Transcript The Bermuda Market in 2005

Employee Benefits in Captives
Speakers:
• George O’Donnell, Senior Vice President, Benefit Funding
Strategies, Aon Consulting
• Brian Quinn, Director & Chief Underwriting Officer, Granite
Management Limited
• Molly Seaburg, Risk Manager – Microsoft Business Risk
Management, Microsoft Corporation
• Christina Reisinger, Director Risk Management, Cephalon, Inc.
Moderator:
• Philip Barnes, Managing Director, Aon Insurance Managers
(Bermuda) Ltd.
Where We Are Today:
Overview of US and Global Captive Benefits Activity
Employee Benefit Risks – What are They?
Types of EB Risks:
• Death/Term Life
• Disability / Income Replacement
• Personal Accident / Accidental Death &
Dismemberment
• Medical / Active Health
• Post-Retirement Health
• Risk riders of pension policies in some
Continental European countries, e.g. Germany,
Belgium, Switzerland, Denmark
U.S. Activity (Dept. of Labor Approval)
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ADM (2)
AGL Resources
Alcoa
Alcon
Astra Zeneca (2)
Banner Health
Cephalon
Coca-Cola
ConAgra Foods
Deutsche Post/DHL
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–
–
–
–
Heinz (2)
International Paper
Memorial Sloan
Kettering
Microsoft
NiSource (2)
SCA
Sun Microsystems
UTC
Wells Fargo
YKK
Growth in U.S. / Dept. of Labor Approvals
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03
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10
Between 2005 and 2010, over 300% increase in cumulative number of DOL-approved transactions
Global Benefits Activity
• Currently at least 30 companies have reinsured
global employee benefit programs through
captives
• Virtually all such arrangements are in non-US
captive domiciles
• Multi-national pooling is the precursor to
“captivation”
Why?
The Reasons Behind the Transactions
Rational for EB in Captive
The risk profile of employee benefits is characterised
by high and stable frequency with low average severity
…
… and a CAT-tail …
Implying that for most corporations employee benefit risk can be fully retained . . .
. . . Except for the CAT-tail
The Numbers Can Sometimes be
Compelling . . . An Example
Most Recent Experience
April 2010
Total (All Lines)
Annual Premium
6,371227
Projected Claims
3,705,560
Projected L/R
58.2%
% Insurer Fees
19.3%
Total
77.5%
% Captive
Retention
22.5%
$ Retention to
Captive
1,434,327
Strategic/Financial/Risk Management
Advantages of Captive Program
• Reduce insurance costs worldwide
• Integrated central control and coordination
• Improved underwriting flexibility
• Timely and detailed global reporting
• Globally aligned risk retention strategy
• Benefits represent an attractive risk
• Acceleration of cash flows
• Interest on risk premiums / reserves
• Diversify risks assumed by captive
• Support/improve captive tax efficiencies through 3rd
party business
Structure
How Captive Benefits Arrangements Work
U.S. Captive Transactions
Benefit Claims
Employees
Direct Premium
Fronting
Carrier
Employer
Dividends
Reinsurance Premium
Captive
Reinsurance Claims
U.S. Dept. of Labor Requirements
CAPTIVE REQUIREMENTS
•
US nexus
•
Financially sound
•
Authorized to reinsure benefits
PROTECTION OF PARTICIPANTS
•
Indemnity reinsurance (front is primarily liable)
•
Fronting carrier has Best’s “Excellent” rating
•
Immediate and objectively determinable benefit enhancement
•
Notification to participants
REASONABLENESS OF THE TRANSACTION
•
Reasonable premiums
•
Similar to formulae used by other carriers
•
No commissions paid by plan
INDEPENDENT CERTIFICATION
•
Independent fiduciary must review and approve the transaction
Examples of Benefit Plan Enhancements
Benefit Enhancements - - A Sampling of the
Possibilities
•
Beneficiary Assistance / Counseling
•
Travel Assistance Program
•
Will preparation and legal services - - access to on-line will and
forms, plus discounted legal fees
•
Employer-paid plan providing benefit up to three times the basic
life insurance benefit, subject to a schedule of amounts
•
Portability provision for life coverages - - continue at group rates
upon employment termination
•
Improve Accelerated Death Benefit, e.g., from 50% ($100,000
max) to 75% ($250,000 max), 6 mos. to 12 mos.
Global Captive Arrangements
Company
Captive
Multinational Network
Carrier#
1
Carrier#2
Carrier#3
Carrier#4
Carrier#5
Carrier#6
NL
D
UK
USA
Singapore
UK
International Employee Benefits
The GM Story
ANITE Management Limited
Brian Quinn - GR
General Motors - 2010 Highlights

