POWER OF CAPTIVES: EMPLOYEE BENEFITS & ERM

Paul WagnerAGL Resources IncVP | Alternative Risk Techniques

James CortigliaZurich Corporate Life & PensionsRegional Sales Manager

WHY A CAPTIVE?

WHY EMPLOYEE BENEFITS?

WHY A CAPTIVE & ERM?

WHY HAWAII?

2

GLOBAL ENERGY RESOURCEINSURANCE CORPORATION

(GERIC)

3

AGL Resources is the largest natural gas-only distribution company in the United States. Its business segments consist of:

• Distribution Operations• Retail Operations• Wholesale Services• Mid-Stream Operations• Energy Services• LNG and Propane

AGL Resources has safely served customers with efficient, reliable natural gas for more than 150 years. The largest segment, Distribution Operations, operates 7 utilities serving residential, commercial and industrial customers in 7 states:

Georgia Illinois Virginia New Jersey Florida Tennessee Maryland

Headquarters: Atlanta

Employees: ~ 5,000

Utility Customers Served:nearly 4.5 million

Retail Customers Served:1.1 million

Ticker Symbols: GAS (NYSE)

Newspaper Listing: AGL Res

Quick Facts

4

STRUCTURE• Single Parent – AGL Resources Inc.

• Domicile – Hawaii

PREMIUMSDirect Write – $14.4 MillionReinsurance – $ 6.0 Million Total Premium $20.4 MillionCede – $10.1 Million

Net Premium – $10.3 Million

STRATEGIES• Risk Financing

• Multi-line, Multi-year limits

• Aggregate Basket

• Enterprise Solutions

GERIC OVERVIEW

5

Coverage TypesCasualty Property Executive RiskGeneral Liability All Risks/Inc Wind/Quake D&OPollution Boiler & Machinery FiduciaryAuto Well Control EPLWorkers’ Comp Crime

Other 3rd PartyTrade Credit Employee BenefitsWeather Extended WarrantyCyber Wrap‐Up Construction

Surety Risk

6

Ι. Direct Access to Reinsurance

ΙΙ. Optimize Risk/Capital

ΙΙΙ. Optimize Premium/Retention

WHY A CAPTIVE?

3 Power Drivers

7

Direct

Access

Reinsurance

WHY

8

WHY

9

CAPITAL&

RISKOPTIMIZE

WHY

10

Insurance Program Pre-Captive

Property

Auto andG

eneralLiability

Workers’

Compensation

Directors &

Officers

Crime

Fiduciary

Boiler &M

achinery

($ - Thousands)

STATUTORY

POLICY TYPES

COVERAGE LIMITS

Employm

enPractices Liability

Traditional Insurance: Placed by a broker with commission and primary carrier costs

Self-insured retention

(Not to Scale)

In a typical Traditional Market, each line of

coverage has a separate large limit.

Each silo represents one line of coverage.

11

Friction Costs

Traditional Market

The

Silo

Stru

ctur

eEach silo = one line of coverage.

A separate large limit.

Re-purchased each year

12

Silo Limits in MillionProperty $400Boiler Machinery $250General Liability/Auto $600Employment Practice Liability $125Directors’ Officers $160Crime $ 15Fiduciary $100

Total Annual $1650

Traditional Market - Illustration

13

Traditional Market- Illustration

Annual Limits $ 1.650B

x3

4.950B

Captive Multi-Year

Total Limits 1.050B

14

GERIC Advanced Risk Strategy Has Been Introduced In Phases:

2001 Direct Reinsurance

Blended Liability and D&O Limits

2002 Shared Multi-Year Multi-Line Limits

2003 1st Buffer Zone & Retention

2004 Integrated M&A

2006 Employee Benefits

Aggregate Primary and 1st Excess

2007 Blended Primary Property

2008 Medical Stop Loss

2009 Salt Cavern Integrity

2010 Enterprise Stop Loss Basket

2011 Integrated M&A Corporate Program

2013 Reinsured Wrap-Up Construction; Warranties

Trade Credit

2014 Weather HDD Protection15

16

Captives and Employee BenefitsAn Enterprise Risk Management Perspective

17

• U.S. Department of Labor criteria– Minimum “A” rated carrier as front– Domestic U.S. domicile or offshore captive with U.S. branch– Employee benefits need to be enhanced as a result of the

transaction• ERISA exemptions

– Class exemption– Individual exemption

• Non-ERISA plan – Medical Stop Loss provided directly to company, not employees

• Application process– Expro (Fast-track) approval available – Minimum three month review

Practical issues must be addressedHistory of benefits in captives

18

• Basic and supplemental life

• Long term disability

• Retiree medical

• Active medical

• Medical stop loss

• Workers’ compensation

Building An Employee Benefits Captive

• Accidental Death & Dismemberment

• Business Travel Accident

• Non-qualified benefit

• Pension

STANDARD COVERAGES

LESS COMMON COVERAGES

19

A Risk Management PerspectiveEmployee Benefits Within A Captive

• Centralized cash flow management for benefit programs• Improved program administration• Cost savings realized by managing risk charges and other

frictional costs

COST EFFICIENCIES

• Diversify captive risk exposure• Reduce capital requirement• Aggregate protection on overall risk exposure

CAPITAL AND RISK OPTIMIZATION

• Add third party risk for captive premium deductibility –accelerated deduction of loss reserves

CAPTIVE PREMIUM DEDUCTIBILITY

• Flexible benefit design and claim paymentGREATER FLEXIBILITY

• Provides higher investment return on reserves for the benefit programINVESTMENT RETURN

20

A Human Resource PerspectiveEmployee Benefits Within A Captive

• Allows for enhancement of benefits• Types of service not traditionally available• Holistic benefits coverage• Targeted provider and/or network negotiation

CUSTOMIZATION

• Enables global harmonization• Provides global data warehouse

EFFICIENT

GLOBALIZATION

• Offers centralized portfolio review• Easy access to claims data• Provider usage and medical diagnosis

ANALYTICS AND

MONITORING

• Flexible benefit design and claim payment• Improved control of benefit programs• In-time claim data to monitor design effectiveness and

efficiency• Break even pricing drives lower benefit cost

COST EFFICIENCIES

• Program design provides better control and oversight of employee benefits

• Cost drivers built into design (i.e., ability to modify plan design)

CONTROLS

21

Risk diversification for the captive

RISK SMOOTHING

RISK SMOOTHING

• More predictable than P&C risks• Generally not correlated to P&C risks

REDUCED VOLATILITYREDUCED

VOLATILITY

• Total capital requirement is less than the sum of P&C and EB stand-alone capital requirements

• Uncorrelated risk results combine to produce aggregate volatility that is less than the sum

Adding employee benefit risks diversifies the captive’s risk portfolio

Adding employee benefit risks diversifies the captive’s risk portfolio

22

• Upfront communication is key – Regional and local HR teams need to be informed– Focus on administrative advantages and financial benefits– Create captive “champions” who will attract and help retain talent

• Support of top management is critical– Executive team needs to be on board to ensure resources are

• Dedicated staffing is mandatory– Core team assigned to combining life and non-life risks– Establish priorities– Coordinated effort and rollout

• Long term vision is the goal– Large and complex programs need to be built over time– Coverages may be introduced into the captive incrementally– Need to focus on long-term risk management solution

What you need to knowCritical Factors To Consider

23

RISK MANAGER

Manage risk exposure, holistically, for captive and educate HR staff

SMEs

Provide a centralized reference source and identify captive SMEs 

BUSINESS PARTNER

View the captive service provider as a business partner with shared goals

HUMAN RESOURCES

Consider having human resources take the lead managing employee benefits portion

Collaborating to successful implementationRoles of risk manager and benefits manager

24

Captives are a powerful tool

Empowering An Organization

CORPORATE CULTURE RISK APPETITE

RATIO OF PROPERTY VS. PEOPLE

ASSETS

EVERY COMPANY

HAS A UNIQUE:

Captives combining non-life and life risks allow for flexible risk management and financial efficiencies• More financially resilient • Responsive to changing coverage needs and employee programs

In today’s ever-changing business environment, the resiliency of a captive can help companies effectively address the challenges of

today, tomorrow and long into the future.

