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Captive Update

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

April, 2015

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

Ratings

A.M. Best, the Leading Specialist Credit Rating Agency for the (Re)Insurance Industry, Opens New Office in Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

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

A.M. Best Affirms Ratings of Energas Insurance (L) Limited. . . . . . . . . . . . . . . . . . . . . .5

A.M. Best Affirms Ratings of National Grid Insurance Company (Isle of Man) Limited 5

A.M. Best Affirms Ratings of Palms Insurance Company, Limited. . . . . . . . . . . . . . . . . .5

A.M. Best Affirms Ratings of Blue Whale Re Ltd.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

A.M. Best Affirms Ratings of NEWGT Reinsurance Company, Ltd.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

A.M. Best Affirms Ratings of Gateway Rivers Insurance Company . . . . . . . . . . . . . . . .6

A.M. Best Affirms Ratings of Isosceles Insurance Ltd.. . . . . . . . . . . . . . . . . . . . . . . . . . .7

A.M. Best Affirms Ratings of Queen City Assurance Inc. and Vine Court Assurance Incorporated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

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

Regulation

Actuary Says Pressures May Speed NAIC Examination to Treat Variable Annuities Captives as Multistate Reinsurers . . . . . . . . . .8

Industry Divided on NAIC Draft Plan to Make Captive Reinsurers Subject to Multistate Reinsurer Accreditation Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Vermont Captive Bill Would Cut Minimum Capital Threshold, Adopt Risk-Retention Governance Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Illinois Senate Considers Repeal of Premium Tax on Industrial Insured Captives . . .10

Nevada Captive Insurers Reach 160 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

US Senate Bill Raising Caps Could Make Microcaptive Insurers More Appealing. . . .11

New York Plan Could Cut AXXX Universal Life Reserves by 15% . . . . . . . . . . . . . . . .12

Cayman Islands Government Enacts Portfolio Insurance Companies Regulations . .13

Domiciles

Texas Lawmakers Moving Bills to Expand Use of Captive Insurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Georgia Passes Bill to Improve Climate for Captive Insurers. . . . . . . . . . . . . . . . . . . .14

Delaware Captive Growth Continued in 2014; State Remains World’s Sixth-Largest Domicile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

Cayman Islands Reports 2.5% Captive Growth in 2014. . . . . . . . . . . . . . . . . . . . . . . .14

Bermuda Monetary Authority: NAIC Reinsurance Collateral Law Drove Uptick In Long-Term Registrations . . . . . . . . . . . . . . . . . . . . . .15

North Carolina Exceeds Captive Goal for 2014 With 49 Licensees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

Oklahoma Nearly Quadruples Number of Active Licensed Captive Insurers in 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

Hawaii Continues Captive Insurer Growth, Adds 15 New Companies in 2014 . . . . .16

Tenn. Senate Considers Bill to Help Captives Provide Workers’ Comp Insurance, Meet Minimum Capital Standards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

New Competition, Soft Market Slows Vermont’s 2014 Captive Growth . . . . . . . . . . .17

Captive Management

Spencer Capital Holdings to Acquire Captive Insurance Manager USA Risk Group. .18

Spencer Capital CEO: Company Seeks More Deals as It Buys SouthWest Dealer Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

Willis Appoints Chairman for Bermuda Operations . . . . . . . . . . . . . . . . . . . . . . . . . . .19

UK Insurance Manager Charles Taylor Posts 38.5% Rise in Pretax Profit . . . . . . . . . .19

National Interstate CEO: ART Programs Gain Ground as Auto Claims Costs Rise . . . .20

First Caymans Portfolio Insurance Company Formed Following New Legislation. . .20

China Railway Approved to Set Up Nonlife Captive Company . . . . . . . . . . . . . . . . . .21

Reports

A.M. Best Special Report: New Reserve Financing Rules Unlikely To Eliminate XXX, AXXX Captives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

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Ratings

A.M. Best, the Leading Specialist Credit Rating Agency for the (Re)Insurance Industry, Opens New Office in Singapore

A.M. Best, the leading specialist credit rating agency cover-ing the insurance and reinsurance industries, has estab-lished a new office in Singapore as part of its continuing growth in the Asia Pacific region.

The office will offer internationally recognised ratings to insurers, reinsurers, takaful operators and captives in Singa-pore and across the Association of Southeast Asian Nations (ASEAN)/Australasia regions. The development of the Asia Pacific economies has prompted A.M. Best to reinforce its commitment to the region.

The new office, located at 6 Battery Road in the heart of Sin-gapore’s Central Business District, will be led by Dr. Roger Sellek, Chief Executive Officer of A.M. Best’s operations out-side of the Americas. Dr. Sellek is relocating from A.M. Best’s London office, which was established in 1997 as the group’s first office outside of the U.S.

A.M. Best was founded in 1899 and has retained its focus solely on the (re)insurance industry since the publication of its first rating in 1906. Globally, the group undertakes almost 3,500 ratings for individual insurance and reinsurance enti-ties. Singapore is A.M. Best’s second office in Asia Pacific after Hong Kong, where the group opened 16 years ago. The Hong Kong office will continue to support A.M. Best’s client base in Greater China, Japan and Korea.

Dr. Sellek said: “We are delighted to announce the opening of our new Singapore office, which we believe will ensure we are even closer to our expanding client base of insurers and reinsurers in Southeast Asia, Australia and New Zealand.Singapore is the obvious choice for a credit rating agency serving the insurance sector as it is home to almost 250 insurers, reinsurers, captives and broking companies. It can truly lay claim to be the international insurance and reinsur-ance hub of Southeast Asia.

“Singapore also has a first class regulatory system and a forward-looking regulator in the Monetary Authority of Singapore (MAS) as well as an excellent legal system and a highly trained workforce,” he added.

A.M. Best currently has ‘live’ credit ratings for 13 Singapore-based companies and it has close to 40 live ratings across the ASEAN region.

Dr. Sellek said the scope for expansion in Southeast Asia was significant given the continuing rapid growth of many insur-ance markets in countries including Indonesia, the Philip-pines, Thailand, Vietnam and Malaysia. A specific driver for A.M. Best’s new Singapore base was the impending arrival of the ASEAN Single Market, which is due to come into be-ing at the end of 2015. A.M. Best believes that a rating from an international rating agency will be a prerequisite for insurers that wish to conduct cross-border business within the Single Market in the future.

The A.M. Best staff in Singapore comprises a team of special-ist credit rating analysts led by MM Lee, head of analytics for Asia Pacific who has transferred from A.M. Best’s Hong Kong office, together with business development staff. (April 17, 2015).

A.M. Best Upgrades Debt 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 compensa-tion arrangement 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 represents 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 circum-stances.

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 maintaining the payment obligations and the recovery rate on the cash flows upon an insurance carrier event of default. The sto-chastic modeling of the transaction incorporated updates on: (1) issuer credit ratings (ICR) of the insurance carriers, (2) financial data required for modeling purposes and (3) remaining collateral/payment information including the reduced payment obligations of Guaranty Association Ben-efits Company, a not-for-profit captive insurance company formed for making payments to the payees and certificate holders of the liquidated Executive Life Insurance Company of New York.

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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/. (April 10, 2015)

A.M. Best Affirms Ratings of Energas Insurance (L) Limited

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

Energas’ ratings reflect its strong capitalization, compre-hensive reinsurance protection and role as the sole captive insurance carrier for its ultimate parent, Petroliam Nasional Berhad (Petronas), an integrated global oil and gas company. Full profit retention in the absence of dividend payments to Petronas has enabled Energas to grow its capital favorably since inception.

Energas’ financial performance is underpinned by its low operating cost structure and consistent investment profits.

Energas has a large investment portfolio comprising of solely cash and cash equivalents, providing a high level of li-quidity and minimum investment risk exposure. Its compre-hensive reinsurance program from a panel of high quality reinsurers limits Energas’ aggregate loss exposure.

Offsetting rating factors include claims volatility from a nar-row scope of assumed risk and increased event retention, especially as premium rates in its main engineering line remain soft while insured values are increasing.

Energas is well-positioned at its current rating level.

Negative rating actions may arise from a material deteriora-tion of Energas’ risk-adjusted capitalization due to a material repatriation of capital.(March 27, 2015)

A.M. Best Affirms Ratings of National Grid Insurance Company (Isle of Man) Limited

A.M. Best has affirmed the financial strength rating of A (Excellent) and the issuer credit rating of “a” of National Grid Insurance Company (Isle of Man) Limited (NGICL), a captive of National Grid plc (NG). The outlook for both rat-ings remains stable.

The ratings reflect NGICL’s very strong risk-adjusted capi-talisation, as well as its importance as a risk management tool within the NG group. A partially offsetting factor is the potential earnings volatility inherent in the captive’s book of business.

