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Captive Update

News of the Alternative Risk Markets From the A.M. Best Company

July, 2014

A. M. Best has been covering the captive sector for several decades. Today we rate approximately 200 captive ventures in over 40 jurisdictions, ranging from Hawaii in the West to Labuan in the East. Although a rating on a

captive is comparable to any other rating issued by AM Best, we recognize that captives serve special purposes and typically have an operating style that differs from the conventional market. A rating can be of benefit to a captive by demonstrating its financial strength and its best practice performance to a variety of stakeholders,

such as fronting insurers, reinsurers and a parent not otherwise engaged in insurance.

Contents

Best’s Rating Announcements

A.M. Best Downgrades Ratings of Risk Reinsurance Limited. . . . . . . . . . . . . . . . . 3

A.M. Best Affirms Ratings of Transmonde Services Insurance Company, Limited . 3

A.M. Best Revises Outlook to Stable for Ohio Bar Liability Insurance Company. . 3

A.M. Best Upgrades Rating of 321 Henderson Receivables V LLC . . . . . . . . . . . . . 4

A.M. Best Assigns Ratings to Pacific Lighthouse Re LLC . . . . . . . . . . . . . . . . . . . . 4

A.M Best Affirms Ratings of Saturn Insurance Inc.. . . . . . . . . . . . . . . . . . . . . . . . . 4

A.M. Best Revises Issuer Credit Rating Outlook to Positive for Jupiter Insurance Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

A.M. Best Affirms Ratings of Sooner Insurance Company . . . . . . . . . . . . . . . . . . . 5

A.M. Best Affirms Ratings of The American Road Insurance Company . . . . . . . . . 6

A.M. Best Affirms Ratings of Ardellis Insurance Ltd.. . . . . . . . . . . . . . . . . . . . . . . . 6

A.M. Best Affirms Ratings of Iron Horse Insurance Company . . . . . . . . . . . . . . . . 6

A.M. Best Affirms Ratings of Heddington Insurance Limited . . . . . . . . . . . . . . . . . 7

A.M. Best Upgrades Ratings of Associated Electric & Gas Insurance Services Limited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

A.M. Best Affirms Ratings of Grupo Nacional Provincial, S.A.B.. . . . . . . . . . . . . . . 7

A.M. Best Affirms Ratings of Delvag Luftfahrtversicherungs-AG and Its Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

A.M. Best Affirms Ratings of Toyota Motor Insurance Company . . . . . . . . . . . . . . 8

Methodology Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Domiciles

Gibraltar Hopes to Finalize Its First ILS Transaction in 2014 . . . . . . . . . . . . . . . . . 9

Gibraltar’s Minister for Financial Services: We Are a Gateway to the EU Insurance Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Bermuda Regulator: Captives Coming From Canada, Latin America, Africa . . . . . 11

Captives Set to Rise in Asia as Companies Look for Ways to Better Manage Risks, Market Watchers Say . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

AIA Sets up Fronted Captive for Employee Benefits in Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Malaysia’s Labuan Financial Center Attracted 19 New Insurance Operations. . . 14

Vermont Governor Signs Bill Allowing ‘Dormant’ Status for Captives . . . . . . . . . 15

Texas Licenses AT&T Subsidiary as Latest Captive Insurer . . . . . . . . . . . . . . . . . 15

Analysts, Brokers & Insurers

Marsh-Managed Hybrid Insurer Issuing Policies to Africa’s First Catastrophe Insurance Pool. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Aon Captive Expert: Terror, Cyber and Bad Behavior Remain Underrated Risks. 16

Deloitte’s Khan: Bermuda Is Drawing Latin American Captives . . . . . . . . . . . . . 17

Aon Exec: Latin American Captive Growth Benefits Bermuda . . . . . . . . . . . . . . 17

Zurich Exec: Captives Expanding Their Role Within Corporations . . . . . . . . . . . 18

Marsh Exec: Captives Moving Cautiously Into Cyber, Supply Risk . . . . . . . . . . . 18

Cedar Consulting Executive: Use Microcaptives for the Right Purposes . . . . . . 19

Insurance Broker Marsh Names President of Global Captive Solutions Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Willis Broker: International Competition a Factor in Lower Medical Professional Liability Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

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Best’s Rating Announcements

A.M. Best Downgrades Ratings of Risk Reinsurance Limited

A.M. Best has downgraded the financial strength rating to A (Excellent) from A+ (Superior) and the issuer credit ratings (ICR) to “a+” from “aa-” for Risk Reinsurance Limited (RRL) (Cayman Islands). The outlook for both ratings is stable. RRL is the single parent captive of Transpower New Zealand Limited (Transpower), the state-owned, sole operator of New Zealand’s electricity grid.

The rating actions consider the high event retentions rela-tive to RRL’s capital target, which potentially could result in significant fluctuation of its risk-adjusted capitalization. Fol-lowing a large dividend payment to Transpower in August 2013, RRL’s capital target has been set at NZD 50 million.

Positive rating factors include RRL’s excellent balance sheet strength and capital generation ability. The quality of Transpower’s risk management has benefitted RRL’s under-writing results since its inception and sustained its excel-lent capital generation ability so far.

Positive rating actions are unlikely at present. Negative rating actions could occur if RRL’s capital target is further reduced relative to its event retentions.

The methodology used in determining these interactive ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Ratings are communicated to rated entities prior to pub-lication, and unless stated otherwise, the ratings were not amended subsequent to that communication.

This rating announcement has been issued by A.M. Best Asia-Pacific Limited, which is a subsidiary of A.M. Best Company. A.M. Best Company is the world’s oldest and most authorita-tive insurance rating and information source.

A.M. Best Affirms Ratings of Transmonde Services Insurance Company, Limited

A.M. Best has affirmed the financial strength rating of A (Excellent) and issuer credit rating of “a” of Transmonde Ser-vices Insurance Company, Limited (Transmonde) (Bermuda). The outlook for both ratings is stable.

The ratings reflect Transmonde’s historical strong operat-ing performance, excellent risk-adjusted capitalization and ability to generate net underwriting income and net income in recent years. These factors have allowed Transmonde to enhance its surplus considerably.

Partially offsetting these positive rating factors are Trans-monde’s relatively high retentions and concentration in liabil-ity lines with significant loss severity potential. An additional offsetting rating factor is its limited market profile as a single parent captive. Transmonde provides professional, general

and pollution liability coverages to members of the Interna-tional Association of Superintendents, which is a subsidiary of SGS SA (SGS) [SWX: SGSN], a publicly traded Swiss company.

Transmonde has maintained very conservative underwriting leverage ratios as surplus has consistently grown to support its business volumes. The company has posted low loss and loss adjustment expense ratios, reflecting SGS’ effective risk management. Transmonde’s relatively high per occurrence retentions are mitigated by significant deductibles and conservative reserving practices. The ratings recognize the company’s balance sheet strength and conservative under-writing leverage measures as well as its role as the captive insurance company of SGS.

While A.M. Best believes Transmonde is well positioned at its current rating level, factors that may lead to negative rating actions include unfavorable operating profitability trends, outsized investment losses and a significant decline in its risk-adjusted capital that would not be supportive of its current rating level.

A.M. Best Revises Outlook to Stable for Ohio Bar Liability Insurance Company

A.M. Best has revised the outlook to stable from negative and affirmed the financial strength rating of A (Excellent) and issuer credit rating of “a” of Ohio Bar Liability Insurance Company (OBLIC) (Columbus, OH).

The rating affirmations reflect OBLIC’s solid risk-adjusted capitalization, conservative operating strategy and histori-cally strong overall profitability. The ratings also consider the company’s leadership position in providing lawyers’ professional liability insurance (LPLI) to sole practitioners and smaller-size law firms operating in Ohio. These positive rating factors are primarily derived from OBLIC’s continued focus and commitment to attorneys in Ohio by maintaining stability in the state’s LPLI market and offering high quality service to its policyholders.

These positive rating factors are partially offset by OBLIC’s concentration of risk by writing one line of business in a single state. This increases its susceptibility to adverse loss trends and economic conditions, as well as challenges in the regulatory or legislative environments. Operating per-formance was impacted by an upward trend in loss ratios during 2010 and 2011 due primarily to unexpected claims severity, including moderately higher defense costs. Manage-ment responded by conducting market research and pricing studies. Through this, OBLIC initiated changes to deduct-ible credits, area of practice debits and firm size discounts, which led to higher overall rates to generate additional premium.

A.M. Best revised the outlook for the ratings of OBLIC based on the recent improvement in its underwriting and operat-ing profitability during the past two years. This has restored growth in surplus despite the impact of stockholder dividends. Management has stabilized after significant turnover in 2010 and 2011 and put increased focus on pricing and reserving.

The ratings of OBLIC could be downgraded as a result of a significant decline in its risk-adjusted capitalization or a

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trend of adverse underwriting performance such as from elevated loss costs and/or inadequate loss reserves. Positive rating actions could result from long-term favorable results stemming from measures taken to restore the company’s underwriting and operating performance, and the con-tinued generation of surplus in order to maintain strong capitalization.

A.M. Best Upgrades Rating of 321 Henderson Receivables V LLC

A.M. Best has upgraded the debt rating to “bb” from “bb-” on the $4,695,000 Class B 10.00% Fixed Rate Asset Backed Notes, Series 2008-3 and affirmed the debt ratings of “aaa” on $74,646,000 Class A-1 8.00% Fixed Rate Asset Backed Notes, Series 2008-3 and $9,389,000 Class A-2 8.00% Fixed Rate Asset Backed Notes, Series 2008-3 of securities issued by 321 Henderson Receivables V LLC (the issuer), a special purpose Nevada limited liability company. The outlook for all ratings is stable.

The issuer was formed for the purpose of acquiring receiv-ables from an affiliate; conducting activities required for the maintenance and servicing of the receivables; creating trust and/or other entities for the purpose of securitizing the re-ceivables; issuing securities related to the securitization; and organizing other activities incidental to the performance of the aforementioned items.

Proceeds from the issuance of the notes, along with con-tributed equity capital were used to purchase a pool of structured settlement and annuity receivables (receivables) from the affiliate and to fund the initial reserve requirement. The initial pool of receivables consisted of 1,844 contracts totaling $189,169,244.16 in payment obligations from 107 annuity providers (i.e., insurance companies). Nearly all of the receivables were pursuant to a court order. A structured settlement describes an arrangement between a claimant and a defendant, which results in compensation to the claimant who has settled a claim, primarily arising from a personal injury lawsuit with the defendant. The compensation arrange-ment provides for a payment to be received by the claimant over time, usually in the form of an annuity payment issued by an insurance company. The settlement receivable repre-sents the purchase of all or a portion of the claimant’s rights to receive scheduled settlement payments, thereby providing liquidity to claimants whose structured settlements no longer meet their particular life circumstances.

The rating actions reflect qualitative and quantitative considerations including updated default probabilities that were derived from stochastic modeling that incorporated the default probability of the annuity providers maintain-ing the payment obligations and the recovery rate on the cash flows upon an insurance carrier event of default. The stochastic modeling of the transaction incorporated updates on: (1) issuer credit ratings (ICRs) of the insurance carriers, (2) financial data required for modeling purposes and (3) remaining collateral/payment information includ-ing the finalization of the reduced payment obligations of Guaranty Association Benefits Company, a newly formed special purpose not-for-profit captive insurance company and the successor to the liquidated Executive Life Insurance Company of New York.

The ratings could be upgraded or downgraded and/or the outlook revised (i.e., positively or negatively) if material changes occur in the ICRs of the remaining insurance car-riers, a reduction in the remaining scheduled payments, an increase in the level of the write-off activity or a breach in ongoing surveillance and/or compliance benchmarks/ratios.

