic occurrences Insurance means taking RISK, not necessarily paying CLAIMS 15

16 CLOSELY-HELD? CAPTIVE? T-Value Analysis (The CPA as a Risk Manager ) Sample General Assumptions: $450,000 annual premiums G/L, Fleet, Umbrella $60,000 to run the captive 5% rate of return 16

17 This is what convinced our most Difficult director! The Captive now has assets of $5.1 M by Year 10! 17

18 CLOSELY-HELD? CAPTIVE? How about claims? We assumed 2 large: $1 M & $450 K 18

19 But what about claims?, they asked. The Captive still has assets of $3.2 M by Year 10! 19

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21 THE CAPTIVES We have two: Global Contractors Indemnity, Inc. Environmental Indemnity, Inc. 21

22 THE CAPTIVES Global Results: We still have all our premiums! 17 years through 12/ Years Avg Investment Income $7.8 M $450 K Operating Costs (1.5 M) (88 K) Claims Paid (4.2 M) (247 K) Surplus Invst. Income $2.1 M $115 K If our Investment Income exceeds total cost, we still have all our premiums 22

23 THE CAPTIVES Global Claims History Detail: Year Amount , ,486, , , , Total: $ 4,179,

24 THE CAPTIVES Keeping creativity alive Medical A, B, C 24

25 THE CAPTIVES Environmental REALLY long haul Claims may not begin for 40+ years? 25

26 THE CAPTIVES Claims Our claims mission statement Converse also true Who defends OUR $$$ better than US 26

27 If we haven t done anything wrong.. We owe ourselves the strongest defense possible. Claims Mission Statement November 1, 2002 Attributed to Wal-Mart s General Counsel quoted from the Wall Street Journal, January 21,

28 THE CAPTIVES Domiciles Moved just last year from Cayman to Utah Cayman is an Excellent domicile Our concern offshore ceding sovereignty to U.S. FATCA, FBAR, etc?? 28

29 THE CAPTIVES The Future Sponsor segregated cells? Identify new risks credit card breach? Still Long Haul Moving to new generation of staff 29

30 General Session: Captive Case Studies Moderator: Hugh Rosenbaum, Towers Watson Speakers: Clarence Batts, AZO Services Management Eric Dethlefs, Cassatt RRG Holding Co. Andrew Bradley, Intercona Re (Nestlé)

31 The CASSATT INSURED GROUP Shared Intelligence Risk Success Eric W. Dethlefs February 4, :30 a.m. 10:00 a.m. 31

32 AGENDA 1) Essence of Cassatt 2) Principles for Success 3) Organizational Structure 4) Services and Coverage 5) Governance 6) Strategic Advantages of Membership 7) The Future 32

33 ESSENCE OF CASSATT Established: 1991 Membership: Healthcare organizations Philadelphia area 8 hospitals insured 1,200 physicians Coverage: Medical professional and other liability Structure: Group captive members share risk Members Participate in vigorous evaluation of risk and aggressive management of claims Engage in open and shared learning Hold one another accountable Objectives: Improve quality of patient care provided Lower cost of insurance 33

34 PRINCIPLES FOR SUCCESS Hospital C-Suite engagement Long-term commitment Dedication to patient safety and risk management Prudent underwriting Disciplined investment policy Aggressive claims management Robust governance 34

35 ORGANIZATIONAL STRUCTURE Cassatt Insurance Group Member Hospitals Provides Excess Coverage Cassatt Insurance Company, Ltd. Cassatt RRG Holding Company, Inc. Provides Insurance Services (Bermuda Domicile) (Vermont Business Corp.) Cassatt Insurance Group, Inc. (Vermont Domicile) Sponsored Cell Captive Provides Primary Coverage Cassatt Risk Retention Group, Inc. (Vermont Domicile) Future Cell Future Cell

36 SERVICES AND COVERAGE Risk-Bearing Non Risk-Bearing Cassatt Holding Co. (PA) - Patient Safety/Risk - Claims - Finance - Legal - Underwriting Cassatt (Bermuda) Excess Limits ($15 million) ($4 million retention) Cassatt RRG (VT) + MCARE (PA) Primary Statutory Limits ($1 million) 36