NGICL’s risk-adjusted capitalisation is expected to remain very strong, supported by internal capital generation. In addition, there has been a reduction in underwriting risk, following the decision by the NG Group in August 2014 to cease ceding its U.S. business to NGICL and instead cede this business to a separate and newly incorporated U.S. do-miciled captive. NGICL retains some exposure to U.S. risks through a layer of stop-loss reinsurance protection provided to the new U.S. captive.

A.M. Best believes that NGICL remains core to NG’s risk management strategy, despite the reduction in U.S. business. NGICL is well integrated into the parent’s overall risk man-agement framework, with its primary objective to mitigate the NG group’s exposure to property damage and business interruption risks.

Prospective underwriting performance is likely to remain volatile, owing to the nature of underwritten risks. The cap-tive is exposed to potentially large losses on its property and business interruption account.

However, technical performance over the long term has been good, demonstrated by a five-year average combined ratio of 65%. The impact of large losses on the captive’s bal-ance sheet is partly mitigated by extensive reinsurance in place with a panel of financially strong counterparties.

Positive rating actions are considered unlikely in the short to medium term. Negative rating actions may occur if there were material deterioration in NGICL’s risk-adjusted capi-talisation or a prolonged period of poor operating results. In addition, if the captive’s importance as a risk management tool within the NG group were to diminish, there may be negative rating pressure.

In accordance with Regulation (EC) No. 1060/2009, the following is a link to required disclosures: A.M. Best Europe - Rating Services Limited Supplementary Disclosure.

A.M. Best Affirms Ratings of Palms Insurance Company, Limited

A.M. Best has affirmed the financial strength rating of A (Ex-cellent) and the issuer credit rating of “a” of Palms Insurance Company, Limited (Palms) (George Town, Cayman Islands). The outlook for both ratings remains stable.

The ratings reflect Palms’ excellent risk-adjusted capitalization, history of consistently strong operating performance and con-servative balance sheet strategies, as well as the captive’s strong integration within the risk management structure of its parent, NextEra Energy Capital Holdings, Inc. (NEECH). The ratings also recognize Palms’ history of maintaining sufficient capital and financial resources to support its ongoing obligations.

Partially offsetting these positive rating factors are Palms’ limited market scope and high net loss potential stemming from a single, severe occurrence relative to surplus. Never-theless, this is somewhat mitigated by the company’s excel-lent loss history, favorable geographic spread of risk and the history of support of Palms’ strong surplus position by its parent. Additionally, while Palms depends on third parties for processing, servicing and administration, the senior man-

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agement of its ultimate parent, NextEra Energy, Inc. (NEE) [NYSE: NEE], is closely involved in these operations.

Palms is a single parent or pure captive insurer wholly owned by NEECH, which in turn is wholly owned by NEE. Palms accepts insurance risks only from NEE and its affili-ates, providing specialized direct and assumed property and casualty coverages: workers’ compensation, automobile liability, employers’ liability and property risk. Although Palms participates in a range of coverages for very large risks, these risks are underwritten with tight guidelines and significant loss control measures by the insured affiliates as evidenced by a favorable loss ratio of less than 40% over the past five years.

A.M. Best believes that Palms is well-positioned at its cur-rent rating levels, and the ratings are not expected to be upgraded or their outlook revised in the near term. None-theless, key rating factors that could lead to negative rating actions include a significant and sustained decline in Palms’ risk-adjusted capitalization, net operating performance re-sults that do not meet A.M. Best’s expectations or a material deviation from its risk profile that could potentially under-mine the stability of the ratings. In addition, financial issues resulting in rating pressure on NEECH and/or NEE could impact Palms’ ratings.(March 13, 2015)

A.M. Best Affirms Ratings of Blue Whale Re Ltd.

A.M. Best has affirmed the financial strength rating of A (Excellent) and the issuer credit rating of “a+” of Blue Whale Re Ltd. (Blue Whale) (Burlington, VT). The outlook for both ratings is stable.

The ratings reflect Blue Whale`s strong capitalization and conservative operating strategy. The ratings also consider the company`s critical and central role and favorable profile as part of the Pfizer Group, as well as the excellent perfor-mance of its operations. Partially offsetting these positive rating factors are Blue Whale`s very large gross and net un-derwriting exposures to property losses and its dependence on reinsurance.

Blue Whale is a single parent captive of Pfizer Inc. (Pfizer) [NYSE: PFE], a leading global pharmaceutical company. As Blue Whale (re)insures Pfizer`s global property exposures, it plays an important role in Pfizer`s overall enterprise risk management and assumes a critical role in protecting the Pfizer Group`s assets. Thus, Blue Whale benefits from Pfizer Group`s extensive risk management and loss control programs.

Blue Whale operates at conservative underwriting lever-age levels; however, it provides coverages with extremely large limits, and its gross exposures per loss occurrence are elevated. Although Blue Whale benefits from reinsurance protection, its net retentions remain very substantial. Rein-surance is provided by a large panel of reinsurers, and Blue Whale relies on significant capacity to be able to support its obligations. As such, it is heavily dependent on reinsurance. Nevertheless, A.M. Best recognizes the quality of the reinsur-ers and the substantial financial resources and support avail-able to the captive as part of the Pfizer Group.

Positive rating actions could occur if there is a sustainable and long-term improvement in the operating performance and capital strength of Blue Whale and Pfizer. Conversely, negative rating actions could occur as a result of material operational and performance issues at both Blue Whale and Pfizer. Rating pressure would be likely if there were any ad-verse changes to many of the regulatory standards to which Pfizer adheres. The potential for future acquisitions, the associated integration risks and company profile changes could lead to both positive and/or negative pressure on the ratings, depending on the acquisition details.

A.M. Best Affirms Ratings of NEWGT Reinsurance Company, Ltd.

A.M. Best has affirmed the financial strength rating of A- (Excellent) and the issuer credit rating of “a-” of NEWGT Re-insurance Company, Ltd. (NEWGT) (Bermuda). The outlook for both ratings is stable.

The ratings reflect NEWGT’s robust risk-adjusted capitaliza-tion and its profitable operating performance. Also, A.M. Best recognizes the support from its parent company, ITOCHU Corporation (Itochu) (Japan).

NEWGT is a single-parent captive of ITOCHU, a major trad-ing company in Japan that engages in a wide range of global businesses. NEWGT’s risk-adjusted capitalization remains robust owing to the profitable underwriting results from its major line of ITOCHU-related marine and cargo line and its conservative investment portfolio.

NEWGT has reported profitable operating performance over the past five years, mainly driven by marine cargo busi-ness, which is diversified globally due to ITOCHU’s broad range of trading activities. Additionally, the ratings recognize NEWGT’s strategic importance to ITOCHU, which has pro-vided a wide range of support to NEWGT’s operation and capitalization.

Partially offsetting these positive rating factors is NEWGT’s expansion into third party business, which could lead to volatility in operating results. This expansion includes the Lloyd’s market, which accounts for a significant proportion of its total net premium income in the forecasted periods.

While no positive movement in the ratings is considered in the short term, negative rating action could occur if there is a sharp decline in NEWGT’s risk-adjusted capitalization caused by deterioration in its operating performance. In addition, material deterioration in ITOCHU’s credit profile could impact NEWGT’s ratings as well.(February 27, 2015)

A.M. Best Affirms Ratings of Gateway Rivers Insurance Company

A.M. Best has affirmed the financial strength rating of A-(Excellent) and the issuer credit rating of “a-” of Gateway Rivers Insurance Company (Gateway) (Dallas, TX). The outlook for both ratings is stable.

The ratings and outlook reflect Gateway’s strong capitaliza-tion and conservative operating strategy. The ratings also

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consider the company’s critical role and favorable profile as part of the AT&T Inc. [NYSE: T] organization, as well as its excellent operating performance during the past five years, providing insurance coverage to subsidiaries of AT&T Inc. for certain property/casualty risks.

Partially offsetting these positive rating factors are Gate-way’s relatively large limits to its property lines of business. Nevertheless, A.M. Best recognizes the substantial financial resources of the AT&T Inc. organization.

A.M. Best views Gateway’s management and corporate strategy as a major factor that strengthens its ratings, given its conservative underwriting, operational goals and trans-parency. A.M. Best believes that Gateway’s enterprise risk management practices are strong given their impact on the company’s conservative risk culture and defined risk con-trols, in addition to optimizing its capital and surplus. Other factors A.M. Best considered in the rating process include, but are not limited to, the diversification in Gateway’s line of business and geography, as well as the support and com-mitment of its parent and the captive’s mission.

A.M. Best expects Gateway’s future operating performance to be stable but strong, and the stable earnings profile should further support the efforts to control its growth and business writings, which are consistent with its capital and surplus position.