These are structured finance ratings.

For access to special reports, analytical criteria and trans-actions relating to insurance-linked securities, please visit http://www3.ambest.com/sfc/.

A.M. Best Assigns Ratings to Pacific Lighthouse Re LLC

A.M. Best has assigned a financial strength rating of A- (Ex-cellent) and an issuer credit rating of “a-” to Pacific Light-house Re LLC (PLRL) (Salt Lake City, UT). The outlook assigned to both ratings is stable.

The ratings for PLRL are based on its excellent risk-adjusted capitalization, history of positive operating performance and effective management of exposures. In addition, the ratings recognize management’s disciplined underwriting philoso-phy and sound enterprise risk management practices. Histori-cally, PLRL has developed a focused portfolio of products that capitalizes on its core competencies, including effective management of exposures and conservative underwriting practices, and it has enabled the company to consistently deliver a solid operating performance. Based on the existing capital within PLRL and its new property/casualty and life reinsured businesses that began in January 2014, A.M. Best expects that the company’s capital position will remain favor-able following the significant growth in its premiums.

Along with the strengths of PLRL, A.M. Best recognizes there is residual risk with the company’s parent, AAA Northern California, Nevada & Utah (AAA NCNU) with respect to operations, geographical concentration and profitability of the parent.

Although the outlook for PLRL’s ratings is stable and the ratings are not expected to be upgraded nor its outlook re-vised within the next 12-24 months, A.M. Best could down-grade the ratings and/or revise the outlook if unexpectedly large losses materially impact the company’s capitalization on a risk-adjusted basis.

A.M Best Affirms Ratings of Saturn Insurance Inc.

A.M. Best has affirmed the financial strength rating of A- (Ex-cellent) and issuer credit rating of “a-” of Saturn Insurance Inc. (Saturn) (Burlington, Vermont). Saturn is a captive of BP p.l.c. (BP) (United Kingdom), an integrated global oil and gas company. The outlook for both ratings is stable.

Saturn’s ratings reflect its strong risk-adjusted capitalisation resulting from excellent group reinsurance support and the full retention of after-tax profits. Saturn benefits from low investment risk as it maintains half of its investments in cash or short term deposits, with the remainder loaned back to BP with excellent liquidity conditions. In addition, the ratings also factor in BP’s financial strength and commit-ment toward Saturn.

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Saturn’s strong risk-adjusted capitalisation supports the company’s developing business profile and is able to ab-sorb an increase in underwriting risk. Going forward, it is expected that the company will gradually increase its net risk retention and accept new lines of business. In addition, Saturn benefits from a comprehensive reinsurance agree-ment with its sister company, Jupiter Insurance Limited.

The importance and integration of the company in BP’s overall risk management framework is also positively reflected in the ratings. In addition, BP’s financial strength and commitment toward Saturn is similarly assessed as a positive rating factor.

Upward rating movements are unlikely at present.

Negative rating actions may arise from a material deterio-ration of Saturn’s risk-adjusted capitalisation. In addition, a significant increase in the retention levels on Saturn’s current and planned programmes without a commensurate increase in the capital base would likely lead to a review of Saturn’s ratings.

A.M. Best Revises Issuer Credit Rating Outlook to Positive for Jupiter Insurance Limited

A.M. Best revised the outlook for the issuer credit rating (ICR) to positive from stable and affirmed the financial strength rating (FSR) of A (Excellent) and ICR of “a” of Jupiter Insurance Limited (Jupiter) (Guernsey). Jupiter is a captive of BP p.l.c. (BP), an integrated global oil and gas company. The outlook for the FSR is stable.

The revised outlook reflects Jupiter’s continued excellent underwriting performance and strong risk-adjusted capitali-sation. These positive rating factors are partially offset by Jupiter’s high level of risk retention, as well as its concen-trated investment portfolio, which primarily contains finan-cial instruments linked to its parent, BP.

Jupiter continued to achieve an excellent underwriting performance in 2013 due to the absence of large losses. In 2013, the company reported a technical profit of USD 1,770 million versus USD 1,924 million in 2012.

Jupiter is expected to maintain its strong risk-adjusted capi-talisation in 2014, supported by a large absolute capital base of USD 7,500 million as of year-end 2013. The company’s risk-adjusted capitalisation also benefits from low under-writing volatility in recent years, demonstrated by a stable five-year average loss ratio below 15%. Despite Jupiter’s high underwriting limit of USD 1,500 million and the absence of reinsurance protection, the company’s capital base is capable of absorbing a small number of major claims.

A partly offsetting factor remains Jupiter’s investments in two discount notes issued by BP International Limited with durations of three months and 30 days, respectively. A.M. Best considers the company’s investment concentration to be high and, in turn, regards the financial strength of Jupiter inextricably linked to that of BP. Jupiter’s investments in the respective discount notes, USD 7,942 million in 2013, result in an asset concentration of 98%.

Upward rating movements are likely to emanate from a sus-tained strengthening of the group’s overall enterprise risk management, which would be reflected by a sound safety track record. In addition, excellent levels of risk-adjusted capitalisation and consistently strong operating perfor-mance would be a prerequisite requirement for positive rating actions.

Negative rating pressure may arise from a material deterio-ration of Jupiter’s risk-adjusted capitalisation. A significant increase in the company’s retention levels of Jupiter’s main business lines without a commensurate increase in the capi-tal base would likely lead to a review of Jupiter’s ratings.

A.M. Best Affirms Ratings of Sooner Insurance Company

A.M. Best has affirmed the financial strength rating of A (Ex-cellent) and the issuer credit rating of “a” of Sooner Insur-ance Company (Sooner) (Burlington, VT). The outlook for both ratings is stable.

The ratings reflect Sooner’s excellent capitalization, history of consistent operating profitability driven by favorable underwriting results, conservative reserve levels and the po-sition it holds as the captive insurer for its ultimate parent, ConocoPhillips [NYSE:COP]. The ratings also consider the level of commitment on the part of ConocoPhillips, whose management incorporates Sooner as a core element in its overall risk management program.

Partially offsetting these positive rating factors are Sooner’s significant reinsurance credit risk stemming from the large limits offered on its policies and the possible change in the captive’s net retentions that could happen year over year, as well as the limited diversification of business written, which is expected with a single parent captive.

Sooner provides property damage, business interruption and general liability insurance to ConocoPhillips and its subsidiaries worldwide.

Sooner has a history of generally positive underwriting results and strong operating return measures. Over a 10-year period, the company’s loss experience has remained favor-able due, in part, to ConocoPhillips’ strong risk management programs.

ConocoPhillips’ corporate insurance and health, safety and environmental groups conduct periodic reviews of their potential loss exposures through a specialist in industrial risks. Sooner may have high net retentions based upon the capacity of the overall insurance market from year to year. Nonetheless, Sooner does have the capital to retain these risks, if net retentions were to increase. Although the majority of Sooner’s capital is loaned to ConocoPhillips, it is considered to have relatively low risk due to this affiliation as well as the parent’s strong balance sheet and history of positive earnings.

A.M. Best is unlikely to upgrade Sooner’s ratings over the long term due to its limited market profile. Key rating driv-ers that could lead to rating downgrades are a significant loss of surplus, consistent adverse reserve development

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and/or a significant change in the company’s risk profile. In addition, deterioration in the credit profile of ConocoPhil-lips could impact Sooner’s ratings.

A.M. Best Affirms Ratings of The American Road Insurance Company

A.M. Best has affirmed the financial strength rating of A (Excellent) and the issuer credit rating of “a” of The Ameri-can Road Insurance Company (TARIC) (Dearborn, MI). The outlook for both ratings is stable.

TARIC, which provides a variety of coverages to its ultimate parent, Ford Motor Company (Ford) [NYSE: F], and its sub-sidiaries in the United States and Canada, remains robustly capitalized driven by a consistently profitable underwriting performance. Following the 2008 financial crisis, the ratings of TARIC were hampered by the operating challenges of Ford Motor Credit and Ford. This concern has been greatly alleviated in recent years due to Ford’s successful imple-mentation of its restructured business plan, continued strong competitive product portfolio (which has resulted in significantly improved financial performance) and credit metrics. Ford’s 2013 financial results and enhanced market share are further evidence of its progress toward returning to lower default risk.

The ratings also recognize TARIC’s excellent capitalization level, history of positive operating performance, conserva-tive reserving practices and effective exposure manage-ment. Over the past five years, the company’s after-tax five-year return on surplus has averaged 14%, primarily driven by underwriting. Stockholder dividends have limited surplus growth to only 2% over the same period; however, there is considerable flexibility in the dividend as evidenced in 2012 and 2013 when no dividend was paid. Additionally, the company continues to maintain an excellent level of capitalization.

Partially offsetting these positive rating factors are A.M. Best’s continuing concerns regarding the operation and profitability of Ford Motor Credit and Ford as well as the potential impact of these entities on the operations of TARIC. An additional offsetting rating factor is the moderate amount of credit risk assumed by TARIC with the placement of reinsurance to an offshore affiliate. However, nearly all of this offshore affiliate’s ceded reserves are backed by a trust account with TARIC, which is named as the sole beneficiary.

TARIC’s ratings are well positioned at the current level, and as a result, upward movement is unlikely over the medium term. Nevertheless, the potential for negative rating actions could occur if volatility in TARIC’s operating performance exceeds A.M. Best’s expectations and it results in a sig-nificant prolonged decline in the company’s risk-adjusted capitalization. In addition, deterioration in the credit profile of Ford Motor Credit could impact TARIC’s ratings.

A.M. Best Affirms Ratings of Ardellis Insurance Ltd.

A.M. Best has affirmed the financial strength rating of A- (Ex-cellent) and the issuer credit rating of “a-” of Ardellis Insur-ance Ltd. (Ardellis) (Bermuda). The outlook for both ratings is stable.

The ratings of Ardellis reflect its conservative underwriting leverage, strong level of capitalization and profitable operat-ing results driven by its excellent underwriting performance.

Partially offsetting these positive rating factors are Ardellis’ rela-tively high retention and limited profile as a single parent cap-tive of Universal Forest Products Inc. (UFP). Ardellis provides coverage for general liability, auto liability, workers’ compensa-tion, property and medical stop loss. Ardellis has maintained very conservative underwriting leverage ratios as surplus has remained strong to support its business volume. The company has posted low loss and loss adjustment expense ratios, reflect-ing its effective risk management practices.

The ratings also recognize Ardellis’ balance sheet strength and conservative underwriting leverage measures.

Although the outlook for the ratings is stable and not ex-pected to be revised within the next 12-24 months, factors that could lead to a positive outlook and/or an upgrading of Ardellis’ ratings are material and sustained improvement in its underwriting performance and capitalization. Factors that could lead to a negative outlook and/or a downgrad-ing of the ratings are material deterioration of capital from the company’s claims, investments and/or a reduced level of capital that does not support its ratings as measured by Best’s Capital Adequacy Ratio (BCAR).

A.M. Best Affirms Ratings of Iron Horse Insurance Company

A.M. Best has affirmed the financial strength rating of A (Excellent) and the issuer credit rating of “a+” of Iron Horse Insurance Company (Iron Horse) (Burlington, VT). The out-look for both ratings is stable.

The ratings reflect Iron Horse’s adequate risk-adjusted capi-talization, explicit parental support, experienced manage-ment team and the role it plays as a direct captive subsid-iary of Chevron Corporation (Chevron) [NYSE:CVX].

