general session: captive case...
TRANSCRIPT
General Session:
Captive Case Studies
Speakers:
Clarence Batts, AZO Services Management
Eric Dethlefs, Cassatt RRG Holding Co.
Andrew Bradley, Intercona Re (Nestlé)
Moderator: Hugh Rosenbaum, Towers Watson
Captive Case Studies: The Privately-Held “Middle Market” Captive
Clarence “CB” Batts, CPA
Chief Financial Officer
AZO Services Management, Inc.
February 4, 2015
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PURPOSE
• Address the following: – Are captives a viable option for the small to medium sized, closely
held companies, either in a hard or soft market scenario?
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AGENDA
• Company Overview & Highlights
• The Risks
• Closely Held? Captive?
• The Captives & Unique Program Structure
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COMPANY OVERVIEW
• Headquarters: Kalamazoo, Michigan
• The Insureds: Family owned and operated companies, since 1911
– Excavation and construction
– Aggregate production
– Waste collection and disposal
– Landfill operation
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COMPANY HIGHLIGHTS
• South Side Landfill, Indianapolis area since 1971.
• Buffer Golf Course created to form a “buffer” between the landfill and residents
• Landfill Gas to Recycled Energy
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COMPANY HIGHLIGHTS The Definition of Small, Medium and Large Businesses...
Small businesses are those companies with fewer than 50 employees.
Medium-sized businesses are those companies with between 50 and 499 employees.
Larger businesses are companies with 500 or more employees.”
• AZO: Currently about 650 employees • When captive companies began we were medium-sized: 250 employees
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INSURABLE EXPOSURES
Traditional
• General Liability
• Fleet
• Aviation
• Umbrella
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INSURABLE EXPOSURES (Cont)
MEDICAL • Self-Funded Plan
• End of Plan – Run-out of claims (A)
• ACA (Obamacare) Exposure (B)
• Stop-Loss Cover (C)
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THE BIG RISKS
UNIQUE • Pollution Legal Liability
• Closure
• Post-Closure
• Post-Post-Closure
NOT IF BUT WHEN AND HOW MUCH
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CLOSELY-HELD? CAPTIVE?
Family trip in 1995 to Cayman
• Buy a bank?
• A captive is what we need
• Why form a captive?
• Why not?
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THE CAPTIVES
• Philosophy – the “Soap Box” – Define Insurance – Black’s Law Dictionary, 7th Ed.
“insurance, n. 1. An agreement by which one party (the insurer)
commits to do something of value for another party (the insured)
upon the occurrence of some specified contingency; esp., an
agreement by which one party assumes a risk faced by another
party in return for a premium payment.”
– Many “claims” are cost of doing business, NOT an insurable RISK
– Insurance is for catastrophic occurrences
– Insurance means taking RISK, not necessarily paying CLAIMS
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CLOSELY-HELD? CAPTIVE?
T-Value Analysis
• (The “CPA” as a “Risk Manager”)
Sample General Assumptions:
• $450,000 annual premiums
• G/L, Fleet, Umbrella
• $60,000 to run the captive
• 5% rate of return
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The Captive now has assets of $5.1 M by Year 10 !
This is what convinced our most Difficult director !
CLOSELY-HELD? CAPTIVE?
How about claims? We assumed 2 large:
$1 M & $450 K
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The Captive still has assets of $3.2 M by Year 10 !
“But what about claims?, they asked.
THE CAPTIVES
We have two: • Global Contractors Indemnity, Inc.
• Environmental Indemnity, Inc.
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THE CAPTIVES
• Global Results:
– We still have all our premiums!
– 17 years through 12/2013
17 Years Avg
– Investment Income $7.8 M $450 K
– Operating Costs (1.5 M) (88 K)
– Claims Paid (4.2 M) (247 K)
– Surplus Invst. Income $2.1 M $115 K
If our Investment Income exceeds total cost, we still have all our premiums
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THE CAPTIVES
• Global Claims History Detail:
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Year Amount
2001 -
2002 -
2003 123,000.00
2004 -
2005 -
2006 -
2007 2,486,000.00
2008 700,000.00
2009 -
2010 837,500.00
2011 -
2012 -
2013 33,000.00
2014 -
Total: $ 4,179,500.00
THE CAPTIVES
Keeping creativity alive
•Medical “A”, “B”, “C”
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THE CAPTIVES
Environmental
• REALLY long haul
Claims may not begin for 40+ years?