Gateway’s ratings are not expected to be upgraded and/or its outlook revised within the next 12-24 months as its operating performance and capital position already have been considered in the rating process. A.M. Best could downgrade the company’s ratings and/or revise the outlook if its Best’s Capital Adequacy Ratio score declines, operat-ing performance and risk profile deteriorate, insured losses deplete capital, significant changes and turnover occur in its management team and/or risk management controls and tolerances or its parent’s ratings deteriorate.(February 24, 2015)

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

A.M. Best has affirmed the financial strength rating of B++ (Good) and the issuer credit rating of “bbb+” of Isosceles Insurance Ltd. (Isosceles) (Bermuda). The outlook for both ratings is stable.

The ratings recognize Isosceles’ adequate capitalization, as well as strict risk and exposure controls in the form of security and indemnification clauses of several agreements between various key parties involved. These agreements significantly isolate Isosceles from liability and insulate each cell from each other and from the general account.

The ratings further acknowledge the financial and operat-ing strengths of Isosceles’ parent, Jardine Lloyd Thompson Group plc (JLT), a global provider of insurance and em-ployee benefits related advice, brokerage and associated services. Furthermore, the ratings consider the financial wherewithal of each individual part as well as the consoli-dated accounts, Best’s Capital Adequacy Ratio (BCAR) and the underlying risks that each cell insures. Additionally, the ratings recognize Isosceles’ ultimate third party reinsurance

participation, which is composed of highly rated global reinsurers.

Formed in 1997, Isosceles is a Bermuda licensed insurance company holding a Class 3 insurance license that permits it to issue policies of insurance to related and unrelated parties. Isosceles also operates under a private act of the Bermuda Legislature entitled, “The Isosceles Insurance, Ltd. Act, 1997,” which permits it to establish and operate separate accounts or cells. In addition to certain contractual protections, Isosceles employs a variety of structures, com-mon in the insurance and reinsurance industry, to mitigate its contractual liabilities and to protect its capital, including protection with highly rated reinsurance and acceptable collateral deposits.

These positive rating factors are partially offset by Isosceles’ lack of a full test in a court of competent jurisdiction on the legality of the walled-off structure between any two or more cells within a general account and the exclusive reli-ance on JLT for production of all of its business. A.M. Best recognizes the complexities involved in this structure and will regularly monitor the financial performance of the cell counterparties and the general account to ensure that the capital is adequate to support Isosceles’ current ratings. Also offsetting these positive rating factors is the execution risk present in all new structures that bear risk. A.M. Best will monitor this closely during the next several months.

Factors that could influence the ratings of Isosceles include changes in the financial ability of each individual client, its BCAR score and the overall risk profile of each individual cell, including commercial reinsurers’ ratings and the finan-cial wherewithal of JLT and Isosceles.(February 20, 2015)

A.M. Best Affirms Ratings of Queen City Assurance Inc. and Vine Court Assurance Incorporated

A.M. Best has affirmed the financial strength rating of A (Excellent) and the issuer credit ratings of “a” of Queen City Assurance Inc. (Queen City) and Vine Court Assurance In-corporated (Vine Court) (both domiciled in Burlington, VT). The outlook for all ratings is stable.

The ratings are based on Queen City’s and Vine Court’s individual and combined profiles as single-parent captives of The Kroger Co. (parent) (Cincinnati, OH). The ratings also are based on both companies’ excellent risk-adjusted capi-talization, substantial net income and underwriting profit-ability, a growing capital base, conservative investments and a strong adherence to the parent’s robust risk controls and its overall risk culture. Additionally, return measures on a group and individual basis are consistently positive, reflec-tive of the organization’s prudent pricing and deployment of capital. These significant strengths are partially offset by the companies’ risk concentration, which is the result of be-ing single-parent captives of The Kroger Co., coupled with a substantial aggregate limit retained by the captives.

Key rating triggers that could result in a ratings downgrade include a precipitous decline in Queen City’s and Vine Court’s risk-adjusted capital strength. Key rating triggers that could result in an upgrading of both companies’ ratings

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include a consistently profitable operating performance coupled with a substantial increase in risk-adjusted capi-talization. Rating enhancement or a deterioration in the capitalization of the parent also could result in an upgrade or downgrade of the ratings.(February 11, 2015)

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.

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

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

Key insurance criteria reports utilized: • Alternative Risk Transfer (ART)• Best’s Idealized Default Matrix • Catastrophe Analysis in A.M. Best Ratings• Evaluating Country Risk• Evaluating Non-Insurance Ultimate Parents• Rating Members of Insurance Groups• Rating Protected Cell Companies• Risk Management and the Rating Process for Insurance

Companies• Securitization of Period-Certain and Life-Contingent Struc-

tured Settlements • The Treatment of Terrorism Risk in the Rating Evaluation• Understanding BCAR for Property/Casualty Insurers• Understanding Universal BCAR

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

These press releases relate to ratings that have been pub-lished on A.M. Best’s website. For all rating information relat-ing to a release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in the release, please visit A.M. Best’s Rat-ings & Criteria Center.

A.M. Best Company is the world’s oldest and most authorita-tive insurance rating and information source.

Regulation

Actuary Says Pressures May Speed NAIC Examination to Treat Variable Annuities Captives as Multistate Reinsurers

External regulatory pressures may cause the National As-sociation of Insurance Commissioners to expedite its exami-nation of insurer use of captives reinsuring variable annui-ties, relative to the NAIC’s three-year examination of insurer use of XXX and AXXX captives, said Alan Routhenstein, consulting actuary at Milliman Inc.

He spoke at the 2015 Life Insurance Conference, held by the Life Insurance and Market Research Association, the Life Office Management Association, the Society of Actuaries and the American Council of Life Insurers.

The NAIC began studying the possibility of treating variable annuities and long-term care in the same manner as multi-state reinsurers last year after failing to reach an agreement on how to treat captive reinsurance for XXX term life and AXXX universal life with secondary guarantee reserves (Best’s News Service, Nov. 17, 2014). A draft document is-sued in March that included variable annuities drew some opposition to the concept from groups such as the ACLI, which objected to the document’s failure to grandfather existing policies in states that permit them and because the group fears such action would have no impact on regula-tory offshore captive reinsurers (Best’s News Service, March 26, 2015).

The NAIC recently formed a new variable annuities issues working group to consider how to approach the issue, but it has yet to meet in open session.

But Routhenstein said the pressure the NAIC is facing to address captives insurance issues from federal and interna-tional quarters may cause the group to rush. Among those pressuring state regulators is the Financial Stability Over-sight Council, which showed its interest in the variable an-nuities issue in its 2014 annual report. Specifically, it said life insurers were expanding their use of captives beyond XXX and AXXX usage.

“Of particular concern is the use of captives to reinsure insurance products with liability valuations that are volatile, cyclically sensitive, or interest rate sensitive, such as variable annuities with guaranteed living benefits and long-term care insurance,” the report said.

Routhenstein said the NAIC wants to have some kind of method in two years’ time that would be much faster than the work done to implement the NAIC’s new XXX/AXXX Reinsurance framework in January. “I don’t know if they can, but I think they’re going to try to do that,” he said.

During the NAIC’s Spring National Meeting in Phoenix last month, Rhode Island Superintendent Joe Torti told Best’s News Service the new panel would examine the purpose behind use of variable annuities captives, and what was driving their use. The panel, he said, would draft a list of is-sues for discussion.

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Routhenstein said the new working group would be aided by its choice of commissioners who are familiar with ap-proving variable annuity captive reinsurance deals. But Routhenstein said the NAIC cannot expect to treat the vari-able annuities issue in the same manner that it did XXX and AXXX.

He said the XXX and AXXX captive transaction require-ments may ultimately move toward some standardization in treatment because of the NAIC’s financial analysis working group, which he said reviews such transactions. However, he said variable annuities cannot be treated in the same way, although they could become included as a topic for the financial analysis working group to address.

Scott Harrison, executive director of the Affordable Life Insurance Alliance and a new managing director at Alvarez & Marsal Insurance and Risk Advisory Services, told Best’s News Service the process used in developing the XXX and AXXX framework appears to be the NAIC’s road map for variable annuities. He said some companies are reinsuring their variable annuities risk with guaranteed life benefits, which he described as risky. In the mind of some regulators, Harrison said, “the implication is that they’re getting regula-tory relief and statutory relief without putting up quality assets on the other side.”

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

(April 17, 2015)

Industry Divided on NAIC Draft Plan to Make Captive Reinsurers Subject to Multistate Reinsurer Accreditation Standards

The American Council of Life Insurers and captive insur-ance departments in prominent states are objecting to the latest National Association of Insurance Commissioners’ proposal that would treat XXX and AXXX captives, variable annuities and long-term care business in the same manner as multistate reinsurers for accreditation purposes. However some individual insurance companies back it.