37 GOVERNANCE ILLUSTRATION Engaged and Committed Membership Board of Directors Executive Committee Claims Finance Membership Nominating Risk/Safety Strategic Planning 37

38 STRATEGIC ADVANTAGES OF CASSATT MEMBERSHIP 1) Ownership and control Ability to direct insurance program Networking with other shareholders to enhance patient safety and risk management initiatives 2) Program design customized Specific risks Insuring risks that may otherwise be uninsurable 3) Employed and dedicated staff Highly specialized risk, insurance and patient safety professionals 38

39 STRATEGIC ADVANTAGES OF CASSATT MEMBERSHIP 4) Invested assets managed with prudence and discipline 5) Access to reinsurance markets Reinsurance differs from excess insurance Diverse portfolio of reinsurers Lloyd s of London Bermuda Financial security 6) Opportunity to accumulate wealth 7) Opportunity for distributions to shareholders 39

40 The Cassatt Insured Group* Total Program Funding: $44 million SHARED INTELLIGENCE RISK SUCCESS Premium rates have decreased by 24% Invested Assets: $250 million Average annual investment return 7.9% Shareholders Equity Shareholders equity investment increased by 120% Dividends/Premium Credits: $104 million While maintaining Reserve to Surplus ratio of 2:1 *

41 THE FUTURE FOR CASSATT Threats/Opportunities Healthcare market consolidation Specialized care centers The ACO factor Strategic Initiatives Increase membership Enhance products and services Develop affiliations and partnerships 11

42 General Session: Captive Case Studies Moderator: Hugh Rosenbaum, Towers Watson Speakers: Clarence Batts, AZO Services Management Eric Dethlefs, Cassatt RRG Holding Co. Andrew Bradley, Intercona Re (Nestlé)

43 Intercona Re - Nestlé s Captive A True Success Story Andrew R. Bradley CEO of Intercona Re Châtel-St-Denis Fribourg Switzerland 43

44 Our World 44

45 Nestlé s mission Our objective is to be the recognised leader in Nutrition, Health and Wellness and the industry reference for financial performance 45

46 The Nestlé Story 46

47 Galderma Products 47

48 Nestlé at a Glance CHF 92.2 billion in sales in ,000 employees in over 150 countries 447 factories in 86 countries Over 2,000 brands 1 billion Nestlé products sold every day 48

49 Total Sales* in 2013 (in billion CHF) Sales by Regions 49

50 Linking ERM, Loss Prevention & Risk Financing 50

51 What we Insure / Risk Finance Fire, Explosion, Aircraft, Natural Perils, etc. Third Party and Products Liability Motor Vehicles Marine / Transport Legal requirements Local specific Buildings, Contents, stocks and Business Interruption (18mths) where feasible Bodily Injury and Property Damage to Third Parties Bodily Injury and Property Damage to Third Parties (occasionally own damage) Imports / Exports of raw materials and finished goods (Inland Transport - country specific) Work injuries, clinical trials, environmental, accidents, etc. Life, Disability, Accident, Medical, etc. 51

52 What we do not Insure / Risk Finance Products Recall Products Tampering Machinery breakdown except refrigeration Cash Credit Fraud Low value items, e.g. laptops, bikes, etc. Items within deductible High frequency claims, i.e. it's no longer Insurance Own damage for vehicles 52

53 From "cash box to central risk management tool Risk financing, Captive 53

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55 Nestlé s Reinsurance Captive 55

56 Intercona Re History The Dark Ages 1965 first study rejected by management 1970s / 1980s update studies rejected by management Enlightenment 1995 rent-a-captive account established 1998 Intercona Re established in Zug, Switzerland 2003 accounting, compliance and actuarial outsourced to Aon 2005 Red Maple Insurance Company (direct captive) established in Vermont, USA 2008 Swiss Solvency Test / Professional Reinsurer licence 2009 recruitment of in-house qualified actuary 2010 move to Chatel St Denis, Switzerland A Bright Future 2016? Solvency 2 / equivalence 56