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THE CAPTIVES
Claims • Our claims mission statement
• Converse also true
• Who defends OUR $$$ better than US
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If we haven’t done
anything wrong………..
We owe ourselves the
strongest defense possible.
Claims Mission Statement
November 1, 2002 Attributed to Wal-Mart’s General Counsel quoted from the Wall Street Journal, January 21, 2002
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THE CAPTIVES
Domiciles • Moved just last year from Cayman to Utah
• Cayman is an Excellent domicile
• Our concern – offshore ceding sovereignty to U.S.
FATCA, FBAR, etc ??
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THE CAPTIVES
The Future • Sponsor segregated cells?
• Identify new risks – credit card breach?
• Still “Long Haul”
• Moving to new generation of staff
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General Session:
Captive Case Studies
Speakers:
Clarence Batts, AZO Services Management
Eric Dethlefs, Cassatt RRG Holding Co.
Andrew Bradley, Intercona Re (Nestlé)
Moderator: Hugh Rosenbaum, Towers Watson
The CASSATT INSURED GROUP
Eric W. Dethlefs
February 4, 2015
8:30 a.m. – 10:00 a.m.
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Shared Intelligence Risk Success
AGENDA
1) Essence of Cassatt
2) Principles for Success
3) Organizational Structure
4) Services and Coverage
5) Governance
6) Strategic Advantages of Membership
7) The Future
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ESSENCE OF CASSATT Established: 1991 Membership: Healthcare organizations – Philadelphia area
8 hospitals insured 1,200 physicians
Coverage: Medical professional and other liability Structure: Group captive – members share risk
Members … Participate in vigorous evaluation of risk and aggressive management of claims Engage in open and shared learning Hold one another accountable
Objectives: Improve quality of patient care provided
Lower cost of insurance
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PRINCIPLES FOR SUCCESS
Hospital C-Suite engagement
Long-term commitment
Dedication to patient safety and risk management
Prudent underwriting
Disciplined investment policy
Aggressive claims management
Robust governance
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Cassatt Insurance Company, Ltd.
(Bermuda Domicile)
Cassatt RRG Holding Company, Inc.
(Vermont Business Corp.)
Cassatt Insurance Group, Inc. (Vermont Domicile)
Cassatt Risk Retention Group,
Inc. (Vermont Domicile)
Future Cell
Future Cell
Cassatt Insurance Group Member Hospitals
ORGANIZATIONAL STRUCTURE
Provides Excess Coverage
Provides Primary Coverage
Provides Insurance Services
Sponsored Cell Captive
SERVICES AND COVERAGE
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Cassatt RRG (VT) + MCARE (PA)
Primary Statutory Limits ($1 million)
Cassatt (Bermuda) Excess Limits
($15 million) Cassatt Holding Co. (PA)
- Patient Safety/Risk - Claims - Finance - Legal - Underwriting
($4 million retention)
Risk-Bearing
Non Risk-Bearing
GOVERNANCE ILLUSTRATION
Board of Directors
Claims Finance Membership Nominating Risk/Safety Strategic
Planning
Executive Committee
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Engaged and Committed Membership
STRATEGIC ADVANTAGES OF CASSATT MEMBERSHIP
1) Ownership and control
Ability to direct insurance program
Networking with other shareholders to enhance patient safety and risk management initiatives
2) Program design customized
Specific risks
Insuring risks that may otherwise be uninsurable
3) Employed and dedicated staff
Highly specialized risk, insurance and patient safety professionals
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STRATEGIC ADVANTAGES OF CASSATT MEMBERSHIP
4) Invested assets managed with prudence and discipline
5) Access to reinsurance markets
Reinsurance differs from excess insurance
Diverse portfolio of reinsurers
Lloyd’s of London
Bermuda
Financial security
6) Opportunity to accumulate wealth
7) Opportunity for distributions to shareholders
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SHARED INTELLIGENCE RISK SUCCESS
The Cassatt Insured Group*
Total Program Funding: $44 million
Premium rates have decreased by 24%
Invested Assets: $250 million
Average annual investment return 7.9%
Shareholders’ Equity
Shareholders’ equity investment increased by 120%
Dividends/Premium Credits: $104 million
While maintaining Reserve to Surplus ratio of 2:1
*2009 - 2014
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THE FUTURE FOR CASSATT
Threats/Opportunities
Healthcare market consolidation
Specialized care centers
The ACO factor
Strategic Initiatives
Increase membership
Enhance products and services
Develop affiliations and partnerships
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General Session:
Captive Case Studies
Speakers:
Clarence Batts, AZO Services Management
Eric Dethlefs, Cassatt RRG Holding Co.