The draft proposal, issued in February, is expected to be part of talks during the NAIC’s Financial Standards and Regulation Committee meeting on March 28, during the Spring National Meeting in Phoenix.

The panel for the past year has been attempting to clarify whether reinsurers organized under captive law and rein-surance business written in other states should be consid-ered multistate reinsurers subject to NAIC accreditation standards.

An initial draft plan offered during the 2014 Spring National Meeting in Orlando, Florida, clarified a multistate reinsurer assuming business written outside its domicile would make them subject to NAIC accreditation standards. Also, it exempted traditional captive insurers owned by non-insurance entities managing their own risk; and indicated changes would not be limited to captives formed to finance redundancies required for XXX term-life and AXXX uni-versal life with secondary guarantee reserves (Best’s News Service, March 31, 2014).

In the face of industry opposition that the initial draft was too broad, NAIC staff in November urged a delay in consid-eration before drafting a new iteration of the plan (Best’s News Service, Nov. 14, 2014). That new draft expanded the scope of the initial draft to include variable annuities and long-term care business.

The American Council of Life Insurers said in a letter it could not support the draft as written and questioned whether captive reinsurers could be considered to have a multistate presence when they are licensed to operate in no more than two states. Its letter said the proposed change would have no effect on regulatory offshore captive reinsur-ers. “It would seem to be a step backwards to only allow captive reinsurers that are licensed outside the U.S. to enter into captive transactions with U.S. reinsurers,” wrote Paul Graham, ACLI senior vice president, insurance regulation.

The ACLI cannot support the measure because there is no grandfathering period for variable annuities and long-term captive reinsurers in states that already permit them, it said. The proposal could circumvent state authority by requiring states to apply the new requirements in order to maintain accreditation. “It is questionable, at best, whether the states would have the constitutional authority to make those changes,” Graham’s letter said. Retroactive application of the proposal would call into question the effectiveness of NAIC’s entire accreditation program, he wrote.

Some insurers support the new document just as they did prior iterations. New York Life’s comments voice support for the new document, claiming it would strengthen state-based regulations and complements the NAIC’s general framework set to regulate XXX and AXXX reinsurance.

New York Life’s letter, from George Nichols, senior vice president in charge of government affairs, supported the inclusion of variable annuities and long-term care captives into the plan, stating “design problems in the accounting and risk-based capital regimes for other products types should be addressed by fixing those problems directly through deliberate and transparent reform of the regulatory regime.”

The Delaware Insurance Department objected to the latest draft, as Steve Kinion, director of the department’s Bureau of Captive and Financial Insurance Products, said it would include more captives than the panel actually intends to deal with. Kinion’s letter pointed out that the proposal would apply only to captive insurance companies that rein-sure XXX, AXXX, variable annuity and long-term care lines. He said the wording of the proposal and the company’s stated intent fail to match.

Vermont leads the nation in active captive insurers. David Provost, deputy commissioner, captive insurance, in the state Department of Financial Regulation, joined Graham in his concerns that applying the accreditation standards to captive life/health reinsurers that assume variable annuities or to long-term care insurance “appears to be immediate and retroactive.”

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

(March 27, 2015)

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Vermont Captive Bill Would Cut Minimum Capital Threshold, Adopt Risk-Retention Governance Standards

Vermont lawmakers are poised to pass captive insurance legislation that adopts model risk-retention corporate gov-ernance standards, cuts the minimum capital thresholds for licensing sponsored captives to $250,000, and allows risk-retention groups to include marketable securities as part of minimum capital thresholds.

Senate Bill 98, introduced in the Finance Committee, passed the House Commerce Committee on March 24 and is ex-pected to move through the full House later this week, said Rich Smith, Vermont Captive Insurance Association president.

Smith told Best’s News Service the bill adopts the risk-reten-tion group corporate governance model standards set by the National Association of Insurance Commissioners and Ver-mont may be the first state to pass them if Gov. Peter Shumlin signs the bill as expected. Smith said states have to adopt the RRG corporate governance model by Jan. 1, 2017, but the provisions could take effect this summer if the bill passes.

David Provost, the deputy commissioner in charge of captives for Vermont, said the bill’s risk-retention group governance and ethics standards provisions were designed because of concerns that risk-retention groups were operating more for the benefit of service providers than policyholders.

Also, the bill would reduce the minimum capital amount a sponsored captive insurer would need before being licensed from $500,000 to $250,000 and would reduce from three to one the number of people necessary to either incorporate or organize a captive insurance company. “We couldn’t come up with why three made more sense than one, since one is all you need to form a corporation,” Provost said.

Cutting the minimum capital amount will make it easier for sponsored captives to come to Vermont. “It makes the capi-tal level consistent with that of other states,” Provost said, citing Tennessee as an example. Should a sponsored captive liquidation be necessary, the lower amount set in the bill is adequate for regulators to use, he said.

In addition to being allowed to use cash and letters of credit to meet minimum capital requirements, the bill also allows risk retention groups to use marketable securities, the parameters of which would be set by the state insur-ance commissioner. A VCIA summary of the bill says the measure refers only to fixed income securities. The docu-ment said the change would allow a captive to manage its liquidity needs effectively and gives Vermont a competitive advantage.

Provost told Best’s News Service the bill includes word-ing that clarifies the recourse creditors have against assets of protected cell companies when delinquencies occur. Specifically, the bill said sponsored captive insurers have an obligation to creditors that extends “only to the assets attributable to that protected cell, and the creditor shall be entitled to recourse only against the assets attributed to that protected cell.”

Vermont is the nation’s leader in captive insurers. Data from

2014 shows the state to have 581 actives and 1,029 total licenses. The projected gross written premium of $29.8 billion led all domiciles, according to the Captive Insurance Division. Last year, the state licensed 16 new captives, 10 of them pure captives, two sponsored captives, two special purpose financial insurers, one association and one risk-retention group (Best’s News Service, Jan. 23, 2015).

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

(March 25, 2015)

Illinois Senate Considers Repeal of Premium Tax on Industrial Insured Captives

The Illinois Senate is considering legislation to repeal a pre-mium tax imposed this year on industrial insured captive insurers.

Senate Bill 1573, the Transportation Network Act of 2015, repeals language in SB 3324, a bill signed by former Gov. Pat Quinn last fall that would apply a premium tax to state-based companies that establish captive insurance in other jurisdictions effective Jan. 1, 2015.

Matthew Boch, a partner at the Chicago-based firm of Mc-Dermott Will & Emery, said SB 1573 initially sought to repeal parts of SB 3324 and an amendment filed this week has nar-rowed the scope of the bill to a tax exemption for industrial insureds’ captives. Passing the bill providing relief would be great for Illinois’ business competitiveness, he said.

SB 3324 requires state-based companies to pay the pre-mium tax, set at 3.5% against the premiums paid to captives outside Illinois. The specific language moved easily through both legislative chambers, but Republican senators later said they were misled by the Department of Insurance to believe the bill was merely technical. It was later claimed the tax exemption would create a potential $100 million tax hike against insurance companies if it took effect Jan. 1. In signing the bill, Quinn said the exemption language closed a tax loophole. The Illinois House issued legislation to repeal that failed last fall (Best’s News Service, Sept. 29, 2014).

The premium tax battle involving captives has its roots in federal law. The 2011 Nonadmitted and Reinsurance Reform Act — part of the Dodd-Frank Wall Street Reform Act — gives a company’s home state exclusive authority to tax and regulate insurance business by companies that are not approved by the Department of Insurance. These “industrial insureds” can conduct nonadmitted transactions tax-free if they meet certain requirements. In Illinois, SB 3324 eliminated provisions allowing industrial insureds to obtain insurance from a company in another jurisdiction without paying taxes. SB 1573 seeks to restore the prior language.

SB 1573 is important to companies headquartered in Il-linois, Boch said. “A self-procured insurance tax is essentially a tax on being headquartered in Illinois,” he said.

The bill defines industrial insureds as those companies with at least 25 employees whose aggregate annual premiums for insurance on risk except for life and accident and health

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insurance total at least $100,000. Also, these companies must have gross assets of at least $3 million and annual gross revenues exceeding $5 million.

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

(March 14, 2015)

Nevada Captive Insurers Reach 160

The ranks of licensed Nevada captive insurers increased in 2014 to 160, as 26 new captives jumped premiums by a combined $3.8 billion, according to Insurance Commis-sioner Scott Kipper.

Nevada has licensed more than 200 captive insurers since becoming a captive insurer domicile in 1999. The Division of Insurance said 2014 marked a second consecutive growth year for captive insurance in the state. Nevada approved 30 captive insurers in 2013, including 17 in December of that year. The DOI reported 150 captives at the end of 2013.

Nevada allows formation of agency captive insurers; alien captives; branch captives; association captives; pure/single parent captives; rental captives; protected cell captives; and sponsored/series limited liability company captives.