These positive rating factors are partially offset by Iron Horse’s high net loss exposures, as the coverages provided tend to result in claims that are characterized as low fre-quency but high severity. This is somewhat mitigated by the captive’s ability to secure capital from Chevron in the event of a covered shock loss. Iron Horse directly benefits from the attention of Chevron’s experienced risk management team. Iron Horse also gains from Chevron’s global opera-tions, which provide favorable geographic spread of risk and line of business diversification.

In its role as a captive insurer, Iron Horse, along with Hed-dington Insurance Limited, currently provides broad and competitive global insurance products for Chevron and its subsidiaries. The insurance needs of Chevron are supplied through these captive operations (where appropriate) and the commercial market.

Iron Horse and the other Chevron captives provide compre-hensive coverage above Chevron’s internal retentions, while Iron Horse’s reinsurance is placed through a corporate wide plan with the world’s leading providers of capacity, result-ing in a diversified and balanced distribution of reinsurers.

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Key rating drivers that could lead to a positive outlook or an upgrading of Iron Horse’s ratings are material and sus-tained improvement of its underwriting performance and long-term maintenance of strong capital levels.

Key rating drivers that could lead to a negative outlook or a downgrading of the company’s ratings are significant de-terioration in its capital from either claims or investments, a reduced level of capital that does not support the ratings as measured by Best’s Capital Adequacy Ratio (BCAR) or a prolonged decline in underwriting profitability.

Iron Horse’s ratings are tied to the rating of Chevron, and a change to Chevron’s rating could result in changes to the captive’s ratings.

A.M. Best Affirms Ratings of Heddington Insurance Limited

A.M. Best has affirmed the financial strength rating of A (Ex-cellent) and the issuer credit rating of “a+” of Heddington Insurance Limited (Heddington) (Bermuda). The outlook for both ratings is stable.

The ratings reflect Heddington’s superior capitalization, consistently positive operating results and the role it plays as a captive insurance company of Chevron Corporation (Chevron) [NYSE:CVX].

These positive rating factors are partially offset by Hedding-ton’s high net loss exposures, as the coverages provided tend to result in claims that are characterized as low fre-quency but high severity. This is somewhat mitigated by the captive’s good loss history supported by strong investment income and parental support provided by high yield loans to affiliated companies. Heddington has sufficient capital resources to meet its underwriting related obligations, as measured by Best’s Capital Adequacy Ratio (BCAR).

The ratings are based on the consolidated results of Hed-dington. The ratings further recognize the company’s strong enterprise risk management controls and underwriting expertise, the loss controls included in the structuring of insurance coverages offered by Heddington, as well as the cost effective manner in which those services are delivered. Heddington also gains from Chevron’s global scope, which provides it with a favorable geographic distribution of as-sumed risks.

In its role as a captive insurer, Heddington, along with Iron Horse Insurance Company (another active Chevron captive), currently provides broad and competitive global insurance products for Chevron and its subsidiaries. The insurance needs of Chevron are supplied through these captives (where appropriate) and the commercial mar-ket. Heddington and the other Chevron captives provide comprehensive coverage above Chevron’s internal reten-tions, while Heddington’s reinsurance is placed through a corporate wide plan with the world’s leading providers of capacity, resulting in a diversified and balanced distribution of reinsurers.

Heddington’s ratings are stable, and there is a small likeli-hood that positive rating actions could take place within

the next 12 to 24 months based on its stand-alone charac-teristics. However, negative rating actions may result from material loss of capital that does not support the company’s ratings and/orits profile is diminished within Chevron.

A.M. Best Upgrades Ratings of Associated Electric & Gas Insurance Services Limited

A.M. Best has upgraded the financial strength rating to A (Excellent) from A- (Excellent) and the issuer credit rating to “a” from “a-” of Associated Electric & Gas Insurance Ser-vices Limited (AEGIS) (Hamilton, Bermuda). The outlook for both ratings has been revised to stable from positive.

The rating upgrades recognize AEGIS’ strong risk-adjusted capitalization, which is appropriate for its current invest-ment and insurance risks, a historically favorable long-term financial performance, as well as an experienced manage-ment team and the utilization of comprehensive enterprise risk management processes. Reserving practices are ad-equate for the hazards insured and losses incurred.

Partially offsetting these positive rating factors are the vola-tility inherent in AEGIS’ underwriting results, given the high severity risk profile and concentration risk of the energy market it serves.

Due to the long-tail nature of its business and its role as a mutual insurer, AEGIS typically relies on investment earn-ings to support overall net income where its underwriting results are managed toward the break-even level, reflec-tive of low profitability. AEGIS generally prices its business on a “total return” basis, i.e., the planned use of its invest-ment results to support underwriting pricing. Nonetheless, management continues to focus on improving its operating performance through various risk management strategies, including rate adjustments and refining its underwriting criteria. Given its forecasted business growth, AEGIS’ risk-adjusted capitalization is expected to remain strong in the near term.

The ratings reflect AEGIS’ improved risk-adjusted capitaliza-tion and operating performance in the past five years after it had encountered a significant loss of surplus in 2008, which was caused by a combination of poor underwrit-ing results and significant investment losses resulting from the financial crisis. The company’s surplus has significantly rebounded from 2008 levels and is currently within an ap-propriate value-at-risk, i.e., risk tolerance/appetite level.

AEGIS is well positioned at its current rating level. However, the ratings may be subject to negative rating pressures if the company’s risk-adjusted capitalization declines to a level below A.M. Best’s expectations, resulting from significant deterioration in operating performance.

A.M. Best Affirms Ratings of Grupo Nacional Provincial, S.A.B.

A.M. Best has affirmed the financial strength rating of A- (Ex-cellent) and the issuer credit rating of “a-” of Grupo Nacio-nal Provincial, S.A.B. (GNP) (Mexico). The outlook for both ratings is stable.

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The rating actions reflect GNP’s leading position in the Mexican insurance market, recent improvements in the operating results of the auto segment, its diversified busi-ness profile and historically profitable overall operating performance. GNP also maintains a conservative valuation policy reserve and high adequacy level of capital according to Mexican regulations.

The ratings of GNP also recognize its supportive risk-adjusted capitalization and consistent growth in embedded valued and improved lapse experience. GNP’s embedded value has grown consistently over the review period, and together with growth in its appraisal value, is reflective of contributions to shareholder value of existing and future new business.

Partially offsetting these positive rating factors are GNP’s continued elevated underwriting leverage to stockholder’ equity, its volatile underwriting and net earnings perfor-mance by segment in recent years.

GNP is the largest domestic insurance company in Mexico as measured by direct premiums written. The company operates as a composite insurer of life and non-life business with core business segments in life, health and automobile coverage.

A.M. Best believes GNP’s ratings are well positioned in the near-to medium-term, based on its current financial strength and risk management profile.

Potential positive rating triggers would include sustained improvement in GNP’s underwriting results in conjunction with the expected improvements in Mexico’s regulatory environment. Possible negative rating triggers could include deterioration in the company’s underwriting results, and consequently, a decline in its risk-based capitalization.

A.M. Best Affirms Ratings of Delvag Luftfahrtversicher-ungs-AG and Its Subsidiary

A.M. Best has affirmed the financial strength rating of A (Ex-cellent) and the issuer credit ratings of “a” of Delvag Luft-fahrtversicherungs-AG (Delvag) and its subsidiary, Delvag Rueckversicherungs-AG (Delvag Rueck) (both domiciled in Germany). The outlook for all ratings is stable.

The ratings of Delvag reflect its strong risk-adjusted capitali-sation and robust operating performance. The ratings also take into consideration Delvag’s role as the insurance cap-tive of Deutsche Lufthansa-AG (Lufthansa), its ultimate par-ent. These positive rating factors are further reinforced by a profit and loss absorption agreement provided by Lufthansa.

The ratings of Delvag Rueck benefit from a full rating enhancement to the level of Delvag’s ratings, reflecting the reinsurer’s strategic importance to the Delvag group, its integration with the parent company in terms of business strategy and management, as well as the profit and loss absorption agreement between both companies.

Prospectively, Delvag’s risk-adjusted capitalisation is expected to remain very strong. Whilst an existing profit and loss ab-sorption agreement with its parent, Lufthansa, limits the po-

tential for earnings retention, it offers protection for Delvag’s balance sheet and consequently for Delvag Rueck. Delvag Rueck’s risk-adjusted capitalisation remains stable, strength-ened by its equalisation reserve and silent claims reserve.

Operating results for 2014 are expected to remain robust, albeit somewhat lower than the pre-tax profit of EUR 19.9 million reported in 2013. However, the company’s disciplined underwriting approach and comprehensive reinsurance pro-gramme are expected to result in continuously stable claims levels going forward. In 2013, Delvag Rueck reported a pre-tax profit (after the equalisation reserve transfer) of approximately EUR 0.5 million (2012: EUR 0.1 million).

Positive rating actions are unlikely at present.

Negative ratings actions would arise from a significant dete-rioration in risk-adjusted capitalisation, and/or a prolonged weakening in the operating performance of either Delvag and/or Delvag Rueck. Additionally, any deterioration in the financial strength of Lufthansa could lead to negative rating actions for Delvag and Delvag Rueck.

A.M. Best Affirms Ratings of Toyota Motor Insurance Company

A.M. Best has affirmed the financial strength rating of A (Ex-cellent) and the issuer credit rating of “a” of Toyota Motor Insurance Company (TMIC) (Cedar Rapids, IA). The outlook for both ratings is stable.

The ratings reflect TMIC’s excellent risk-adjusted capitaliza-tion, underwriting income and overall earnings. Addition-ally, TMIC produces strong cash flows while maintaining liquidity and leverage metrics that outperform the industry composite. TMIC also benefits from support provided by its ultimate parent, Toyota Motor Corporation (Toyota) (Japan). TMIC plays a strategic role within the Toyota organization by providing vehicle service agreements, guaranteed auto protection agreements, excess wear and use coverage and tire and wheel protection sold through Toyota, Lexus and affiliated dealerships throughout the United States.

Somewhat offsetting these positive rating factors are TMIC’s limited business profile as a single parent captive as well as its reliance on sales at Toyota’s level for premium generation.

Positive rating actions could occur if TMIC continues to produce sustainable robust overall earnings while maintain-ing its strong level of risk-adjusted capitalization. Negative ratings actions could occur if underwriting results deterio-rate and/or there is a significant decline in surplus.

Methodology Sources

A.M. Best remains the leading rating agency of alternative risk transfer entities, with more than 200 such vehicles rated in the United States and throughout the world. For current Best’s Credit Ratings and independent data on the captive and alternative risk transfer insurance market, please visit www.ambest.com/captive.

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehen-

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sive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Domiciles

Gibraltar Hopes to Finalize Its First ILS Transaction in 2014

Gibraltar officials are visiting Bermuda, New York and other markets with the goal of raising Gibraltar’s profile in the global insurance and reinsurance communities, including in the realm of insurance-linked securities. Senior Finance Centre Executive Michael Ashton of Gibraltar Finance spoke to A.M.BestTV at the 2014 Bermuda Captive Conference.

View the video version of this interview at: http://www.ambest.com/v.asp?v=ashton614

Q: I understand you might be working on an insurance-linked security, which would be the first for Gibraltar.

A: We had a soft launch in terms of positioning Gibraltar as an insurance-linked jurisdiction within the European Union at the beginning of March in New York. Our regulator has published some draft ILS guidelines, which we’re now actively in consultation with some of the major ILS players around the world, just to make sure that those guidelines, before they’re officially published, that they really offer what the capital markets desire at the same time as Gibraltar main-taining a robust and professional regulatory environment.

We’re very keen that we’re able to develop insurance-linked securities from Gibraltar and that it’s very important that we try to get the feedback and input from the major players so when we structure it, it’s something that we can work with those organizations. Obviously, our biggest challenge when you’re entering any new market is to get the first transaction away. Our hope and target is to get the first ILS transaction secured and finalized by the end of 2014.