Andrew Bradley, Intercona Re (Nestlé)
Moderator: Hugh Rosenbaum, Towers Watson
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Intercona Re - Nestlé’s Captive
A True Success Story
Andrew R. Bradley
CEO of Intercona Re
Châtel-St-Denis
Fribourg
Switzerland
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Our World
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Nestlé’s mission Our objective is to be the recognised leader in Nutrition, Health and Wellness
and the industry reference for financial performance
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The Nestlé Story
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Galderma Products
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Nestlé at a Glance
CHF 92.2 billion in sales in 2013
333,000 employees in over 150 countries
447 factories in 86 countries
Over 2,000 brands
1 billion Nestlé products sold every day
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Sales by Regions Total Sales* in 2013 (in billion CHF)
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Linking ERM, Loss Prevention & Risk Financing
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What we Insure / Risk Finance • Fire, Explosion, Aircraft, Natural Perils, etc. Buildings, Contents, stocks and
Business Interruption (18mths) where feasible
• Third Party and Products Liability Bodily Injury and Property Damage to Third Parties
• Motor Vehicles Bodily Injury and Property Damage to Third Parties (occasionally own damage)
• Marine / Transport Imports / Exports of raw materials and finished goods (Inland Transport - country specific)
• Legal requirements Work injuries, clinical trials, environmental, accidents, etc.
• Local specific Life, Disability, Accident, Medical, etc.
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What we do not Insure / Risk Finance
• Products Recall
• Products Tampering
• Machinery breakdown except refrigeration
• Cash
• Credit
• Fraud
• Low value items, e.g. laptops, bikes, etc.
• Items within deductible
• High frequency claims, i.e. it's no longer Insurance
• Own damage for vehicles
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From "cash box” to central risk management tool
Captive
Risk financing,
…
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Nestlé’s Reinsurance Captive
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Intercona Re History
The Dark Ages
1965 first study rejected by management
1970s / 1980s update studies rejected by management
Enlightenment
1995 rent-a-captive account established
1998 Intercona Re established in Zug, Switzerland
2003 accounting, compliance and actuarial outsourced to Aon
2005 Red Maple Insurance Company (direct captive) established in Vermont, USA
2008 Swiss Solvency Test / Professional Reinsurer licence
2009 recruitment of in-house qualified actuary
2010 move to Chatel St Denis, Switzerland
A Bright Future
2016? Solvency 2 / equivalence
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Captive Board and Organisation
Board
CFO
Head of Accounting / Reporting
Treasurer
Head of Pension & Insurance
Legal Compliance
• 4 Board meetings a year
• 1 AGM
• 1 Stakeholders meeting
• 1 Annual Risk Assessment Meeting
• 1 Meeting with FINMA
Management Team
Intercona CEO
Intercona General Manager
Intercona Actuary
Intercona Underwriting & Claims Management
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• Châtel-St-Denis, Switzerland reinsurance captive
• Established in 1998
• C1 Professional Reinsurance License
• Share Capital CHF 35 mio (2013) / Equalisation Reserves CHF 372 mio (2013)
• Annual Premiums CHF 152 mio in 2013 (CHF 133 mio in 2012)
• Diversified portfolio
• Technical Reserves CHF 200 mio (2013)
• Combined Ratio 2011 to 2013: 82%, 90%, 68% (Average 80%)
• Invested Assets CHF 555 mio (2013)
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Intercona Re – Lines of Business
• Property/Business Interruption
• Third Party Liability
• Goods in transit
• Automobile liability
• Primary Casualty USA
• Contractors All Risks
• Bonds
• Over redemption/ Prize indemnity