Nevada offers regulatory options for other types of cap-tives, including LLC’s and segregated cell captive programs. “We saw a lot of companies choose to take advantage of Nevada’s efficient application approval and series LLC legislation,” Deputy Commissioner Michael Lynch said in a statement.

The DOI statement said the state has seen rapid growth in captive use by companies in various segments of the worldwide economy, including biotechnology, alternative energy, multi-national transportation and manufacturing. Financial groups also have moved significantly toward cap-tive growth.

The National Association of Insurance Commissioners reported last year that captive premiums increased by 17% nationwide in 2013 over 2012. Vermont and Arizona ranked first and second in premiums, with $25.56 billion and $12.46 billion respectively (Best’s News Service, Sept. 10, 2014).

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

(March 10, 2015)

US Senate Bill Raising Caps Could Make Microcaptive Insurers More Appealing

The U.S. Senate Finance Committee recently moved to pass legislation that could make 831(b) microcaptives more attractive to companies and wealthy individuals, just days after a measure to put significant limits on those captive insurers had been introduced and quickly withdrawn.

The bill would raise the cap on the amount of tax-deduct-ible premiums parents of 831(b) captives can contribute to the captives each year by $1 million.

Under current law, parents of 831(b) captives can make up to $1.2 million in tax-deductible premium contributions to

the captives each year without having to pay federal taxes on the underwriting income. Such companies and their parents can elect to be taxed strictly on their investment income if they stay under the $1.2 million threshold. The Internal Revenue Service is conducting a probe to deter-mine whether 831(b) companies meet the tests for doing so (Best’s News Service, Sept. 11, 2014).

That limit would increase to $2.2 million under the bill backed by U.S. Sens. Charles Grassley, R-Iowa, Tammy Bald-win, D-Wis. and Joe Donnelly, D-Ind.

The bill that passed the Finance Committee did not include several provisions an earlier version of the bill had that would have placed restrictions on how 831(b) captives are allowed to operate.

The earlier measure included a provision that would have limited to 20% net written premiums from a single policy-holder in the captive. Additionally, it would have considered related family members as one policyholder.

Robert “Skip” Myers, co-chairman of Morris, Manning & Mar-tin’s insurance and reinsurance practice in Washington, D.C., said removing the restrictions included in the earlier bill could make 831(b) captives more attractive to many busi-nesses and individuals who use them to obtain tax benefits.

“The original bill would have tremendously limited the abil-ity to use the 831(b) deduction,” Myers said. “But then those two provisions were taken out, leaving the sole provision to increase the premium by $1 million by which you could se-lect this benefit. In the stroke of a pen, it turned from being opposed to 831(b) captives to pro, which is a big deal.”

Myers said it was unclear when the changes were made or why.

Efforts to reach spokesmen for Grassley, Baldwin and Don-nelly were not immediately successful.

In a statement, Grassley said “This legislation helps to en-sure that small mutual insurance companies will continue to be able to serve rural residents who have unique cir-cumstances, such as living far from a fire station, and so are often unable to obtain private property insurance through traditional insurance companies.”

831(b) captives, which take their name from the portion of the tax code allowing for their operation, were originally created to allow small groups of farmers to pool their risk as a way to guard against crop losses.

But the IRS has criticized 831(b) captives for allegedly offer-ing some companies and wealthy individuals a way to avoid paying taxes.

Earlier this month, the IRS singled out microcaptives on its annual list of the “Dirty Dozen List of Tax Scams.”

The IRS said in a Feb. 3 news release some companies and individuals abuse the 831(b) structure to create illegal tax shel-ters. The IRS said “unscrupulous” promoters often help closely held entities to create captive insurance companies onshore or

12

offshore by drafting organizational documents and preparing initial filings to state insurance authorities and the IRS.

“The promoters assist with creating and ‘selling’ to the entities often times poorly drafted ‘insurance’ binders and policies to cover ordinary business risks or esoteric, implau-sible risks for exorbitant ‘premiums,’ while maintaining their economical commercial coverage with traditional insurers,” the IRS said.

The IRS added that promoters manage the entities’ captive insurance companies year after year for hefty fees, “assist-ing taxpayers unsophisticated in insurance to continue the charade.”

Myers said the IRS is likely to come out against the Grassley-Baldwin-Donnelly bill because it increases the size of 831(b) captives without putting restrictions on how they operate.

“They’re certainly going to oppose this bill because it basi-cally enhances the ability to take advantage of a provision that they have already placed on their Dirty Dozen List of Tax Scams,” Myers said. “I can’t see that absent any restraint that this bill would pass.”

State regulators and insurance groups have also warned that captives functioning primarily to avoid taxation instead of conduct insurance business could face difficulties.

Steve Kinion, Delaware’s director of the Bureau of Captive and Financial Insurance Products in the Delaware Insur-ance Department, recently told Best’s News Service the IRS probe into microcaptive abuse might turn up some difficul-ties among some 831(b) captives nationwide because there are so many (Best’s News Service, Sept. 26, 2014).

Fred Eslami, senior financial analyst at the A.M. Best Co., told Best’s News Service in September that the use of 831(b) vehicles has become more popular in recent years with the diminishing of Section 501(c)(15) tax-exempt status for certain nonprofit mutual insurers and associations other than marine or life.

The 831(b) captives are cost-effective ways for small and midsize companies to transfer risks. They usually are formed to insure risks of affiliated family businesses and are popular because of the small-company premium income tax exemp-tion, Eslami said. With the availability of Section 501(c)(15) status diminishing for smaller property/casualty insurers, the 831(b)’s lower overhead costs have made the 831(b) option increasingly popular. “As captive managers and re-lated service providers are looking to grow, they are aggres-sively promoting the 831(b) option for the small/midsize companies,” Eslami wrote.

(By Jeff Jeffrey, Washington Bureau manager: jeff.jeffrey@ambest.com)

(February 19, 2015)

New York Plan Could Cut AXXX Universal Life Reserves by 15%

New York’s Department of Financial Services has proposed changes to a reserve calculation for universal life insurance policies with secondary guarantees that would cut reserves

by as much as 15%.

DFS Superintendent Benjamin Lawsky made the proposal known in a letter to fellow insurance commissioners.

New York has already developed and a revised formula for level term products, defined as those backed by XXX reserves. Lawsky’s letter said that plan would result in a reserve reduction of 30%-35% for new business written after Jan. 1, 2015. The plan was greeted coolly by insurance industry groups (Best’s News Service, April 9, 2014).

But Lawsky’s letter said the DFS recently has proposed changes to the calculation for the AXXX reserves, which back universal life insurance policies with secondary guar-antees. The proposal would apply a 1% mortality improve-ment factor to the current mortality table for up to 40 years. It would then apply a 0.5% mortality improvement factor thereafter through age 80, followed by a grade-in to the standard table by age 90. The amendments allow a 2% lapse rate during the first five years, and then a maximum 1% lapse rate for the remainder of the policy.

“New York expects that the combined impact of these modifications to the existing ULSG formulas, which would apply prospectively to policies issued on or after Jan. 1, 2015, will result in a reduction of reserves of up to 15%,” Lawsky’s letter concludes.

The latest proposal is consistent with the DFS’ reliance on formulaic approaches, but the plan represents an acknowl-edgement by the department that reserves for XXX and AXXX are high and create problems for consumers and companies, said Scott Harrison, executive director of the Affordable Life Insurance Alliance. Harrison said the new DFS proposal tries to “dial in a particular outcome” and is somewhat limited because it only affects business written in New York state.

Lawsky has long sought to limit or eliminate the use of cap-tives to reinsure AXXX and XXX reserves. But the National Association of Insurance Commissioners has approved Actuarial Guideline 48 in an attempt to allow life insurers to continue using the captives at least until principles-based reserving is ratified by states.

Lawsky’s office has been critical of AG 48. Rob Easton, DFS deputy superintendent and general counsel, said AG 48 would allow regulators to skirt rules allowing captives to hold fewer reserves and would allow captive use to contin-ue unabated until principles-based reserving is adopted by enough states to make it a national accreditation standard — and maybe not even then (Best’s News Service, Nov. 24, 2014).

A.M. Best Co. on Feb. 6 released a related special report, “New Reserve Financing Rules Unlikely To Eliminate XXX, AXXX Captives.” The report said “this new framework is effectively a ‘stopgap’ measure intended to regulate captive financing structures until the long-awaited implementation of a principles-based reserving framework, which very likely would significantly diminish the need for XXX and AXXX captive financing structures for new business issued after the implementation date.”

(By Thomas Harman, associate editor, BestWeek:

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Tom.Harman@ambest.com)

(February 7, 2015)

Cayman Islands Government Enacts Portfolio Insurance Companies Regulations

The Cayman Islands government has enacted the Portfolio Insurance Companies Regulations 2015 along with related sections of the Insurance Amendment Law 2013.