Q: Can you tell us what’s going on in the insurance market in Gibraltar?

A: Gibraltar’s got a vibrant insurance sector. Over the last 10 years, it’s grown really quite substantially, so today we have al-most 60 insurance companies currently writing new business.

The market is really...the major part of the market is motor business, and a lot of that business is actually U.K. motor business. As of currently, Gibraltar motor insurance is writ-ing around about 16% of the U.K. motor market across all classes of motor business, which I think has been a great success story over these last few years.

If you think about it, almost one in six motor policies in the U.K. is now being written by a Gibraltar motor insurer. One of the things that the government is looking to do is to really provide a platform for the insurance sector to continue to grow but to diversify, both by geographical area and by class of business.

Gibraltar does have captives, but it’s not a captive domicile in the way that some of the other offshore domiciles have

really specialized in the captive industry. The oldest captive in Gibraltar was established nearly 40 years ago. It’s some-thing we’d like certainly to develop further.

We’ve had protected cell company legislation, or segregated account legislation, since 2001. I suspect that is an area which is more likely to gain further momentum in the next few years rather than the traditional captive, partly because Gibraltar is very much within the European Union. The cost of setting up a captive in the European Union is quite a lot higher than setting up a captive offshore.

For many captive owners, unless they want to have the flex-ibility of being within Europe, the additional costs may be slightly prohibitive.

Q: Why are you here at the Bermuda Captive Conference?

A: I joined Gibraltar Finance last year in a newly created role to help the profile and raise awareness of Gibraltar’s insurance sector and what we have to offer. Previously, I spent a number of years working for Ace in London, so I am familiar with the Bermuda insurance market. We have a number of businesses in Gibraltar which are either owned or have fellow subsidiaries of Bermudan operations.

It seems a natural extension to the work that we’ve been doing in Gibraltar to come to Bermuda, which I did last year, and to talk to people about opportunities for Gibraltar to act as a gateway for Bermudan insurance businesses want-ing to access the EU in a direct fashion.

I met with the BMA last September, and they talked about the Bermuda Captive Conference and said, “This would be a great opportunity for us to raise our profile,” in the way that I just described. We contacted the organizers and asked if we could participate. Very graciously they agreed for us to participate this year.

If I could give you an example, maybe for some of the larger Bermuda captives, they’re accessing reinsurance markets in Europe. They’re having to pay fronting fees and then brokerage. By establishing a captive integral, or maybe a protected cell company, or segregated cell in Gibraltar, they could then access those reinsurance markets in a direct way which we believe would be far more cost-effective. That is one area.

At the same time, we’re just looking to establish ties with other non-captive insurance businesses in Bermuda because, again, we would like to be on the shopping list so when businesses think about Europe, it’s not automatically London, or Dublin, or Luxembourg. They think about Gibraltar as an alternative jurisdiction which is very insurer-friendly.

View this and other interviews at http://www.ambest.tv(By Meg Green, senior associate editor, BestWeek:

Meg.Green@ambest.com)

Gibraltar’s Minister for Financial Services: We Are a Gateway to the EU Insurance Market

Gibraltar’s minister for financial services, Albert Isola, said he was meeting with Bermuda government leaders and

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regulators to learn from and develop beneficial relation-ships. One goal is raising Gibraltar’s profile in the world’s re-insurance market, he told A.M.BestTV at the 2014 Bermuda Captive Conference.

View the video version of this interview at: http://www.ambest.com/v.asp?v=isola614

Q: This is the first time Gibraltar has had a presence here at the Bermuda Captive Conference. Why are you here?

A: As a government, yes, it’s the first time we’ve attended and supported this conference. Gibraltar’s business commu-nity is extremely diverse. Insurance is one of the important sectors we’ve been working on to develop further. As two British overseas territories, which Gibraltar and Bermuda are, we have an awful lot in common.

Part of the visit here would be also to engage with gov-ernment to look at how we can work closer together in a series of different areas. Ultimately, we all need to be innova-tive, inventive and creative in terms of how small territories are run and developed. For us to be in Bermuda at this time with this conference, and to use this opportunity to engage with people directly is a wonderful opportunity.

What we’re doing here really is not competing with Ber-muda by any stretch of the imagination but very much like we do with Switzerland, like we do with London, like we do with Hong Kong, we offer those people there solutions that perhaps are not available in that territory.

For example, Bermuda is the insurance hub of the world but there are certain things that can’t be done from Ber-muda. For example, Gibraltar has access to the European Union market with 520 million people. There is no reason why companies that wish to enter the EU markets could not set up a subsidiary in Gibraltar, for example, and access the market through Gibraltar.

We’re looking at trying to have cooperation at a regulatory level, at an association level, at a business development level and at a political level. When the Bermuda companies want to stay here, which is what we’d like them to do, but want to access the EU marketplace then Gibraltar is an ideal place to be able to do that for you.

There are enormous numbers of synergies between Gibral-tar and Bermuda. The legal system is a fundamental one. We have a very similar legal basis for what we do. For people to be able to go from one territory to another, two Brit-ish overseas territories, stay here and access the European Union marketplace through Gibraltar through a subsidiary is something that we believe will work for many companies here that may want to tap into that market.

Q: How would you describe the insurance market in Gibraltar?

A: The insurance market is predominantly, our biggest area is motor insurance, bizarrely. Sixteen percent of the United Kingdom motor markets, or one in every six cars on the road in the United Kingdom, is written through Gibraltar. We have a huge motor division. We’re working hard to expand into other areas, general lines of insurance, reinsur-

ance. The obvious entry point into Europe for Bermuda companies could be something of interest to them.

It will help us to diversify what is already an important sec-tor within our community. We work very, very closely with the private sector. We’re passing through our parliament in the coming months a whole raft of legislation really driven by the private sector to meet their needs and to add more strings to their bow.

It’s an extremely competitive marketplace. The world is changing enormously with the exchange of information to which Gibraltar and Bermuda are fully subscribed. Conse-quently, it continues to grow but we do need to keep look-ing at ourselves and what we do and how we do it and the different ways in which we can improve it.

When we look at our insurance sector we’re very proud of it. It’s a winning formula in terms of certainly motor insur-ance. But we now need to use that experience and knowl-edge to diverse further into other new areas of insurance.

Q: Those motor insurance companies, are they stand-alone companies or are they captives?

A: It’s a bit of everything, to be honest. We have captives. We have general lines of insurance. We have the motor insur-ance. But reinsurance is one area in particular that we are not as strong as we should be. That’s an area we’d like to pursue. When you think of Bermuda, it’s the capital of the world in terms of reinsurance. Therefore to come and speak to people here, learn from people here, is a very interesting thing to do.

We met yesterday with the Bermuda development agency, to exchange notes and ideas on how they do things, how we do things, what support we can give them in terms of knowledge in Europe, which they may wish to tap into. Likewise they’re assisting us in the marketplace here. It re-ally is very much of working together to see how we can both benefit from that relationship.

Q: In a year’s time, do you think you’ll be back?

A: We’ll certainly be back. I’m looking forward to engaging the Bermuda government, which we’re doing in the next couple of days to see politically what other cooperation we can enter and enjoy. We all have the same issues.

We have issues of power, of sewage, of water, more security, apart from the commercial aspects of that relationship. Just on insurance alone it would be worth coming back for but also there’s a lot more that we need to do together and learn from each other or working together to learn from each other’s mistakes, how not to do things again, and to see how we can develop.

We’ve got to keep innovating. It really is extremely competi-tive out there, and small territories like ours need to work extremely hard. Our economy is strong. We record sur-pluses every year. We have a GDP of 1.2 billion sterling. Our growth last year was 7.8%. Debt is at 25%.

We are doing certain things right but there are many other

11

areas in which we can learn enormously from Bermuda and insurance is a great starting point.

View this and other interviews at http://www.ambest.tv(By Meg Green, senior associate editor, BestWeek:

Meg.Green@ambest.com)

Bermuda Regulator: Captives Coming From Canada, Latin America, Africa

Shelby Weldon of the Bermuda Monetary Authority outlined the makeup of the continuing growth of captive insurance organizations in Bermuda. Speaking with AMBestTV at the 2014 Bermuda Captive Conference, he described a new Africa-focused captive designed to provide disaster relief.

View the video version of this interview at: http://www.ambest.com/v.asp?v=weldon614

Q: How are captives doing in Bermuda today?

A: Actually, we’ve had a great year in 2013 from a newly incorporated standpoint, with 24 new captives forming in Bermuda through January and December of 2013, which represented a significant increase from what we’ve seen in previous years. Quite obviously, on the back of the financial crisis, there was a bit of a slowdown in captive formations, not only in Bermuda but globally.

We’ve started to see some resurgence in that space, some interesting new companies choosing Bermuda as their do-micile of choice over 2013. All indications through 2014 are that we will have another good year when we look at the numbers at the end of this year.

Q: What’s the total number of active captives today?

A: I believe it was close to 850. I don’t have the exact num-ber on hand but it’s very significant. Bermuda continues to have more captives registered than any other domicile. Our closest competitor is probably 100 captives below Bermuda from that perspective. Also, from an underwriting perspec-tive it has been a robust underwriting year for our captives registered in Bermuda. The captive industry is still thriving and doing well in Bermuda.

Q: You have some interesting new captives, I understand. Tell us what you’ve seen there.

A: The most interesting new captive is a captive established by the African Union, which was set up to provide disaster relief to a number of African member states. It was set up in Bermuda a number of months ago. It provides real-time relief from drought to African states. It’s pretty interesting from that perspective. Bermuda was very welcoming of that initiative. We’re looking to partner with other regions to provide similar disaster relief.

From an overall standpoint, we’ve seen Latin America as one of the regions where we’ve seen a significant amount of growth. Out of the 24 new captives formed in 2013, close to 30% of them actually represented Latin American corpo-rates. We see that as a growing region for us.

There’s also been interest from Canada in that perspective. Bermuda signed a tax information exchange agreement with the Canadian government a number of years ago. We’ve spent a lot of time marketing the captive concept in Canada. There are bright days ahead for Bermuda’s captive industry.

Q: How is Bermuda faring when it comes to meeting inter-national standards?

A: As you can appreciate, there is a constant review of our supervisory and regulatory regime from an international standards standpoint. Bermuda is one of the founding members of the International Association of Insurance Su-pervisors. We are very involved in a number of committees, particularly with respect to what is seen as appropriate captive regulation.

There’s an ongoing initiative at the IAIS around providing a guidance paper to captive domiciles with respect to how we go about supervising captives in the future. Bermuda is very involved in that perspective. To date, most of those in-ternational assessments have looked at not only Bermuda’s captive regime but commercial regime and given us that seal of approval.

We are still very involved in the Solvency II equivalence initiative. While that assessment still plays out, EIOPA, which is the governing body in the European Union that is doing those assessments, has indicated that our commercial re-gime is broadly equivalent, with a number of caveats.

Also, we were very successful in getting the European Union to recognize that a bifurcated equivalence assess-ment process was possible, which essentially means that we would have our captive regime outside of a Solvency II compliant-type of regime, which we thought was very ben-eficial for our captive regime in the long term, recognizing that we can continue to take our risk-based proportional approach to the supervision of captives going forward.

Q: Are there any new issues that the BMA is concerned with?

A: From a captive standpoint, not really. We have a very new, exciting initiative from a reporting or filing standpoint we are looking to implement and enhance the statutory finan-cial return, which would then provide additional data to the regulator to ensure that those captives are one, appropriately licensed and supervised, then giving us an ability to get en-hanced data collection for statistical purposes for the support-ing of this international initiative such that Bermuda is provid-ing real-time data around the captive market, not only Bermuda but internationally. We’re hoping to roll that out in 2015.