57 Captive Board and Organisation Board CFO Head of Accounting / Reporting Treasurer Head of Pension & Insurance Legal Compliance Intercona CEO Management Team Intercona General Manager Intercona Actuary Intercona Underwriting & Claims Management 4 Board meetings a year 1 AGM 1 Stakeholders meeting 1 Annual Risk Assessment Meeting 1 Meeting with FINMA 57

58 Châtel-St-Denis, Switzerland reinsurance captive Established in 1998 C1 Professional Reinsurance License Share Capital CHF 35 mio (2013) / Equalisation Reserves CHF 372 mio (2013) Annual Premiums CHF 152 mio in 2013 (CHF 133 mio in 2012) Diversified portfolio Technical Reserves CHF 200 mio (2013) Combined Ratio 2011 to 2013: 82%, 90%, 68% (Average 80%) Invested Assets CHF 555 mio (2013) 58

59 Intercona Re Lines of Business Property/Business Interruption Third Party Liability Goods in transit Automobile liability Primary Casualty USA Contractors All Risks Bonds Over redemption/ Prize indemnity Expatriates Medical Business Travel Medical Workers compensation Personal Accident Medical stop loss Life & Disability Pet health insurance 59

60 Current Captive Structure Local Local Local Local Policy Policy Policy Policy Pooling Insurer Intercona Re Risk retained within the Group Excess / Catastrophe Cover True Risk Transfer 60

61 Global Insurance Program 2015 (in CHF) 750m Property ALLIANZ + Others 300m Liability Munich Re AIG Intercona Retentions Zurich Cross Class Aggregate 25 mio per occ / 100 mio annual aggregates including Construction, Work Injury UK, Swiss Accidents and Environmental Including 50 mio x/s 25 mio PDBI equals 150 mio annual aggregate for Zurich placements Pharma & Galderma Liability and EB ACE 250m 75m 25m ZURICH 100% 50 mio X/S 125m 100m 25m ZURICH 100% Liability for pharmaceutical products Interona Re 1c00% 100m per occurrence & annual aggregate 180m 80m Galderma Liability 50% SwissRe 50% Intercona 50% Allianz 50% Zurich 25m Motor ZURICH 100% various limits 15m Marine Employee Benefits 61

62 Captive Development The Intercona Re s portfolio remains diversified in Positive effects of improvements in risk control and loss prevention. Assisting businesses 62

63 Intercona Re diversified portfolio in 2013 Line of Business 2012 in CHF 2013 in CHF 2013 Split Variation % 4% 2% 6% 19% 23% WC & EL 35'017'000 33'465'000 23% -4% PD/BI 25'539'000 30'400'000 21% 19% Employee Benefits 18'499'000 25'705'000 17% 39% US Primary Casualty 11'347'000 11'979'000 8% 6% Medical Costs 10'168'000 11'746'000 8% 16% Third Party Liability 10'377'000 10'910'000 7% 5% Marine 7'557'000 8'272'000 6% 9% Motor 5'804'000 6'024'000 4% 4% Swiss Accident 5'138'000 5'903'000 4% 15% Pet health 5'030'000 2'556'000 2% -49% Total UWY '477' '961' % 9.3% Prior years -1'049'000 5'072'000 Total Financial year 133'427' '033' % 8% 8% 17% WC & EL Employee Benefits Medical Costs Marine Swiss Accident 21% PD/BI US Primary Casualty Third Party Liability Motor Pet health 63

64 Premiums, Assets and Equalisation Reserves Development (in CHF) 700,000, ,000, ,000, ,000, ,000, ,000, ,000, Assets Equalisation reserves 64

65 Development of Property & Casualty Premiums 1996 / 2013 (Property, Liability, Marine, Auto, CAR, D&O, excluding workers compensation and employee benefits) 0.15% % Premiums to Intercona in mio CHF Premiums to third parties in mio CHF % reduction in premiums to Markets in spite of 52% increase in Sales from 1996 to 2013 Premiums to Intercona grew by 435% from 1996 to 2013 Premiums compared to Sales reduced from 0.15% to 0.08% ie a reduction of 46% 65