According to the Insurance Managers Association of Cay-man, the regulations enhance the insurance statutory framework and enable insurers incorporated as segregated portfolio companies more flexibility. IMAC said the legisla-tion is considered more robust than incorporated cell com-pany structures offered in other jurisdictions.

The PIC legislation and accompanying regulations both ex-emplify and reinforce Cayman’s “leading position over other jurisdictions in terms of sensible and proportionate regula-tion, innovative legislation — based upon a trustwor-thy and reliable legal system — and the high level of governance and compliance afforded to it,” said Kieran O’Mahony, chairman of IMAC, in a statement

Under the recently passed legislation, an SPC insurance company will be able to incorporate one of its cells by establishing a PIC under it. Once the PIC is registered with the Cayman Islands Monetary Authority, it may write insur-ance business in its own name, as a separate legal entity — an exempted company limited by shares.

“There are several key points that make these new regula-tions noteworthy,” said IMAC in a statement. “A PIC can con-tract with other cells and other PICs within the SPC, which facilitates reinsurance, quota sharing and risk pooling.”

Although the PIC is controlled by voting shares by its SPC, participating shares can be issued to those with an economic interest in the PIC, said IMAC. A PIC can have a different board of directors to that of the controlling SPC, providing for greater governance flexibility. The PIC is recognized as a separate legal entity for U.S. tax purposes, including having its own federal tax identification number. Also, a PIC can be wound up without affecting its control-ling SPC or other PICs, or a PIC can merge with another captive; and a foreign captive can redomicile to Cayman as a PIC where it may not be of sufficient size to operate as a stand-alone captive.

An effort to contact a spokesperson for IMAC for further comment was not immediately successful.

Last year, a decision by the U.K. Financial Conduct Author-ity to withdraw its list of 95 countries considered to be at “high risk” of financial crime points to the need for more open assessment of overseas jurisdictions by the British regulator, according to the chief executive officer of the main trade body for the Cayman financial services industry, Gonzalo Jalles of Cayman Finance (Best’s News Service, Sept. 8, 2014).

Last year, the Cayman government welcomed the U.K. Financial Conduct Authority’s decision to remove its

“high risk” list from its website. The U.K. regulator, the Cayman government said in a statement, “has commit-ted to a full review of the methodology that resulted in the Cayman Islands being placed on the list.” The Cayman government said it had been in contact with the FCA since it raised the issue in a letter to the FCA on July 8.

(By David Pilla, international editor, BestWeek: David.Pilla@ambest.com)

(February 3, 2015)

Domiciles

Texas Lawmakers Moving Bills to Expand Use of Captive Insurers

The Texas Senate is considering legislation that would allow Texas companies that have captive insurers elsewhere to redomesticate them to their home state.

Texas Captive Insurance Association Board of Directors President Josh Magden said the bills, SB 667 and compan-ion bill House Bill 1700, are an extension of legislation that made Texas a captive domicile when Gov. Rick Perry signed SB 734 in 2013. That was backed by Texas-based companies that wanted to transfer their captives based in other states back to Texas in order to save costs. SB 734 allows captives to insure operating risk of entities that include a captive’s affiliates (Best’s News Service, June 6, 2013).

The new bills would allow insurers to pay dividends to the holders of equity interest in a captive insurance company and allow companies to participate in a captive reinsur-ance pool. Magden said the bills would grant the Texas Department of Insurance the authority to approve credit for reinsurance for transactions between captives of the same corporate parent.

The bills would allow smaller companies the chance to have the necessary corporate setup to execute risk transfer in order to redomesticate captives. Magden said while there are about 15 licensed captives in Texas, the bill could result in dozens of redomesticated captives coming into the state.

“These changes made to the law would open the barn doors up fairly wide and let people come back in [to Texas],” Magden said. “There are a lot of businesses out there that have a captive set up and want to bring it back to Texas, but lack the corporate structure.”

The Senate Business and Commerce Committee is expected to place SB 667 on the local and uncontested calendar and is expected to be on the calendar for an April 9 vote, ac-cording to the Texas Captive Insurance Association. Should it pass there, the bill would move to the House Insurance Committee, which is considering identical companion legis-lation, House Bill 1700. Both committees have held hearings on the bills with no opposition emerging, said Magden.

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

(April 8, 2015)

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Georgia Passes Bill to Improve Climate for Captive Insurers

Georgia lawmakers have passed legislation designed to make the state an attractive locale to license captive insur-ance companies.

House Bill 552 changes the tax structure for captive insur-ance companies domiciled in the state, said Alana Mueller, president of the Georgia Captive Insurance Association. The bill awaits Republican Gov. Nathan Deal’s signature.

The key provision in the bill is the reduction in the premi-um tax rate on captive insurance companies to 0.4% for the first $20 million of net premium and a net 0.3% tax beyond the $20 million threshold. The tax rate is set at 2.25%, the rate at which traditional insurance companies are taxed, and is at a level far higher than many other states, Mueller said.

The bill lowers the aggregate maximum premium tax to $100,000 and states when two or more captive insurance companies are owned by the same parent, they can be taxed as a single company at the $100,000 amount.

It cuts in half the amount of required surplus capital a pure captive insurer must have in reserves to ensure solvency from $500,000 to $250,000. Association captives, industrial insured captives and risk retention groups all must maintain a $500,000 surplus, the bill said.

Georgia has been a captive domicile since 1988, but has seen few licensed captives since that time. “We don’t have a lot of captive insurance companies domiciled in Georgia because of the laws,” Mueller told Best’s News Service. A group of interested parties met last fall to map out legisla-tion to improve state law to make Georgia more desirable as a captive insurance domicile and to restart the association, which had been dormant for several years.

The bill said licensing information submitted by insurers will be granted confidential treatment unless specified by the applicant.

Mueller said another bill, House Bill 703, was introduced in an attempt to add protected cells, segregated cells and special purpose vehicles onto the list of captive types. But that bill likely will require other changes to insurance law before it can move, she said. Such legislation, Mueller said, would bring the state in line with leading captive states such as Vermont, Delaware and neighboring Tennessee, which passed a captive reform bill in 2011 (Best’s News Service, May 23, 2011).

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

(April 10, 2015)

Delaware Captive Growth Continued in 2014; State Remains World’s Sixth-Largest Domicile

Delaware continued its captive insurance growth in 2014, licensing 87 new captive insurers and 141 special purpose vehicles known as series business units.

The increases allow the state to remain as the world’s sixth-largest captive insurance domicile and the third-largest in

the United States, according to a statement from Insurance Commissioner Karen Weldin Stewart’s office.

The totals bring year-end 2014 active captive insurance com-panies in the state to 333, series business units to 688, and cell captives remain at 13. Twenty captives dissolved in 2014, De-partment of Insurance spokesman Jerry Grant said in an email.

The DOI reported almost a 40% increase in licensed cap-tives at the end of 2013 over 2012. At that time, the DOI re-ported 298 licensed captives, including 266 actives in 2013, up from 212 licensed and 192 active in 2012.

Delaware’s captive program has grown from almost no participation since state lawmakers passed a 2005 reform law. To date, the captive program has licensed 385 captive insurers, 753 series business units and 13 cells.

The National Association of Insurance Commissioners’ 2013 Insurance Department Resources Report estimated that Delaware was third in domestic captives in 2013, behind Vermont and Utah, with 267 total captive premiums up from 181. The NAIC’s 2013 data also placed Delaware with the third-highest captive premiums at $6.61 billion (Best’s News Service, Sept. 10, 2014).

“I am very pleased that the captive program continues to grow,” Stewart said in a statement. “This program provides economic opportunities for my constituents and much-needed revenue for the state.”

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

(February 18, 2015)

Cayman Islands Reports 2.5% Captive Growth in 2014

The Cayman Islands captives industry grew 2.5% last year after 22 new captive insurers received licenses, accord-ing to statistics released by the Cayman Islands Monetary Authority.

The new captives brought the total number of domiciled captives to 759 as of Dec. 31, 2014. Cayman captives wrote premiums totaling $12 billion and held total assets of $51.5 billion.

CIMA statistics show captive growth on the islands oc-curred annually from 1994, when there were 352 captives licensed, until 2009, when the total reached 780. In 2010, however, the number dropped to 738 and growth of only three captives occurred in 2011 and 2012 combined. But the total number of captives grew by 19 in 2013 and 22 last year.

The increasing number of captive domiciles — now more than 80 worldwide — has required increasing diligence among the Cayman captive industry to attract new entrants, said new Insurance Managers Association Cay-man Chairperson Kieran O’Mahony in a statement.