What it’s actually doing is consolidating three distinct data collection exercises that we had in the past. You would have under our legislation a requirement to submit a statutory financial return. We were also going out and doing a captive data call which was getting that enhanced data, but it was a voluntary exercise. We were then going out and doing a segregated accounts data call, which was also voluntary.

Now we have made that mandatory. All companies, once this comes into force, would have to provide that enhanced

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data. From a supervisory and regulatory perspective, there’s no intention at this particular time to change drastically what we are intending or how we supervise and regulate captives.

We are involved in that international initiative to look at captives globally. We contribute to that guidance note. We will keep a watching brief for international standards as it relates to captives, and change accordingly. But the founda-tion of our approach is still to recognize the risk profile of those entities and to take a risk-based approach to that supervision. We’ve been in this space for a number of years, a real experience in that regard and we’ll continue to do what’s best for the market operating in Bermuda.

Q: You had mentioned earlier you thought you were maybe 100 captives larger than the next biggest competitor. Is competition an issue when it comes to domiciles? How do you handle that?

A: We don’t shy away from competition. We believe compe-tition actually makes each domicile step up their game and it provides for better service. We recognize that over the last 10 years there have been a number of domiciles who have enacted captive legislation but we still see ourselves as the premier domicile and our numbers reflect that.

Whilst we recognize that corporates have a choice in domicile or jurisdiction when they’re looking at their feasibility study, when they’re looking at a domicile to set up, our numbers reflect that Bermuda still is a significant part of their conversation when they’re going through that process.

I wouldn’t see us losing much competitive advantage from that domicile, because of our history, because of the intellectual capital that resides in Bermuda, because of the approach of the Bermuda Monetary Authority to the regula-tion of captives. Bring on all competition. We’re ready.

View this and other interviews at http://www.ambest.tv(By Meg Green, senior associate editor, BestWeek:

Meg.Green@ambest.com)

Captives Set to Rise in Asia as Companies Look for Ways to Better Manage Risks, Market Watchers Say

The use of captives remains a domain of Western corpora-tions. But now Asia is in catch-up mode as companies in the region become more sophisticated and continue to look for ways to better manage their risks.

Paul Owens, chief executive officer of Willis’ global cap-tive management practice, told Best’s News Service that for many Asian companies, the main focus to date has been to transfer risk through purchasing of insurance. But with recent growth of Asia-based companies, not only locally but also globally, many are now considering alternatives --- one of which is risk retention through the use of a captive insur-ance company.

“This is being driven not only from domestic demand but globally as Asian companies expand and acquire more assets overseas,” he said.

“While Asia currently only accounts for roughly 5% of captives worldwide, we would anticipate Asian captives to grow over the next 5 to 10 years --- from the perspective of single parent formations,” he added.

Captives are established to finance risk coming from their parent group or groups. Along with a simplified claims process and direct access to reinsurers, captives also offer a lower cost of insurance because companies don’t pay to cover overhead costs or profits of their insurance com-pany. Also, captives are able to generate long-term capital surpluses, and they help companies improve their overall competitiveness and attract and retain customers, vendors and partners.

Several types of captives exist, including a single parent that underwrites only the risks of related group companies. Group captives are owned and controlled by two or more unaffiliated organizations, while agency captives are owned by insurance agents that use it to take risk in some of the business they place in the insurance market.

Owens noted the encouraging trend in Asia is given fur-ther impetus by governments and regulatory bodies in the region, which continue to look for ways of providing attrac-tive environments as they see the creation of new domiciles for captives as an attractive means to develop their econo-mies further.

“We see the level of economic development being part driver to captive appetite. We would expect to see Malay-sia, Indonesia, Taiwan and South Korea to start considering captives following the lead of Singapore, Hong Kong and China,” Owens said. “Governments will need to provide the right regulatory environment to facilitate the growth,” he added.

Singapore remains the largest domicile in Asia-Pacific, with 66 captive licenses and 62 captive insurers. Captive insurers reported total gross premiums of S$1.14 billion (US$906.7 million) in 2012, accounting for 17% of total offshore insur-ance fund. Property was the biggest business line for off-shore insurance fund’s general captive insurers, with gross premium of S$786 million in 2012, according to Monetary Authority of Singapore.

The principal captive type in Singapore is single parent. Main risks covered by captive insurers are property damage, business interruption and general liabilities.

Availability of offshore insurance business incentives and a tax exemption for captive insurers, along with existing infrastructure, management and operation systems for cap-tives, make Singapore attractive as a captive hub, Owens said.

Analysts noted, however, that Hong Kong is poised to chal-lenge Singapore’s leadership position as soon as the city whets the appetite of nearby mainland Chinese corpora-tions looking to establish their captives in the domicile.

Hong Kong’s Legislative Council recently approved a tax concession that will allow captive insurers to enjoy a 50% reduction in the profits tax on their insurance business of

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offshore risks, in line with the tax break currently appli-cable to reinsurance companies (Best’s News Service, March 25, 2014).

Professor K C Chan, secretary for financial services and the Treasury, said the move is meant to lure Chinese companies to form captives in Hong Kong, following the Chinese gov-ernment’s policy announcement in June 2012 encouraging mainland enterprises to form captive insurers in Hong Kong to enhance their risk management.

“The tax concession would provide further impetus for groups or enterprises to consider setting up captive insur-ers in Hong Kong to underwrite their own risks. With mainland enterprises becoming more internationalized and sophisticated, they will increasingly use captive insurance for reducing insurance costs and better risk management,” he said in a statement.

David Wu, partner of financial services consulting at Deloitte, said while this move shows promise in further developing the captive insurance market in Hong Kong, this needs to be viewed against the level of captive insur-ance activities currently in the market and how Hong Kong compares against other jurisdictions such as Singapore and the global leader Bermuda.

“Globally, there are around 6,000 captive insurers world-wide but Hong Kong currently only has two captive vehicles. Whether the proposed reduction in the profits tax rate will be sufficient to attract companies to set up their captive insurance operations in Hong Kong remains to be tested in the short to medium term,” he said.

“The good news is while captive insurance remains signifi-cantly underutilized at present, Hong Kong’s close proxim-ity to China should make it more attractive as a potential location --- with a well-developed insurance market and infrastructure with plenty of insurers, reinsurers, brokers and other consultants, global banks and asset managers --- for Chinese companies to establish their captive insurance operations,” Wu added.

From a tax perspective, Patrick Cheung, a partner of tax practice at Deloitte, said the announced tax concession is competitive enough although in comparison, Singapore has a wider tax treaty network.

“Technically, some companies in Singapore can qualify for a full tax exemption on offshore insurance risks but this scheme is valid only till 2018 and it is not certain whether it will be renewed. In our view, it will ultimately be the business needs of the MNC (multinational captive), their geographical footprint as well as comparison of all other factors that will drive the ultimate location choice,” he said.

“In additional to tax concession, MNCs thinking of setting up a regional or global captive operation will also need to clarify from the regulator things such as capital require-ment, investment restrictions, supervision requirement, establishment process and timeframe, etc. so they can put together a proper game plan,” Cheung added.

Hong Kong’s current captive insurer belongs to a Chinese

company and mainly underwrites property business. Pre-mium income of the captive insurer amounted HK$1.33 billion (US$171.5 million) in 2011, according to the Office of Commissioner of Insurance.

In China, the largest petroleum company, China National Petroleum Corp., set up a property captive insurer as the first locally incorporated captive. The captive insurer is located in western China’s Karamay City in Xinjiang Uyghur Autonomous Region, with registered capital of 5 billion yuan (US$809.4 million).

Globally, Bermuda, Cayman Islands and Vermont are the top three domiciles, accounting for 36% of all captives. The highest captive-use industry is financial institutions (18.6%), followed by health care (17.2%) and retail and consumer products (9.1%), according to Marsh’s 2013 report.

(By Ernesto Calucag, Hong Kong news editor: Ernesto.Calucag@ambest.com)

AIA Sets up Fronted Captive for Employee Benefits in Asia

As market watchers predict a brighter future for Asian cap-tives, regional insurer AIA Group Ltd. wants to capture a share of the increasing market with the launch of its captive solutions in employee benefits across Asia.

Cedric Luah, director of client development, group corpo-rate solutions at AIA, told Best’s News Service the launch of their captive solution is in response to the continued sophistication of Asian-based companies, with risk profiles becoming more like those in Western markets, indicating drivers for further growth.

“We are seeing an increasing demand for captive solutions among companies seeking to mitigate risk through increas-ing their self-insurance beyond traditional pooling strate-gies. Multinationals in the Asia-Pacific region are operating in culturally diverse environments where there are no uniform standards for employee benefits. This gives us confidence about the growth prospect of captive employee benefits risk financing,” he said.

Luah further said this type of captive vehicle would be beneficial to companies seeking to have greater control over their risk exposure and more flexibility in employee benefits plans, as opposed to solely funding the benefits. “This would allow employers to implement their risk man-agement strategy and achieve better controls, consolidate their insurance risk and potentially result in a better cash flow structure,” he added.

Called AIA Asia Benefits Network, the newly launched solu-tion will provide multinational corporations access to a cen-tralized platform for the implementation of their employee benefits plans. It will cover 16 markets in the region, namely Hong Kong, Australia, Brunei, China, India, Indonesia, Korea, Macau, Malaysia, New Zealand, Philippines, Singapore, Sri Lanka, Taiwan, Thailand, and Vietnam.

Rather than helping companies set up or operate captives, Luah pointed out this will be operated as a “fronted captive” in which AIA will be the fronting insurer for captive opera-

14

tors. As a fronting insurer, AIA also reinsures all or a portion of the risk to the captive.

This approach is usually done for most third-party risks within captives such as employee benefits, because a captive generally cannot transact business with third parties directly.

According to 2014 Marsh Captive Benchmarking Report, nearly one-third of the benchmarked captives are operating with a fronting arrangement. “The most common reasons to use a front with a captive are the writing of third-party risks, compliance with contractual terms where “admitted” coverage is required, and parent country admitted and non-admitted regulations,” the report noted.

This is common in Asia where admitted or locally issued in-surance is mandatory in many countries like Taiwan, South Korea, Philippines, Indonesia and China. India, meanwhile, limits or prevents the ceding of risk to a captive.

According to a Marsh report, this regulatory requirement, which serves as an additional frictional cost to the structure, can slow down the growth of captive industry in the region.

“Asia-Pacific, as observed in previous years, did not present much in the way of growth on the captive front. Compa-nies in this region are more likely to transfer their risk to traditional insurance companies instead of retaining it in a separate facility due to higher aversion to risk and a more traditional approach to risk management,” it said.

Marsh said Asia-Pacific companies’ use of captives has re-mained constant at about 5% to 6% of total captives world-wide over the past years. United States companies own 58% of all captives while European parents own 28%.

“Despite the increased activity in emerging captive markets, the dominance of U.S. parent companies owning captives is a trend that will continue, with small captives remaining an area for growth,” the report noted.

However, market analysts believe Asia will catch up soon with the rest of world as companies in the region continue to grow in size, thus, become more sophisticated in look-ing for ways to manage their insurable risks (Best’s News Service, April 25, 2014).

“This is being driven not only from domestic demand but globally as Asian companies expand and acquire more assets overseas. While Asia currently only accounts for roughly 5% of captives worldwide, we would anticipate Asian captives to grow over the next 5 to 10 years --- from the perspective of single parent formations,” said Paul Owens, chief execu-tive officer of Willis’ global captive management practice.