25

Top 10 reasons to use a captive For employee benefits

Effective risk management involves control of all risks, including brick and mortar and human capital risks

10. Improved claims ratio9. Improved data management8. Improved central coordination7. Tax advantages6. Improved underwriting flexibility5. Efficient use of capital4. Tailored benefit designs3. Improved cash flow2. Improved control of employee benefits1. Reduce employee benefit costs 26

PREMIUM

RETENTION

OPTIMIZE

WHY

27

WORKING LAYER$1M ‐ $2M

BUFFER ZONE$2M ‐ $10M

CATASTROPHIC  LAYER$10M ‐ $450M

Unexpected Losses

Not known to occur

Reinsurance

Unexpected Losses

Known to occur

Captive Retention

Expected Losses Business Unit

BIG PICTUREHOW IT FITS

28

BUFFER ZONE$2M ‐ $10M

Large Premiumto Loss Ratio Base Premium

BIG PICTUREHOW IT FITS

CATASTROPHIC  LAYER$10M ‐ $450M

Small Premiumto Loss Ratio

Bundle Volume Discount

29

30

CAPTIVE

Within a Captive, a 3 year Stop Loss Feature (Basket) optimizes Enterprise Expense/Risk that includes Operational, Financial & Employee Benefits Exposures in a Pool.

Strategic Structure:

• Unexpected , Non‐correlated Exposures• Spread the Risk• Pool the Premium• Share the Loss• Manage the Volatility

Limits and Retention Levels for the Portfolio are selected to maximize Enterprise Net Premium Savings. 

ENTERPRISE BASKET

31

BIG PICTUREWHY IT FITS

Property / Casualty

Property

Employee Benefits Weather

D & O

Crime

Fiduciary

Liability /Auto Group Life      / LTD

Medical     Stop Loss

CAPTIVE RETENTION

Basket__M

__M

Trade Credit

EnterpriseStop Loss

3 yrs.

Supply Chain TBD

BUFFER ZONE

NICOR SouthStar

Rate CaseGaps

* For Review 2016

Reinsurer

32

ADVANCED RISK TECHNIQUES Strategic Summary:DIRECT ACCESS TO REINSURANCE

Reduce Friction Costs

Program Design/Control

Long Term Relationships

OPTIMIZE RISK/CAPITAL

Multiline/Multi-year

Blended Coverage – Shared Limits

OPTIMIZE PREMIUM/RETENTION

Cost vs. Exposure Analysis

Risk Appetite – Buffer Zone

Stop Loss Baskets

Establish Premium Structure 33

34

WWW.GOGERIC.COM

Hawaii in a class by itself!

COSTMany of the features of the Top Tier with lower operating costsExam CostReinsurance Costs

OPERATIONAL SUPPORTStrong infrastructureManagement FirmsLegal

STATE/REGULATORY SUPPORTHighly Experienced-Licensing captives since 1987Track record of flexibility and innovationAccessible & Dedicated Staff

Why HAWAII?

35

This presentation is for informational purposes only.  Any and all information contained herein is not intended to constitute legal advice and accordingly, you should consult with your own attorneys when developing programs and policies.  We do not guarantee any results and assume no liability in connection with this presentation.  The subject matter of this presentation is not tied to any specific insurance product nor will adopting these procedures be appropriate in all circumstances.

36

This page was intentionally left blank.