“The increase in the number of captives last year is evi-dence of the continued strength of our industry and the domicile, O’Mahony said. “The enactment of the Portfolio Insurance Company regulations earlier this year also sets

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the stage for continued growth and innovation in 2015.”

Of the 759 captives, 415 are pure captives, 139 are segregat-ed portfolio companies and 129 are group captives, accord-ing to the CIMA. About 33.86% of Cayman’s captives are formed in the medical professional liability business clas-sification, with an additional 22% in workers’ compensation. Captives are being formed for innovative efforts including insurance against cybersecurity risk, terrorism threat and environmental pollution.

In 2014, then-IMAC Chairman Rob Leadbetter told Best’s News Service the Affordable Care Act passage in the United States was having an impact on the Cayman captive market (Best’s News Service, May 2, 2014).

The IMAC is a nonprofit organization run by insurance man-agers in the Cayman Islands that acts as a liaison with the Cayman Islands government and to promote the Caymans as an attractive captive domicile.

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

(February 11, 2015)

Bermuda Monetary Authority: NAIC Reinsurance Collateral Law Drove Uptick In Long-Term Registrations

The Bermuda Monetary Authority registered 89 new insur-ance entities, 65 new insurers and 24 new intermediaries in 2014, the authority said.

“[Qualified jurisdiction] status allows reinsurers from a par-ticular domicile to reinsure U.S. risk on a non-discriminatory basis and benefit from reduced collateral requirements,” Shelby Weldon, director of licensing and authorizations for the BMA, said in a statement. “This is a great achievement for the authority and Bermuda’s reinsurers who reinsure U.S. risks. Bermuda firms are encouraged to contact the relevant U.S. state insurance commissioners regarding their eligibility for reinsurance collateral reduction.”

Weldon said the sector that saw the most significant growth last year was long-term life. Four new Class E long-term life insurers, five Class C insurers, and one Class A insurer regis-tered in Bermuda during 2014.

Weldon attributed the uptick to a recent decision by the National Association of Insurance Commissioners to grant qualified jurisdiction status to Bermuda.

Class E license holders are the largest of Bermuda’s long-term insurers and are each required to have total assets of more than $500 million. The new Class E insurers that were registered last year launched with over $2 billion of assets.

The 2014 registration figures marked an increase from the six long-term registrants the BMA saw in 2013. The 2013 registrants included three Class C insurers, two Class B insurers and one Class A insurer.

Bermuda was one of seven jurisdictions the NAIC’s reinsur-ance task force voted to grant qualified jurisdiction status on Dec. 11. The other countries to gain approval were Germany, France, Ireland, Japan, Switzerland and the United

Kingdom (Best’s News Service, Dec. 11, 2014).

The NAIC’s plenary signed off on the task force’s recom-mendation on Dec. 16. The qualified jurisdiction approvals went into effect on Jan. 1.

Reinsurers based outside the United States are required by most state regulators to post collateral reflecting 100% of the liabilities they cover. The NAIC created the Credit for Reinsurance Model Law as a way to provide more regula-tory uniformity in the area of regulating reinsurers based outside the United States.

In addition to the 10 long-term insurers BMA reported, 16 new captives, 11 new commercial insurers writing general business and 28 special purpose insurers registered during 2014.

Weldon said both captive and commercial registrations remained “moderate” during 2014. However, he noted that a committee of the BMA approved an additional 22 cap-tive and commercial insurers. Weldon said he expects the captives and commercial insurers to formally register in the first quarter of 2015.

(By Jeff Jeffrey, Washington Bureau manager: jeff.jeffrey@ambest.com)

(February 4, 2015)

North Carolina Exceeds Captive Goal for 2014 With 49 Licensees

North Carolina’s captive insurance program licensed 49 domestic captive insurers during 2014 in its first full year, to go with four others in 2013, and Insurance Commissioner Wayne Goodwin credited the state’s 2013 captive law as one reason for the strong start.

The Department of Insurance was authorized to license captive insurance companies in 2013 and released data through Feb. 1, showing that it had exceeded its initial goal of bringing 40 companies into the state by 2015.

“When captive insurance companies form in or relocate to North Carolina, they create jobs, generate premium tax reve-nue and bring business to the hospitality industry in our state,” Goodwin said in a statement. “I am proud of our progress toward becoming a leading captive domicile and look forward to what I’m confident will be another successful year.”

Among the total of 53 domestic captives that are now licensed in the state, 11 protected-cell captives housed a combined total of more than 120 individual cells. The DOI counts those protected-cell captives – 10 licensed in 2014 and one in 2013 – within its current total of 53 captive insurers. The 120 individual cells within the protect-ed captives are not being counted as part of the total, Kerry Hall, DOI director of public information, said.

North Carolina lawmakers passed legislation in mid-2013 that made the state a captive domicile, a law Goodwin called “well-crafted.” The law set minimum capital and surplus requirements for captives. For instance, pure and protected cell captives must keep $250,000; association and industrial-insured captives must keep $500,000; risk retention groups will need $1 million and special-purpose financial captives will

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need $250,000. The law also set a premium tax of 0.4% on up to $20 million in direct premiums collected and 0.3% on larger premiums (Best’s News Service, June 24, 2013).

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

(February 4, 2015)

Oklahoma Nearly Quadruples Number of Active Licensed Captive Insurers in 2014

Oklahoma nearly quadrupled the number of active licensed captive insurers in the state in 2014, according to the Okla-homa Insurance Department.

The department reported it now has 47 licensed captive insurers in the state, after attracting 37 of them during 2014.

Captive insurance companies in most instances are formed to insure the risk of a single company or industry group. Captives in Oklahoma have low tax rates and fees, the po-tential for tax advantages over other risk transfer methods and what the department describes as a supportive regula-tory environment.

“Oklahoma is now an extremely competitive domicile with a straightforward and efficient captive formation process,” Insurance Commissioner John Doak said in a statement.

Currently, Oklahoma’s captive law sets a premium tax cap of $100,000; low application and licensure fees; no re-quirements for in-state annual board meetings and in-state managers; and allows full first-dollar coverage and excess workers’ compensation as lines.

Oklahoma became a captive domicile in 2004, but legisla-tion was passed in 2013 to improve upon the initial law. House Bill 1108 revised licensing requirements to bring Oklahoma in line with requirements approved by the Na-tional Association of Insurance Commissioners. The law al-lows Oklahoma companies to write workers’ compensation to finance the risk through captives domiciled in the state.

Also, the new law cut premium tax rates on captive pre-miums from 0.4% to 0.2%. And it established captive and surplus requirements that allow pure captives to start busi-ness before obtaining a license if they can put up $150,000 in the first year and the remaining $100,000 of the total required in year two. Captives operating as risk retention groups must have at least $1 million, cuts annual licensing costs to $2,000 annually, less than half of most states (Best’s News Service, May 17, 2013).

James Mills, the director of the captive insurance division, said the Oklahoma Captive Insurance Association has been formed by the industry in response to the state’s modern-ized regulations. “It is very promising to see the industry respond so favorably to the work we are doing,” Mills said in a statement. “I look forward to working with them to con-tinue Oklahoma’s success as a captive domicile.”

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

(February 3, 2015)

Hawaii Continues Captive Insurer Growth, Adds 15 New Companies in 2014

Hawaii continues its growth as a captive domicile, adding 15 newly licensed captive insurers to a group that wrote more than $2.85 billion in premiums in 2014.

Hawaii is ranked as the nation’s fourth-largest captive domicile and the 11th-largest worldwide based on total number of active captive licenses, the state Insurance Division of the Department of Commerce and Consumer Affairs said in a statement.

As of Dec. 31, 2014, there were 194 active captive insurers in Hawaii, up from 188 reported by the Insurance Division in a mid-2014 fact sheet.

“The captive insurance market is becoming increasingly competitive with additional domiciles vying for the atten-tion of companies,” Insurance Commissioner Gordon Ito said in a statement. “Hawaii continues to attract owners that want an experienced and business-friendly captive environ-ment with a strategic location in the middle of the Pacific.”

Hawaii’s captive insurance growth continues despite the re-cent increase in states becoming captive domiciles. “While there have been more domicile options for captive owners, we have continued to experience double-digit growth in formation of new captives over the past few years,” Insur-ance Division spokeswoman Lindsay Chambers said in an email.

Hawaii regulators have licensed 290 captive insurers since legislation making Hawaii a captive domicile was enacted in 1986. The insurance division estimates the total combined asset base has increased from $7.22 billion to $15.66 billion since 2009.

Hawaii has lower overhead costs than all other offshore locations and places no state taxes on captives, according to the Hawaii Captive Insurance Council’s website. Hawaii sets a graduated premium tax rate on applicable premiums, makes no minimum tax requirement and caps premium tax rates at $200,000.