Owens noted the encouraging trend in Asia is given further impetus by governments and regulatory bodies in the region, which continue to look for ways of providing attractive envi-ronments as they see the creation of new domiciles for cap-tives as an attractive means to develop their economies further.

“We see the level of economic development being part driver to captive appetite. We would expect to see Malaysia, Indone-sia, Taiwan and South Korea to start considering captives fol-

lowing the lead of Singapore, Hong Kong and China,” Owens said. “Governments will need to provide the right regulatory environment to facilitate the growth,” he added.

(By Ernesto Calucag, Hong Kong news editor: Ernesto.Calucag@ambest.com)

Malaysia’s Labuan Financial Center Attracted 19 New Insurance Operations

The Labuan International Business and Financial Center, Ma-laysia’s offshore financial center, granted 19 new insurance licenses including four reinsurers, three retakaful operators, three insurers, four captives and five brokers in 2013, ac-cording to the Labuan Financial Services Authority.

Total number of insurance entities increased to 213 in 2013, compared with 203 and 181, in 2012 and 2011, respectively. The IBFC has continued to attract new international insur-ance institutions such as the entrance of a Middle Eastern reinsurance company to set up its first overseas branch there to tap regional business, said the FSA in a statement.

In 2013, total gross premiums written by non-life insurers and reinsurers in the IFBC dropped 6.2% to US$1.6 billion. Nonresident business accounted for a majority share of 53.1%, according to the FSA. Fire and engineering sectors were the major business lines, representing 36% and 24.2% of market share.

The Malaysian offshore financial center saw insurance growth fueled by Asia’s energy production. The FSA had said “the positive prospect of oil and gas production in Asia is favorable to the growth of Labuan IBFC to become the financing hub for oil and gas business” (Best’s News Service, June 17, 2013).

The Labuan captive insurance business reported a 33.8% rise in gross premiums to US$437.5 million in 2013. En-gineering line saw the biggest rise in gross premiums of 48.4% to US$274.7 million, representing 62.8% of total market share. This rise was contributed by the risks under-written for aviation and manufacturing industry.

The center’s takaful and retakaful, or Shariah compliant insurance and reinsurance businesses, saw a 64.9% drop in gross contribution to US$136.9 million in 2013.

Underwriting margin ratio improved to 25.1% in 2013 from 15.2% in 2012. The FSA said better underwriting margin was due to fewer occurrences of natural catastrophe losses as compared with the previous years. Net Incurred claims ratio dropped to 47.4% from 57% in 2012 and 67.9% in 2011.

In regulatory development, the FSA said it “has continuously enhanced its prudential regulatory regime,” with new guide-lines in line with international standards. With intensifying global economic and financial integration, more interdepen-dence has increased the need for collaboration with other regulatory authorities to ensure supervisory cooperation.

Looking ahead, the IBFC will focus on three main areas: strengthening of regulatory framework, widening of collab-orative linkage with other supervisory bodies and enhanc-ing the center’s value as a cost-effective regional hub for

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global corporations and investors.(By Iris Lai, Hong Kong bureau manager: Iris.Lai@ambest.com)

Vermont Governor Signs Bill Allowing ‘Dormant’ Status for Captives

Vermont Gov. Peter Shumlin has signed legislation creating a new “dormant” status for captive insurers, allowing cap-tives that have ceased operation to retain their state licenses in the event they wish to resume.

David Provost, the deputy commissioner of the Vermont Captives Division, said his office worked to have lawmak-ers approve the update to the state’s captive insurance law. He previously said Vermont usually loses captives as either the result of mergers and acquisition activity, or a change in plan at the parent level. In 2013, 27 captives dissolved in Vermont and three redomesticated to the state, he said.

Fewer than a dozen captives qualify to take advantage of the new law, Provost said in an email. He had testified previ-ously to the state’s House Ways and Means committee that seven companies were in excellent position to take advan-tage of the law. “However, we expect that the law will be used only rarely going forward,” he said. “But for those that choose to take advantage of the law, it will be a welcome option.”

The new law defines a “dormant captive” as a pure cap-tive insurance company domiciled in Vermont that has not insured any controlled, unaffiliated business; ceased all in-surance business, including issuing policies; has no liabilities associated with insurance transactions or policies issued be-fore seeking a five-year dormancy certificate. The certificate must be renewed within the five-year period, or it expires.

Companies that qualify for dormant status must possess and maintain paid-in capital and surplus of at least $25,000; must submit an annual report on its financial condition; pay license renewal fees; and is not subject to tax. A dormant captive insurance company must gain approval from the in-surance commissioner to surrender its dormancy certificate in order to conducting new business, the law said.

Provost said the bill grants the insurance commissioner the authority to waive assessment rules so that captive recip-rocals can operate in accordance with approved business plans. “This is attractive to nonprofit organizations because the reciprocal form allows the income of the captive to be allocated to the members for federal income tax purposes, and does not generally result in taxable income to the mem-ber,” he said.

Captive insurance companies that are formed as reciprocal insurers can be exempted by the commissioner from assess-ments, time limits for assessments and aggregate liability, the final text of the law states.

As of January 2014, Vermont was the nation’s leading do-micile with more than 1,000 captives licensed in the state with 588 active captives. The state licensed its 1,000th cap-tive insurer in October (Best’s News Service, Jan. 24, 2014).

(By Thomas Harman, associate editor, BestWeek: Tom.Harman@ambest.com)

Texas Licenses AT&T Subsidiary as Latest Captive Insurer

Gateway Rivers Insurance Co. has become the latest com-pany to become a captive insurer in Texas since the state became a captive insurance domicile in 2013.

Gateway Rivers is the wholly owned captive subsidiary of Dallas-based AT&T Inc. It joins Commerce Way Insurance Co., Cart Assurance Co. Inc. and Prize Indemnity in becom-ing captives in the state since the passage of SB 734 in Texas during the 2013 session.

Having a licensed captive in Texas should help AT&T con-duct business with more efficiency and keep risk manage-ment operations closer to home, said Leslie Ward, AT&T Texas’ vice president, legislative and external affairs. “Any day that lawmakers and regulators can eliminate obstacles to business operations is a day when Texas becomes even more attractive as a corporate home,” she said in a state-ment. “We are impressed with the Texas Legislature’s and the insurance commissioner’s ability to take a business concept and make it a reality in Texas in less than a year.”

SB 734 allowed the state to become a captive domicile. The bill was backed by Texas-based companies that had captives domiciled outside the state, but were looking to transfer them to Texas, according to the Property Casualty Insurers Association of America.

The bill requires affiliated insurance companies to have significant operations in Texas before they can form or move a captive there. Texas captives are limited in that they can insure only the operational risks of affiliated companies and controlled unaffiliated business and cannot accept any insurance policy risks of an affiliate. Also, SB 734 provided a two-year waiver of any insurance fees or taxes on any cap-tive that relocates to Texas from another jurisdiction. Texas captives can provide reinsurance to any insurer covering a captive’s affiliates, including liability insurance and workers’ compensation (Best’s News Service, June 6, 2013).

AT&T has 36,000 employees in the state of Texas.

Gateway Rivers Insurance Co. currently has a Best’s Finan-cial Strength Rating of A- (Excellent).

(By Thomas Harman, associate editor, BestWeek: Tom.Harman@ambest.com)

Analysts, Brokers & Insurers

Marsh-Managed Hybrid Insurer Issuing Policies to Africa’s First Catastrophe Insurance Pool

An African Union agency has established the continent’s first catastrophe insurance pool, the policies being issued by a hybrid mutual insurance company managed by Marsh’s captive solutions practice, Marsh said.

The insurance pool is being launched by the African Risk Capacity, a specialized African Union agency that will help member states become more resilient to extreme weather while protecting populations facing drought.

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The ARC Agency created ARC Insurance Co. Ltd., a special-ist hybrid mutual insurance company, to issue insurance policies to African governments. Initially the participating nations will include Kenya, Mauritania, Mozambique, Niger and Senegal, all of which have taken out insurance contracts for coverage of agricultural seasons beginning on May 1, Marsh said in a statement. The United Kingdom and Ger-many supplied $200 million for ARC Insurance’s foundation. ARC Ltd.’s incorporation and start up has been supported by a number of partners, including Stroock Stroock & Lavan, Appleby Bermuda, Marsh IAS as insurance manager in Ber-muda, and Willis Group as reinsurance broker.

African nations typically obtain international assistance after catastrophes through an appeals system, with funding allocated on a largely ad hoc basis once a disaster strikes. African governments hit hard by disaster can be forced to reallocate funds from development projects, creating prob-lems in other economic sectors.

ARC Ltd. has issued $135 million in parametric insurance policies that are tailored to requirements in each insured participating nation. Also, ARC Ltd. has secured $55 million from the international reinsurance and weather risk markets to cover risks from participating nations.

“The underlying insurance policies issued by ARC Ltd. are cutting-edge, index-based coverages with parametric trig-gers tailored to reflect each country’s specific rainfall re-quirements for growing staple crops,” said David Simmons, Willis Re managing director of analytics. “The calculation of claims to the program is based upon satellite rainfall data, which is used to objectively determine whether a drought has occurred. This then allows claims to be calcu-lated quickly, and as a result, funds can be deployed in a timely and efficient manner. This is one of the first times in Africa that the reinsurance process has become such a key instrument in achieving humanitarian and development goals.”

Claire Wilkinson, partner of Willis’ global weather risks practice, said there was significant appetite for the risk in the reinsurance and index-based weather markets. “Despite keen pricing, the core layers of the programs were around three times over-subscribed,” she said.

As much as 90% of Africa’s insurance premiums are sold in a few nations --- South Africa, Morocco, Nigeria, Egypt, Kenya, Algeria and Angola. Portions of Sub-Saharan Africa such as Kenya, Nigeria and Ghana are viewed as a potential growth market for insurers in South Africa, Europe and the United States, because the region generates 0.2% of the continent’s premiums, according to Swiss Re.

(By Thomas Harman, associate editor, BestWeek: Tom.Harman@ambest.com)

Aon Captive Expert: Terror, Cyber and Bad Behavior Remain Underrated Risks

A survey of leaders of captive organizations show their lead-ers either ignore or underrate many of the 50 top possible risks, Peter Mullen,chief executive officer of captive and risk insurance management at Aon Global Risk Consulting, told AMBestTV at the 2014 Bermuda Captive Conference. A

big challenge to organizations remains the interconnected nature of global risks, he said.

View the video version of this interview at: http://www.ambest.com/v.asp?v=mullen614

Q. Let’s talk about the recent research you’ve done into risks facing corporations that maybe they’re underestimating.

A: Last year we undertook a body of work with about 1,500 of our clients, quite a diverse group of clients across a number of geographies from a number of industries. The purpose of that research was to look into what sort of risks are on their minds right now. We ranked them from 1 to 50.

When we got the results of that first body of research, we noticed and we felt that some of those risks may be underrated. We took a deeper dive into the research and we approached over 100 of our captive clients, talking to captive directors, both corporate directors and independent non-executive directors. I think the results are interesting and highlight a couple of areas.

Firstly, relevance came out of this work in that there were 50 risks on the list, and of those 50 risks, the majority are not currently insured or are only partially insured. That speaks to the relevance of both the insurance market and the captive industry today and its ability to address some of the risks facing our clients.

Then there’s also the issue of complacency and underrated threats. I’ll just point out three of those threats that we felt were underrated, cyber being an obvious one. Cyber was ranked at number 18. Looking at the rate at which cyber at-tacks were reported in the news in the last couple of years, we think and the captive directors concur, that cyber is underrated at number 18.