Successfully transitioned to four brands in North America, with
combined sales of Chevrolet, Buick, GMC, and Cadillac
surpassing sales with eight brands a year ago

Announced investments of more than $2.3 billion in the U.S. and
Canada, adding more than 9,100 jobs

Paid back the loan portion of support from the U.S. and Canadian
governments

Achieved first quarterly profit as a new company and positive
operating cash flow, both important milestones

Making progress in restructuring operations in Europe
 Opel/Vauxhall’s Plan for the Future has reached a significant
milestone with a European-wide tentative labor agreement

GMIO, continuing its strong growth, recently recorded its 1
millionth sale this year in China, more than two months earlier
than its 1 millionth sale last year

The new GM has a cleaner, healthier balance sheet

Solidly positioned in China, Brazil, and other growing markets
General International Limited (GIL)


General Motors’ Bermuda
domiciled reinsurance captive
GIL Mission Statement

“The primary focus of GIL is to provide insurance
and reinsurance services and savings/financial
efficiencies to General Motors’ affiliates, employees
and suppliers worldwide when corporate programs
or local retentions are not viable options.”
GIL Financials

In 2009 GWP
 Predominantly employee benefits
US$ 90M

Funds under management
US$129M

Shareholders’ equity
US$ 70M

Pre tax Return on Average Equity

Total Corporate Return (on GIL equity) 119.8%
41.6%
The GM International Employee
Benefit (IEB) Project

Captive reinsurance first considered
in the late ’90s

3 passively managed multinational
pooling arrangements

Scant knowledge of its global risk
benefit exposures

Self-insured programs in the U.S.

Commenced the IEB project in 2000
 Managed jointly by the captive and GM HR
GM Corporate Goals for IEB Project

Ensure that GM units are paying appropriate
premiums for level of claims incurred

Monitor all costs charged to GM units

Reinsure 100% of Employee Benefit programs
 Improve financial efficiency
 Maximize investment returns
 Improve understanding of global programs
and exposures
 Stable source of “unrelated” premium
income per IRS
Insured Employee Benefit Funding
Mechanisms
Least Financially
Efficient
Most Financially
Efficient
Fully
Stop
Multinational
Captive
Self
Insured
Loss
Pooling
Reinsurance Insurance
Managing The Risk

Why take the “Risk” into the company
 Risk taken when benefit promise was made
 Need to “manage the risk”
 Insurance companies will manage it for a price
 Captive reinsurance can manage and cap the cost
 No insurance company will subsidize a benefit
promise over time
Captive Reinsurance vs. the Market

The GM program has always beaten the market
 Target premiums to equal claims plus admin cost

Why can units sometimes get cheaper quotes?
 Buy-in the risk but in time;
 Price will increase to cover costs plus profit

Can’t units change every year to get cheapest quote
 Disruption to employees
 Budgeting uncertainty and volatility
 Market fatigue
 Loss of control
 Relationships
GM Results to Date


To date global structural cost/premium savings of
approximately 35% have been achieved for GM
Reported savings of $35M in 2009
INSURED
Broker Fee
CAPTIVE
Profit
REINSURANCE
Risk
Admin
Admin
Claims
Claims
International Employee Benefits Growth of GM project
Historic Development
140
Premium ($M)
120
Savings ($M)
120
Countries (No.)
100
80
70
$M
65
60
50
50
40
34
23
21
20
10
4
11
7
0.5
1
2002
2003
35
35
2008
2009
45
20
15
14
10
43
40
38
9
5
5
2004
2005
2006
2007
Underwriting Year