• Expatriates Medical
• Business Travel Medical
• Workers compensation
• Personal Accident
• Medical stop loss
• Life & Disability
• Pet health insurance
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Current Captive Structure
Local
Policy
Pooling Insurer
Intercona Re
Excess / Catastrophe Cover
Local
Policy
Local
Policy
Risk retained within the Group
True Risk Transfer
Local
Policy
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ZURICH 100%
ALLIANZ +
Others
75m
250m
750m
Property
25m
ZURICH 100%
Munich Re
AIG
ACE
25m
125m
300m
Liability
15m
Marine
Motor
ZURICH
100%
various limits
Global Insurance Program 2015 (in CHF)
100m
180m
80m
Employee Benefits
50% Zurich
50% SwissRe
50% Allianz
Galderma Liability
Zurich Cross Class Aggregate
• 25 mio per occ / 100 mio annual aggregates including Construction, Work Injury UK, Swiss Accidents and Environmental
• Including 50 mio x/s 25 mio PDBI equals
150 mio annual aggregate for Zurich placements
Pharma & Galderma Liability and EB
Intercona Retentions
50% Intercona
50 mio X/S
Interona Re 1c00% 100m
per occurrence &
annual aggregate
Liability for pharmaceutical
products
25m
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Captive Development 2007-2013
• The Intercona Re’s portfolio remains diversified in 2013.
• Positive effects of improvements in risk control and loss prevention.
• Assisting businesses
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Intercona Re diversified portfolio in 2013
Line of Business
2012
in CHF
2013
in CHF
Variation
2013-2012
WC & EL 35'017'000 33'465'000 23% -4%
PD/BI 25'539'000 30'400'000 21% 19%
Employee Benefits 18'499'000 25'705'000 17% 39%
US Primary Casualty 11'347'000 11'979'000 8% 6%
Medical Costs 10'168'000 11'746'000 8% 16%
Third Party Liability 10'377'000 10'910'000 7% 5%
Marine 7'557'000 8'272'000 6% 9%
Motor 5'804'000 6'024'000 4% 4%
Swiss Accident 5'138'000 5'903'000 4% 15%
Pet health 5'030'000 2'556'000 2% -49%
Total UWY 2013 134'477'000 146'961'000 100% 9.3%
Prior years -1'049'000 5'072'000
Total Financial year 133'427'000 152'033'000 13.9%
2013
Split
23%
21%
17%
8%
8%
19% 6%
4% 4% 2%
WC & EL PD/BI
Employee Benefits US Primary Casualty
Medical Costs Third Party Liability
Marine Motor
Swiss Accident Pet health
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Premiums, Assets and Equalisation Reserves Development (in CHF)
-
100,000,000
200,000,000
300,000,000
400,000,000
500,000,000
600,000,000
700,000,000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Assets Equalisation reserves
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• 20% reduction in premiums to Markets in spite of 52% increase in Sales from 1996 to 2013
• Premiums to Intercona grew by 435% from 1996 to 2013
• Premiums compared to Sales reduced from 0.15% to 0.08% ie a reduction of 46%
80.9
17.3 19.6 18.3 19.3
12.9
52.7 47.7 48.7 56.2
93.8
70.0 67.3 67.0 75.5
0.15%
0.08%
1996 2010 2011 2012 2013
Premiums to Intercona in mio CHF
Premiums to third parties in mio CHF
Development of Property & Casualty Premiums 1996 / 2013 (Property, Liability, Marine, Auto, CAR, D&O, excluding workers compensation and employee benefits)
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Operational pillars • Deliver efficiently/customer
service
• Staff training/education
• Communication through network (information collection/distribution)
• Contribute to reducing insured losses through cost effective Loss prevention
Growth drivers • Employee benefits
• Acquisition, new construction, inclusion of 50% share of JV’s and reduced premium leakage
• Explore new business opportunities outside of traditional lines
• Nestlé Health Sciences
• Affinity business
Intercona Model • Average three year combined
loss ratio of 85% or less
• Average three year combined RoE of 15%
• Site risk grading to be average of 100 or less
• Property and Casualty premium to be less than 0.075% of global sales (@ existing profile)
• Average annual investment return above 4% over 5 year period
Competitive advantages • Any profits/investment
income retained within group