There’s also terrorism at number 46 out of 50. With ter-rorism it’s a case of “out of sight is out of mind.” Lastly, I’ll mention unethical behavior. Unethical behavior, as we have seen, can take down a company from top to bottom. We feel that’s also an underrated risk out there.

We’ve covered relevance, we’ve covered complacency and then I see there’s interconnectivity of risk where when you look at, for example, a typhoon in Japan, which can result in parts for products not being available for supply to the US or Europe. That in turn can result in failure to deliver those products or reduction in revenue.

But it might also be part of a reputational issue. If that also damages your brand and your reputation, that in turn can impact your ability to hire talent. If you can’t get the right talent on board, that in turn can impact your ability to inno-vate in the marketplace. They were three of the issues that emerged from the report.

Q: How would this impact captives?

A: From a captive owner’s perspective, first of all, captives tend to be owned by larger corporations. They own the risk. They’re always looking for ways to innovate and deal with some of these larger and more difficult risks.

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Data now today is much more available in the market and especially for large corporations. Their ability to access data and use data has increased dramatically in the last 10 years. Using the captive as a repository for data and analysis I think is a very useful tool. Then there is the usual incubation of risk, where the market is unwilling to unable to assume a risk, using the captive as an incubator so that within...you’re incubating that risk within an insurance context.

You’ve got an insurance policy issued. You’re paying claims as per that insurance policy. You’re using actuarial methods to measure how much of the premium should be charged. Once you’ve done that for a number of years you can in turn go to the market and look for a risk-transfer capacity using that data.

View this and other interviews at http://www.ambest.tv(By Meg Green, senior associate editor, BestWeek:

Meg.Green@ambest.com)

Deloitte’s Khan: Bermuda Is Drawing Latin American Captives

Recent international agreements are helping draw captives to Bermuda from five Latin American countries, according to Muhammad Khan of Deloitte. Khan spoke to A.M.BestTV at the 2014 Bermuda Captive Conference.

View the video version of this interview at: http://www.ambest.com/v.asp?v=khan614

Q: I understand you’re seeing a lot of growth from Latin America. Can you tell us about that?

A: For the Bermuda captive industry this is a new phenome-non emerging, a trend really, an interest from Latin American business. Over the past couple of years, what we are seeing is many nationalized corporations, as well as many private organizations, especially from the utility and energy sectors, are really taking interest in setting up their captives here.

This is a new phenomenon for Bermuda business. Generally, the typical business was more so from U.S. and Canada and other countries. Latin America is currently seeing that.

Q: What is driving that increase?

A: Of course, there cannot necessarily be a trigger but what seems like it is the very recent taxation and exchange agreements Bermuda has in place with Brazil, Mexico and Argentina. To some extent it seems like those drive that and a general growth in Latin American business itself.

Because the growth, this is not only from those three coun-tries but work also from Columbia and Panama. These are the really the five countries where we can see that they are coming out, setting up their captives. We may associate the growth to the deals we have with those countries.

Q: Do you expect to see that trend continue?

A: Yes, I think it’s in very early stages. So far it seems very suc-cessful. There were quite a few challenges. They are new to us. We are new to them, but it seems like they’re working well. This has been established for at least, now, a couple of years.

What I would expect, that the growth will be not only from various other sectors coming forward and establishing their captives. What we can see, that yes, Bermuda was able to of-fer a competitive service. It means I have reasons to believe that yes, the growth will come.

It will come not only from the existing companies we have set up. It may go and then really explore more, and then go from traditional types of insurance to more and more mechanisms, segregated sales, and then some other variety. As well as they’re looking at the results and looking at the success, hopefully more companies from Latin American regions will come forward and set up their captives here.

View this and other interviews at http://www.ambest.tv(By Meg Green, senior associate editor, BestWeek:

Meg.Green@ambest.com)

Aon Exec: Latin American Captive Growth Benefits Bermuda

Bermuda is seeing growth in captives from Mexico, Colom-bia, Chile, Ecuador and Peru. International investment and infrastructure development are drivers of captive growth, according to Robert Johnston of Aon Insurance Managers (Bermuda) Ltd. Johnston spoke with A.M.BestTV at the 2014 Bermuda Captive Managers conference.

View the video version of this interview at: http://www.ambest.com/v.asp?v=johnston614

Q: We hear there’s a lot of interest in captives from Latin America. Where are you seeing that interest coming from?

A: Most of what we see is coming out of five different countries. Mexico and Colombia would be number one and two and you can also put in Chile, Ecuador and Peru. Those five are coming up with most of the activity that we’re see-ing coming through the captive space. Brazil and Argentina are on the horizon but there are some issues related to the ability to access funds, move capital as a company may want for their own benefit. We’re watching them but they’re not quite there like these other five that I mentioned.

Q: What is driving that growth?

A: Latin America is on the receiving end of a lot of interna-tional investment. You have a lot of infrastructure develop-ment going on. They have improved in so many different ways, whether it’s from a regulatory standpoint, whether it’s the banking infrastructure. Quite frankly, construction is driving a tremendous amount of activity in areas such as property, surety, you name it. Colombia, if you’re there visiting on business, which I am often, you can see this unfolding in front of you. It’s a very exciting time in those countries.

Q: How is the market changing for service providers?

A: You have people such as ourselves at Aon penetrating. The brokering world has been there and it’s infiltrated quite a bit. Whether it’s the brokering side, Aon Benfield, some of our competitors as well. However, the captive space is rela-tively new. The number of Latin American captives that are forming is growing every year. There are certain domiciles,

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Bermuda being one of course, as a recipient of that growth, which is a positive.

You’re seeing a lot more fronting companies set up. You often have what is referred to as a double front require-ment, where you need a fronting carrier to cede to a re-insured admitted carrier and then to a captive. There’s an added step in the process, but a lot of the same carriers that you see here in Bermuda are the reinsurers now set-ting up operations in Latin America, and they can serve that market.

The Latins enjoy that because they like the idea of coming to Bermuda and placing insurance and reinsurance along with their peers from Europe and the US. There’s a little bit of a status symbol for them.

Q: What is Bermuda doing to support that Latin America interest?

A: Bermuda has depth in their regulatory environment where they’re bilingual and they have certainly made a commitment to the regulatory process. They understand their needs. They understand the fact that it’s a relatively simplistic market. They’re writing a lot of basic property starting out, surety, et cetera, and a lot of class 1 and 2s.

They try to make it as painless as possible but they also rec-ognize Latins have a bit of a need for capital. When you start looking at dividends and looking at loan back opportunities, the BMA understands that and they’re trying to really work with the Latin America captive owner as well as ourselves to make that happen.

View this and other interviews at http://www.ambest.tv(By Meg Green, senior associate editor, BestWeek:

Meg.Green@ambest.com)

Zurich Exec: Captives Expanding Their Role Within Corporations

Steve Bauman, Zurich’s head of captive services, said com-panies are using captives to support more initiatives, reach-ing beyond their traditional roles as providers of property and catastrophe coverage. Bauman spoke with A.M.BestTV at the 2014 Bermuda Captive Conference.

View the video version of this interview at: http://www.ambest.com/v.asp?v=bauman614

Q: What kind of innovation are you seeing in the captive industry today?

A: I think we’re seeing captives get into a lot of different areas now. I think it has to do with the maturity of captives. If you think about it, captives have been, some around for nearly 50 years. With that comes a lot of extra capital and surplus. They’re putting the capital and surplus to work in many interesting ways.

What we’re seeing is that captives are no longer just a zero-sum balance for the corporations. They’re working it into their business plans and using it to the advantage of their normal products and the captives are supporting that.

Q: Can you give us some examples of what you’re seeing, new things in captives?

A: If you look at a manufacturing company who puts prod-ucts out in the marketplace and the warranties on that prod-uct, often that’s captive-supported. Innovative ideas like that. It’s not only manufacturing firms. Now we have high-tech firms looking at the same type of products. It’s the captive getting more involved in the business practices of the compa-nies and not just the normal property and casual risk.

Q: Have you seen much action from private equity getting into segregated cells as an investment?

A: We have seen activity from private equity. What normally happens is we may have a large client and all of a sudden private equity comes in and they purchase that client. Then all of a sudden private equity’s involved in the captive of that client. It’s a normal progression now, working with the client as we usually do but then having a private equity involvement as well.

They bring interesting ideas to the table. They’re often creative minds and they have capital. They look at the captive as an asset. The ability to use that asset to really create a better busi-ness model. We’re seeing that, and I think it’s a good thing.

Q: You think we’ll continue to see that growth?

A: I definitely think we will, yeah. There’s no hint of private equity slowing down. We’re comfortable with it. At Zurich, we have a group that exclusively works with private equity. It’s a new business model for us and I think we’re pretty happy with it.

View this and other interviews at http://www.ambest.tv(By Meg Green, senior associate editor, BestWeek:

Meg.Green@ambest.com)

Marsh Exec: Captives Moving Cautiously Into Cyber, Supply Risk

Robert Geraghty of Marsh’s captive services unit, said cap-tive insurers are learning to accommodate some emerging risks. They generally begin by gathering information, then moving into coverage areas incrementally. He spoke to A.M.BestTV at the 2014 Bermuda Captive Conference.

View the video version of this interview at: http://www.ambest.com/v.asp?v=geraghty614

Q: What emerging risks are you seeing going into captives these days?

A: One key one we’re definitely seeing is cyber. Everybody’s talking about cyber. We’ve got to understand what cyber is. Cyber means different things to different people. We’ve got to understand what data we have behind that to make an in-formed decision. Once we define what cyber is and we see what data we have, then we can decide if it’s applicable to enter the captive or not and if so at what retention.

We’re seeing 17 captives of our 1,148 benchmarks and us-ing or putting cyber through the captive. Of those, some of

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them are taking different levels of retention and different layers, so there’s no major trend there.

There’s a bit over nine domiciles as well. U.S., Europe, there’s no distinction as to one area is seeing it a lot more than the other.

There’s a lot of cyber coverage out there. You can buy over $500 million coverage in the market. There’s a lot of capac-ity there. What we are seeing is companies doing it but doing it slowly. Taking it to the captive and trying to under-stand the risk a bit more.

Once they’ve done their assessment, their cyber assessment and the pre-placement assessment with the market, maybe they’ll take deductible levels and, as they understand it more, maybe take higher attentions within cyber.

Most of them are taking first priority and third priority cyber. Whenever you have a cyber hit or an attack, it’s not a time to be learning on the job.

Companies want to make sure that they’re covered, wheth-er that be within the captive or the market or a bit of both. Most of them are using the market and some of the captives, the 17 that we have.

Going forward captives will start to place cyber more. But it’s not going to happen overnight. I don’t think there’s go-ing to be 100 captives doing it next year, but there will be more than the 17 that we’ve had. It’ll be interesting to see. I think they will do it going forwards.

One of the risks we’re looking at is supply chain. We’ve seen from business interruption and contingent business interrup-tion policies that there are gaps in those policies and there’s tighter wordings, there’s perils mentioned. Sometimes only first-tier suppliers are the ones who are covered for, basically.

What we’re seeing is companies putting in nondamaged business interruption. We’ve only got two companies doing it at the moment. But what they’re doing is having a full, broad coverage. They’re putting some into the captive and some into the market. We’ve had some inquiries of compa-nies to take it all themselves within the captive.

That may be one that will trend going forward. There are two captives doing it at the minute, but, as I say, companies want to be fully covered. They want to ensure that things like strikes, pandemics and volcanic eruptions that may cause ash clouds, they want to make that they’re covered in all cases.

The captive offers capacity there and offers them a chance to build data and to, as they learn more, to take some reten-tion within the captive.