66 Intercona Business Strategy Intercona Model Average three year combined loss ratio of 85% or less Average three year combined RoE of 15% Site risk grading to be average of 100 or less Property and Casualty premium to be less than 0.075% of global sales existing profile) Average annual investment return above 4% over 5 year period Growth drivers Employee benefits Acquisition, new construction, inclusion of 50% share of JV s and reduced premium leakage Explore new business opportunities outside of traditional lines Nestlé Health Sciences Affinity business Mission Statement Optimize Nestlé s Total Cost of Insurable Risk (TCoIR) Support Nestlé entites in addressing risk management, loss prevention and corporate finance issues Provide, where appropriate, risk financing solutions to operating entities to support business opportunities Creating Shared Value Sustainability Compliance Competitive advantages Any profits/investment income retained within group Reduce dependency on external insurers and counterparty exposure Trusted in house partner with expertise /competences Integrated in Group s strategy and good understanding of Nestlé business/organization Providing innovative and competitive solutions Operational pillars Deliver efficiently/customer service Staff training/education Communication through network (information collection/distribution) Contribute to reducing insured losses through cost effective Loss prevention 66

67 Intercona Strategy How successful were we? Targets established in 2011 Assessment in Q Controlled organic premium growth at compound annual growth rate in excess of 4% to CHF 146 mio by Gross written premium peaked in 2013 at CHF 152 mio and is forecast to reduce to CHF 146 mio in 2014, in line with the target. Average three year loss ratio of 85% or less Average annual investment return initially agreed at 4% over 5 year period, subsequently reduced to 2% Average three year combined Return on Equity (ROE) of 15% Property and Casualty premium to be less than 0.075% of global sales Over the past years, the loss ratio has never been larger than 85%. Negative investment income in 2013 penalised the investment return. Current average: 4.0% Against the background of a significantly increased capital base (mainly Equalisation Reserves) 15% RoE are not achieved despite consistently solid returns over the period.* In 2012, the P&C premium represented less than 0.075% of global sales. The threshold was slightly exceeded in 2013 due to change in risk profile.. Site risk grading to be average of 100 or less Since 2011, the site risk grading has been lower than 100 and now stands at 92. Forecast for 2014 Most of the targets have already been achieved or should be reached at the end of The target will not be achieved The target is not yet reached The target is already reached * E.g. for FY 2013 RoE was at 10.6%. To achieve 15%, beginning of year equity would have needed to be at CHF 260 mio, i.e. CHF 107 mio lower than actual SST capital requirement was at approximately CHF 280 mio to achieve a 200% SST ratio

68 Intercona s Mission Statement KPIs Loss Prevention 68

69 Intercona s Mission Statement Operational Pillars Loss Control Initiatives Funded: Property Loss Prevention Program Supplementary Safety Audits F Manual / Loss Prevention Manual Virtual Fire Manager Thermo Scanning Virtual Fleet Manager / Driver Safety Transport / Marine loss prevention Schneider Electric pilot studies BIA / BCP program BELFOR property restoration after fire, flood, storm, earthquake, etc. Operational Pillars Deliver efficiently/customer service Staff training/education Communication through network (information collection/distribution) Contribute to reducing insured losses through cost effective loss prevention 69

70 The Future? Compliance Solvency II Expanding pharma / health business Potential new exposures eg Cyber and Political violence Continue EB expansion obtain clear mandate Continued Focus on loss prevention in all lines Continue to improve and fine tune processes via 6 Sigma Improve Captive communication 70

71 Conclusion Was Captive a success? Underwriting profit delivered every year since 1996 Millions of profit taken out of Insurance Market P+C Insurance budget reduced by using Intercona and Global Programmes Loss Prevention financed by Intercona drastically improved: - Property grading - Motor Losses - Marine Losses Improved knowledge of exposures Business enabler Its our money Insurance has never prevented a Loss 71

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