• Reduce dependency on external insurers and counterparty exposure
• Trusted in house partner with expertise /competences
• Integrated in Group’s strategy and good understanding of Nestlé business/organization
• Providing innovative and competitive solutions
Sustainability
Compliance
Creating Shared Value
• Optimize Nestlé‘s Total Cost of
Insurable Risk (TCoIR)
• Support Nestlé entites in addressing
risk management, loss prevention and
corporate finance issues
• Provide, where appropriate, risk
financing solutions to operating
entities to support business
opportunities
Mission Statement
Intercona Business Strategy 2011-2014
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Targets established in 2011 Assessment in Q3 2014
Controlled organic premium growth at compound annual growth rate in excess of 4% to CHF 146 mio by 2014.
Average three year loss ratio of 85% or less
Average three year combined Return on Equity (ROE) of 15%
Gross written premium peaked in 2013 at CHF 152 mio and is forecast to reduce to CHF 146 mio in 2014, in line with the target.
Property and Casualty premium to be less than 0.075% of global sales
Average annual investment return initially agreed at 4% over 5 year period, subsequently reduced to 2%
Over the past years, the loss ratio has never been larger than 85%.
Negative investment income in 2013 penalised the investment return. Current average: 4.0%
Against the background of a significantly increased capital base (mainly Equalisation Reserves) 15% RoE are not achieved despite consistently solid returns over the period.*
In 2012, the P&C premium represented less than 0.075% of global sales. The threshold was slightly exceeded in 2013 due to change in risk profile..
The target will not be achieved The target is not yet reached The target is already reached
Site risk grading to be average of 100 or less
Since 2011, the site risk grading has been lower than 100 and now stands at 92.
Forecast for 2014 Most of the targets have already been achieved or should be reached at the end of 2014.
* E.g. for FY 2013 RoE was at 10.6%. To achieve 15%, beginning of year equity would have needed to be at CHF 260 mio, i.e. CHF 107 mio lower than actual. 2013 SST capital requirement was at approximately CHF 280 mio to achieve a 200% SST ratio.
Intercona Strategy 2011-2014 – How successful were we ?
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Intercona’s Mission Statement – KPIs Loss Prevention
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Intercona’s Mission Statement – Operational Pillars
Loss Control Initiatives Funded:
Property Loss Prevention Program
Supplementary Safety Audits
F Manual / Loss Prevention Manual
Virtual Fire Manager
Thermo Scanning
Virtual Fleet Manager / Driver Safety
Transport / Marine loss prevention
Schneider Electric pilot studies
BIA / BCP program
BELFOR – property restoration after fire, flood, storm, earthquake, etc.
Operational Pillars
• Deliver efficiently/customer service
• Staff training/education
• Communication through network (information collection/distribution)
• Contribute to reducing insured losses through cost effective loss prevention
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The Future ?
• Compliance Solvency II
• Expanding ‘’pharma / health’’ business
• Potential new exposures eg Cyber and Political violence
• Continue EB expansion – obtain clear mandate
• Continued Focus on loss prevention in all lines
• Continue to improve and fine tune processes via 6 Sigma
• Improve Captive communication
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Was Captive a success ?
• Underwriting profit delivered every year since 1996
• Millions of profit taken out of Insurance Market
• P+C Insurance budget reduced by using Intercona and Global Programmes
• Loss Prevention financed by Intercona drastically improved: - Property grading - Motor Losses - Marine Losses
• Improved knowledge of exposures
• Business ‘’enabler’’
• Its ‘’our money’’
• Insurance has never prevented a Loss
Conclusion
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Question ?