Q: How about terrorism insurance? Are you seeing any movement there into captives?

A: From our benchmarking report, we found that 11.5% of our captives are accessing terrorism pools. That’s not just TRIA. That’s TRIP in Belgium. That’s Pool Re in the U.K. and the GAREAT in France.

Not all of them are doing it but some of them are access-ing terrorism pools. Around approximately 80% of those is TRIA. With TRIA looking to being extended now, I think the number will stay around the same.

But it’s definitely an advantage of having a captive in place. The access to TRIA and the access, as I’ve seen a lot, to Pool Re in the U.K. as well, it can be a cost advantage, especially in the Pool Re case.

Q: What other new risks are you seeing on the horizon that may end up in captives?

A: We’re seeing a little bit and having discussions on em-ployment practices liability because it’s excluding wage and hour claims. A lot of policies exclude wage and hour claims. There could be potential there.

We saw a lot of cases in the U.S. last year on this where for the top 10, the average claim event was $25 million. If that’s excluded from your policy, well certainly you may find your-self in a position where you’re not covered.

We are seeing some inquiries on that, too, for potentially the captives to take the whole lot, to write the whole lot amount or to write some of it.

As I’ve mentioned with cyber, with supply chain and with wage and hour claims there as well, as the company learns more about this and they get more data and more data to base it off, then they will look at taking higher retentions and make more informed decisions.

Companies want to make decisions based on data rather than just based on gut feeling. For example, with cyber, when somebody says, “I want to insure a cyber,” I’ll say, “What are you looking at insuring? Let’s talk about it. Do you understand the risk and how applicable is it to your industry?

Then at what level should you look to buy it at and at what level should you look to retain it at?” There’s a lot of under-standing before you make the decision as to insurance and insurance within the captive.

View this and other interviews at http://www.ambest.tv(By Meg Green, senior associate editor, BestWeek:

Meg.Green@ambest.com)

Cedar Consulting Executive: Use Microcaptives for the Right Purposes

Dennis Silvia, president of Cedar Consulting, said captive owners should be careful in setting up microcaptives, often known as 813(b) captives, for risk tax difficulties. Silvia spoke to A.M.BestTV at the 2014 Bermuda Captive Conference.

View the video version of this interview at: http://www.ambest.com/v.asp?v=silvia614

Q: There’s a lot of interest in microcaptives. What are they?

A: Microcaptives, also called 831(b) programs, are a special-ized captive insurance arrangement that allows the owner

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of the captive not to pay taxes at least at the captive level on the underwriting income of the captive. They’ve become very popular as an estate tool, estate management or that kind of a tool.

We’ve always seen them as risk tools. As an insurance company we have to avoid some of the downfalls that might happen as far as only planning from a tax or wealth management planning perspective and avoiding the risk implications of them. That’s somewhere we run into a lot of problems in interpretation of that law as a result.

Q: They’re typically about how big?

A: $1.2 million is the annual premium limit that is allowed under law. They typically handle liability programs for smaller companies.

Q: What are some of the pitfalls?

A: When they’re being designed primarily as a wealth management tool or as a tax avoidance tool, they often fall in this gray area because of the requirement that they have risk distribution, risk transfer happening inside the captive --- real insurance, as the IRS might call it.

When they’re planning primarily from a non-insurance perspective and from a wealth-management perspective, they end up missing that risk distribution, risk transfer key. As a result, they have to create these weird risk-planning pools that they take risk out of in order to legitimatize the insurance cover.

What we found is that for some companies, they are excel-lent ways of handling risk, financing risk. And then, by the way, there are some tax advantages. That’s the way that they really need to be designed. Because I’m just really concerned for in the industry a lot of programs that start with the wrong premise and then drive into this insurance mechanism as opposed to starting with the risk manage-ment need and then driving into the program itself.

We try to be very sensible about making sure that they’re done properly. In my opinion at least, a lot of them are done very gray kind of justification for the programs.

Q: Is there a way to measure the risk-transfer mechanism?

A: There are some very clear standards about that as well. The IRS has given some real clear guidance on what distri-bution looks like, how risk transfer has to happen, how pric-ing has to occur in the program at an arms’ length kind of a transaction.

But a lot of companies that put these programs together avoid all that. They find the shortcuts, if you will, to how to making those programs work.

I just think that at some point we’re going to end up with a lot of these programs that when the IRS really starts to investigate them will say that they’re really not clearly the kind of deals that should fall under that law. We’re very cautious in making sure that people have clear, justifiable, defensible kinds of 831(b) programs in our design program.

View this and other interviews at http://www.ambest.tv(By Meg Green, senior associate editor, BestWeek:

Meg.Green@ambest.com)

Insurance Broker Marsh Names President of Global Captive Solutions Business

Insurance broker Marsh said Chris Lay has been named president of its global captive solutions business, effective July 1.

Based in London, Lay will focus on the priorities to drive growth across the business’s operations and future plat-form. He most recently served as the business development leader within Marsh’s international division. Lay succeeds Michael Cormier, who will continue as chief executive of-ficer of Marsh Risk Consulting.

Since joining Marsh in 1984, Lay has held several senior roles in the United Kingdom; the Europe, Middle East, and Africa regions; and the international division. His experience includes leading the United Kingdom and EMEA corporate segment and Marsh’s operations in Russia, Eastern Europe, and the Middle East.

He will report to John Drzik, president of Marsh’s global risk and specialties division.

“In a rapidly evolving risk landscape, it is vital that we offer clients innovative alternative financing solutions to protect their assets and enable them to grow and thrive,” Lay said in a statement.

Marsh & McLennan Cos. (NYSE: MMC) is the No. 1-ranked in-surance broker in the world based on total revenues in 2012 of $11.9 billion, according to Best’s Review’s annual ranking.

Ohio Gov. John Kasich signed legislation making Ohio the nation’s latest captive domicile, the bill moving through the Senate once lawmakers decided to include special purpose vehicles in the bill. The Department of Insurance has until mid-September to write regulations for the law and interested parties expect captives to be operating in the state this fall. Ohio joins more than 30 states, and the District of Columbia and Puerto Rico, that are captive domiciles.

Willis Broker: International Competition a Factor in Lower Medical Professional Liability Rates

In an interview with A.M.BestTV, broker Donna Vible of Willis reviews the current soft market for medical liability coverage and explains how competition between London, Bermuda and other markets is benefiting U.S. doctors and hospitals.

View the video version of this interview at: http://www.ambest.com/v.asp?v=vible614

Q: I was hoping we could hear a little bit about what you’re seeing in terms of market conditions at the moment.

A: Well, the market conditions are still very good for my hospital and physician clients. So our client base in the

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Northeast region has still benefited by soft conditions in the marketplace and by the competition we introduce into the marketing process. I have colleagues on the ground in London directly across the street from Lloyd’s of London, as well as colleagues in Bermuda. We are literally looking across the world, the globe for solutions for our clients and fortunately seeing year-over-year reductions and those re-ductions continue for malpractice insurance. I’m delighted to say our clients are happy with the results that we are able to achieve for them in the marketplace.

Q: Now you specialize in alternative risk transfer. Are you still seeing a demand for captives and risk retention groups?

A: Absolutely. Yes, I have focused on alternative risk financing programs, captives offshore, risk retention groups onshore, since 1992. Those captives have been solutions for clients where even when the market conditions changed they remained in those captive programs because controlling risk, being able to control their own destiny was appealing them. Maybe you changed the reinsurance structure to take advantage of the soft conditions but they weren’t reversing their decision to go into a captive program. The captives have increased in interest to my clients as well as to my clients in New Jersey. I have two New Jersey based med mal captives for two for-profit clients of mine and the inter-est is still there in captives and risk retention groups as solutions in the health care sector.

Q: Who are your clients interested in captives?

A: My clients are not only large integrated delivery systems but they’re also physician groups who now are becoming larger physician groups merging with other groups, for example, or physicians who are entrepreneurial like my one client in New Jersey who has set up a captive here in New Jersey. Surgery centers associated with these physicians are rolled into the risk in this captive program. As these groups get larger, as they merge, as they become affiliated with other groups, these captives are much more appealing to them than buying guaranteed cost coverage.

Q: Why is that?

A: Well, what you’ll find out as you are a smaller physician group merging with a larger physician group, that you can now take advantage of the marketplace by having your program loss rated, for example, as opposed to rated as a group of 10 physicians, for example. As they get larger and the premium base gets larger, it’s more cost effective to go into an alternative risk vehicle. Because there are costs associated with running these programs year after year. You have your captive management fees. You have your actuarial fees. We do a feasibility study and a pro forma to show that the company does make sense over a projected period of time. Then of course, it’s critical to control those losses to make the company really profitable for these organizations that form them and for the physician groups who now can enjoy some of that profit back on their books as opposed to their insurance company books.

Q: What do you recommend to your clients to reduce medi-cal malpractice claims? Are there things you can suggest?

A: Absolutely. When we are broaching the subject of doing

a captive, broaching the subject of doing a risk retention group, we start out with a feasibility study. Does this make financial sense to do? But we also have a very serious dis-cussion on risk management. If you don’t intend to adopt risk management techniques don’t even go down this road of having self insured through a captive because it’s not going to be successful. Very often we recommend solutions for our clients, whether it be risk management education programs, a lot of those are online. The insurance compa-nies offer those, outside firms like Astute Doctor. We also seriously recommend that they have education in the form of maybe mock trials. So come in and have the doctors, have the nurses see what it’s like to go through a trial. See how uncomfortable it is to be deposed or be on a witness stand. We do really want to make them aware that you control your own destiny and if you can mitigate or avoid a claim to begin with, that’s the most important thing. Because no one wants to be subjected to going through a trial, having to deal with the time away from work, the stress of undergo-ing that. Risk management techniques are the best in avoid-ing claims as long as the education is there, whether it be proper documentation, proper communication, or working on your interpersonal skills like they are trying to educate physicians through Astute Doctor. For example, educate doctors how those interpersonal skills and relating to your patient is very likely going to avoid someone from coming back and trying to sue you later.

Q: How are reinsurers treating your clients today?

A: The reinsurance marketplace remains very competitive. For our clients the best solutions are always an international marketing effort. I actually will jump on a plane and go and meet with my client and the reinsurers at Lloyd’s of London. We will present there in London with my colleagues at our London office. Very often in Bermuda. I’ve just gotten back from Bermuda the last couple of weeks with clients and renewals and meeting with those underwriters and making them understand the risk and how we’re improving the risk so that it’s a good risk for them to assume. We are continu-ing, because of that international marketing effort, to see 20% and 25% reductions year over year for our clients, sometimes there are as substantial as 50% reductions.

There is a hospital system here in New Jersey and they, as little as 12 months ago, were paying in excess of $3 mil-lion for their malpractice program and have reduced that by over $2 million in the course of 12 months. We have reduced that and we have increased their insurance cover-age. We have increased it by adding batch coverage to the program, by adding twin towers of coverage to the program and by increasing their limits at a cost of less than a third of what they were paying before. Is the international reinsur-ance marketplace working for us? It absolutely is. But the competition must be there. If there is no competition or no fear of competition those prices are not going to keep going south. So we do have to, as a broker, continue to keep pressure on the markets to give the clients the premium they’re justified. If their loss experience justifies that reduc-tion we’re going to go out and get that reduction for them.

View this and other interviews at http://www.ambest.tv(By Meg Green, senior associate editor, BestWeek:

Meg.Green@ambest.com)

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For comments or questions on Best’s rating of Captive Insurers, please contactMr Clive Thursby, Senior Director, A. M. Best Europe — Rating Services Ltd.

Telephone: +44 (0) 207-397-0279or Email: Clive.Thursby@ambest.com