Total premium savings since inception - $117M
2010 forecast
Lessons learned by GM

Move quickly as there is no need to delay

Each country is different but the goal is the
same

The amount of premium you think you have
is probably understated

Need to gain confidence of local leadership

Question all frictional costs

Be creative and demand creativity from
your global partners/fronting insurers
IEB Captive Reinsurance - Advantages

Significantly reduced employee benefit cost

Enhanced knowledge and control of local
programs

Superior corporate governance
 Central knowledge and control
 FAS reporting

Excellent stable source of captive business
 IRS requirements
 Captive metrics and IRR

Enhances relationship between HR and
Finance divisions
What Next?

Captive reinsurance arrangements are merely the
beginning

Shift focus from negotiating to claims management
 Analyze claims and identify abuses
 Implement controls to reduce/eliminate abuses

Unit HR and Finance departments responsible for
risk/claim management
 Educate employees
 Analyze the big cost drivers (i.e. special clinics)
Microsoft Corporation
Molly A. Seaburg
Risk Manager, SMSG
Agenda
• An overview of our company
• MSFT from the Risk Manager’s perspective
• What led us to decide to reinsure employee
benefits to one of our captives
• The key stakeholders in the process, and how we
addressed their respective concerns
• Our experience so far
• Our future plans for “captivating” benefit programs
Company Overview
• Microsoft Corporation is the worldwide leader in
software services, and solutions that help people
and businesses realize their full potential.
– Founded in 1975 in Albuquerque, NM
– Moved to Washington in 1979
– Incorporated June 25, 1981
– Currently employ >88,000 employees
worldwide
• >53,000 in the US
– Currently have subsidiaries in 112 countries
– Annual revenue for FY09 was $58.4 billion
Microsoft – Redmond Campus
Company Overview
• Microsoft Corporation – Where are we going?
– Software – YES
– Online Services
• Includes MS Exchange, Sharepoint, Amalga,
Xbox Live, & Bing
– Windows Azure
• Operating system for cloud computing
– Storage, computing and networking
infrastructure services
– Accessibility that is easy and secure and
accessible on any device from any
location
– Kinect formally Project Natal for Xbox 360
• Body recognition, sensors, verbal recognition
Microsoft from a Risk Manager Perspective
• MSFT From the Risk Manager’s Perspective
– A great deal to contemplate with all different
risks
– For Risk Management, this implies a
philosophy of the basics:
• Risk ID, Assessment, Response, Financing,
& Monitoring
• Treasurer Challenge
– What can Risk Management do to prolong the
life cycle of the MS dollar?
– What can Risk Management do to increase
shareholder value?
Captive Centric Framework
• Microsoft’s captives were established and
operated consistent with this philosophy
– 3.5 captives
• Bermuda – est. 1998
– Branch in VT – est. 2008
• Vermont – est. 2000
• Arizona – est. 2008
• Why so many?
Benefits & Captives
• Benefits and Captives – How we got there
– Foot in the door
• And so it began…
– Internal Meetings with HR, Tax and LCA
(2008)
– Commissioned feasibility analyses on big
picture
– Re-evaluated – established timeline
• Finally decided in July 2009 to proceed with
reinsuring Long-Term Disability (LTD) in the
Bermuda branch
Stakeholders
• Key Internal Stakeholders / Issues & Answers
– Human Resources
• Why does Risk want to do this?
• How will this affect our relationship with our
current carrier?
• How will this affect plan design?
• How will this be communicated to
employees?
• Will this mean more work for us?
Stakeholders
• Key Internal Stakeholders . . . (Cont’d)
– Finance
• Capital requirements for reinsurance
collateral?
• Letter of Credit, Reg 114 Trust, or Funds
Withheld?
• Accounting?
Stakeholders
• Key Internal Stakeholders . . . (Cont’d)
– Legal
• ERISA attorney briefings
• Contract attorneys provided input on
reinsurance contract
– Risk Management
• Coordination of events
• Tracking of timeline and deliverables
• Creating smooth transitions – being the
backstop
Stakeholders
• Key Stakeholders / Fronting Carrier
– Commitment / cooperation of fronting carrier
greatly expedites the process
– Prudential has extensive experience as a
fronting carrier, and was always committed to
achieving success
– Carrier provides initial drafts of reinsurance
agreements, which were reviewed / modified in
response to comments by MSFT and its
advisors
Stakeholders
• Key Stakeholders / Independent Fiduciary
– Milliman has rendered fiduciary opinions in
several previous transactions
– MSFT’s transaction was very similar to
preceding EXPO transactions, and did not
pose any unusual issues
– A favorable fiduciary opinion was issued
quickly
Experience So Far
• Our Experience so Far . . .
– So far, so good
• Preliminary meetings with fronting carrier,
treasury controller, captive managers, risk
management
• Reporting – clean and timely
– We’ll keep you posted
Our Future Plans
• Our Future Plans . . .
– Review of additional lines of domestic benefits
– Currently reviewing the reinsurance of our
international benefits into the captive
• Multiple countries
• Multiple lines
• Timing – phases/waves
Cephalon, Inc
Christina Reisinger
Director Risk Management
Cephalon Story
• Cephalon is a global biopharmaceutical company
dedicated to discovering, developing and bringing to
market medications to improve the quality of life of
individuals around the world. Since its inception in 1987,
Cephalon has brought first-in-class and best-in-class
medicines to patients in several therapeutic areas.
• Cephalon has the distinction of being one of the world's
fastest-growing biopharmaceutical companies, now
among the Fortune 1000 and a member of the S&P 500
Index, employing approximately 4,000 people worldwide.
The company sells numerous branded and generic
products around the world. In total, Cephalon sells more
than 150 products in nearly 100 countries
A Decade of Solid Growth
$2,800
$2,600
$2,400
$2,200
$2,000
$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
Oncology
Branded &
Generics
Pain
CNS
*2010 estimates depict the midpoint of guidance ranges provided in press release issued 5/4/10.
Cephalon’s Captive Program
In addition to ERISA benefits Cephalon places
the following programs in their Captive:
• Buy-Down Program Workers’ Compensation
and Auto
• Worldwide Product Liability
• Quota Share Excess Liability
• Worldwide Clinical Trials
What About Federal Government
Requirements?
• Pre-approval of DOL if benefit regulated by ERISA
• Fronting carrier must reinsure to captive
• Fronting carrier rated at least “A minus” by Best (DOL
initially required “A”; the DOL has relaxed it position)
• Captive must have a US presence (either domicile or
branch)
• HR involvement:
– “Benefit enhancement”
– Independent fiduciary review/approval
– Employee Communication
“Benefit Enhancements”
• Fronting Carrier is generally able to work with you to
“tweak” existing contracts
• Example
– Accelerated life insurance death benefits (6 mos. – 12
mos.)
– Tuition reimbursements in event of disability
– Day care for dependent child in event of employee
disability
– Other miscellaneous (travel aid, etc.)
Dealing With the “Tricky Stuff”…
• Suppose you have a new captive (less than a year old)?
– DOL requires financial statements for most recent taxable
year
– How can this requirement be satisfied by a new captive?
• Suppose you have an offshore captive – what’s involved in
establishing a US branch?
• The fronting carrier will require security (collateral) for the
reinsurance obligation from the captive to the fronting carrier
– What are the requirements, and how do I meet them?
• What to do about the DOL-mandated “benefit
enhancements”?
New Captive? Here’s What to Do .
YEAR 1
SHORT
YEAR
The Dept. of Labor will accept financials for “short year” (in
this case, 10/16/2006 – 12/31/2006)
What if You Have an Offshore Captive?
BRANCH
CAPTIVE
VERMONT
•
BERMUDA
Patriot Act and related legislation
– Additional due diligence, particularly if funding for branch
originates offshore
– Form W-8 BEN
– US financial institutions involved in this transaction are required to
“know their customers”
Dealing With the “Tricky Stuff”. . .
Fronting Carrier
Obligation
Assets
Claim + IBNR Reserves = Reg. 114 Trust Assets
Remember: Captive employee benefit arrangements require capital/surplus
(just like any other type of insurance arrangement)
Any Questions?