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

(January 31, 2015)

Tenn. Senate Considers Bill to Help Captives Provide Workers’ Comp Insurance, Meet Minimum Capital Standards

The Tennessee Senate is considering legislation that would expand captive insurer workers’ compensation coverage and loosen minimum capital standards captives are required to meet.

Senate Bill 80, sponsored by Republican Sen. Mark Norris, seeks to clarify points in existing law, said Kevin Doherty, president of the Tennessee Captive Insurance Association.

The bill would allow captive insurers to provide excess or stop-loss workers’ compensation coverage for companies that are not qualified as self-insured, broadening the scope of those eligible to be insured, Doherty said. To date, only those

17

companies that qualified as self-insured companies could re-ceive excess or stop-loss workers’ compensation coverage.

A 2011 reform law sought to allow self-insured companies in Tennessee to open a captive and write workers’ compen-sation insurance directly, but there have been differences among traditional insurance and captive insurance regula-tors about how to do so. The bill is an attempt to enable employers in Tennessee to write workers’ compensation directly, said Belinda Fortman, regional manager at the cap-tive management firm Strategic Risk Solutions.

Also, SB 80 would allow the insurance commissioner the discretion to approve rating plans submitted by captives that are authorized to provide workers’ compensation cov-erage provided that the plan does not threaten the compa-ny’s solvency and protects insureds. “We want to encourage the use of workers’ comp in captives and we’re doing that by giving the state a lot of flexibility in approving designed [rating plans],” Doherty said.

Next to Colorado, Tennessee is the nation’s second-oldest captive domicile, having passed its law in 1978. The number of active captive insurers had dwindled to almost zero until lawmakers passed legislation in 2011. It allowed the forma-tion of new types of captives in the state, by authorizing sponsors to form a sponsored captive insurance company that could create one or more protected cells to insure its participants’ risk (Best’s News Service, Jan. 8, 2014).

Fortman said changes made in 2013 to protective cell cap-tive law have helped attract captives to Tennessee. Those changes lowered the capital and surplus requirements for a protected cell captive insurance company from $500,000 to $250,000; enabled a person or a business to sponsor a protected cell captive insurance company and eliminated the requirement for a holding company; applied the maxi-mum premium tax to the protected cell captive insurance company as a whole instead of applying it to each cell; and allowed risk participation by the cells on a direct basis for all participants.

She said the cost of establishing a protected cell is the same as establishing a pure captive and this has led to an increase in protected cell captives, including some that gave up pure captive status to become a protected cell captive.

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

(January 30, 2015)

New Competition, Soft Market Slows Vermont’s 2014 Captive Growth

Vermont’s captive insurer growth slowed in 2014, primar-ily because of a prolonged soft market and because of new competition from other states, according to the Vermont Captive Insurance Division.

Vermont licensed 16 new captive insurers in 2014, bringing the nation’s leader to 581 actives and 1,029 total licenses, while a projected gross written premium of $29.8 billion continues to lead all domiciles, the CID’s data for 2014 said.

Of the new captive insurers, there were 10 pure captives,

two sponsored captives, two special purpose financial insur-ers, one association and one risk retention group. Two new captives were redomesticated, one from Bermuda and the other from Delaware.

Vermont, which has been a captive domicile since 1981, is unlikely to grow as fast as some other domiciles in sheer numbers of active captives because the state is selective about which smaller companies it chooses, Dave Provost, Vermont’s Deputy Commissioner of Captive Insurance, told Best’s News Service.

“The quality of Vermont’s 2014 licensees continues to be outstanding,” Provost said in a statement. “Vermont’s prima-ry focus is licensing quality companies regardless of market conditions. Much of the activity across other jurisdictions is driven by small 831(b) companies, which is not a core market for Vermont.”

Section 831(b) of the Internal Revenue Code covers so-called micro-captives, defined as companies that qualify to insure less than $1.2 million in risk. Such companies and their parents can elect to be taxed strictly on their invest-ment income if they stay under the $1.2 million threshold. The Internal Revenue Service is conducting a probe to de-termine whether 831(b) companies meet the tests for doing so (Best’s News Service, Sept. 11, 2014).

A variety of licenses were awarded to companies in health care, insurance, financing, manufacturing, real estate, technol-ogy, religious institutions and mining. Drexel University, Physi-cians Insurance & Mutual Co., and Emergency Physicians Medi-cal Group PC & AF all received health care captive licenses. “The continued formation of hospitals and doctors’ groups setting up captives in Vermont has been a very positive trend that we expect to continue,” Dan Towle, Vermont’s Director of Financial Services, said in a statement. “Hospitals maintain a high interest in forming their captive on-shore and in Vermont.”

Other notable captives in the class of 2014 include Union Carbide Corp., Aon Risk Services Cos. Inc., Sazerac, Swiss Re Life & Health America Holding Co., and MasterCard Interna-tional Inc.

Provost said his office expects to propose captives reform legislation for initial consideration by the state Senate Finance Committee this session. One change would be to change captive insurer minimum capital standards. Cur-rently, they must have $1 million in capital reserves, but Provost wants to allow captives to use marketable securities such as investment bonds and long-term Treasury notes to meet the standard. Provost’s office is discussing the details with investment managers and regulators. The investment, he said, “has to be low-risk and very liquid.”

He said other technical changes are up for proposal, includ-ing dropping the number of incorporators captives need to form from three to one. Also, the office wants to tighten the sponsored cell law by writing specific language guar-anteeing the safety of finances for one cell should another individual cell fail.

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

(January 24, 2015)

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Captive Management

Spencer Capital Holdings to Acquire Captive Insurance Manager USA Risk Group

Global investment firm Spencer Capital Holdings Ltd. has agreed to acquire USA Risk Group, an independent captive insurance manager with $9 billion in assets under manage-ment.

The financial and operational support of Spencer Capital will provide USA Risk with the opportunity to expand its capabilities to clients while keeping its autonomy, Spencer Capital said in a statement. Spencer Re, a reinsurance sub-sidiary of Spencer Capital focused on the U.S. automobile dealership industry, and USA Risk are expected to mutually benefit from cross-selling opportunities.

Financial terms of the transaction weren’t disclosed.

The Vermont-based USA Risk was founded in 1981 by H. Lin-coln Miller Jr., who helped enact legislation enabling Vermont to become the pre-eminent captive domicile within the Unit-ed States, according to the statement. It has since established member companies in 10 additional locations, servicing 20 captive domiciles, inside and outside the U.S. market.

The deal, which needs regulatory approval, is expected to close during the first quarter. USA Risk is a “welcomed ad-dition to Spencer Capital Holdings as we seek to assemble a robust platform of leading and value-driven companies in the insurance and financial services industries,” Ken Shubin Stein, chairman of Spencer Capital, said in a statement.

After the transaction closes, USA Risk will keep its name and continue to do business. Miller, group chairman of USA Risk, will join the board of directors of Spencer Capital. Gary Os-borne, president of USA Risk, will join the board of Spencer Re.

“We have been approached by many suitors over the years, but until we met the team at Spencer Capital, we did not view a transaction as being in the best interests of our cus-tomers and employees,” Miller said in a statement. “This also allows us to maintain our long-held philosophy of indepen-dence from conflicts of broker-owned managers.”

Vermont’s captive insurer growth slowed in 2014 primar-ily because of a prolonged soft market and because of new competition from other states, according to the Vermont Captive Insurance Division. The state licensed 16 new cap-tive insurers in 2014, bringing the nation’s leader to 581 actives and 1,029 total licenses while a projected gross writ-ten premium of $29.8 billion continues to lead all domiciles, the CID’s data for 2014 said.

USA Risk has captive management operations in Arizona, Barbados, Bermuda, the British Virgin Islands, Grand Cay-man, Malta, South Carolina, Tennessee and Vermont, man-aging companies in 20 domiciles. Its services help clients maintain flexible insurance coverage, improve cash flow, and control expenses.

Spencer Re is focused on reinsuring insurance products sold by American auto dealers, direct marketers and loan

providers. It is the first international reinsurer formed in Puerto Rico that abides by the laws of the International and Offshore Insurance Center in that commonwealth domicile, the firm said (Best’s News Service, Dec. 16, 2014).

(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)

(February 3, 2015)

Spencer Capital CEO: Company Seeks More Deals as It Buys SouthWest Dealer Services

Spencer Capital Holdings Ltd. has acquired SouthWest Deal-er Services, which provides finance and insurance products and services to automobile dealers in the Southwest and Midwest. Terms of the transaction weren’t disclosed.

Spencer Capital, which is actively looking to buy into finance and insurance services and other industries, saw SouthWest as a good fit because of its pre-eminent reputa-tion and size, Ken Shubin Stein, chief executive officer and chairman of Spencer Capital, told Best’s News Service.

SouthWest Dealer serves more than 550 active dealers in 14 states using local sales forces to give dealers a hands-on experi-ence with representatives in their individual markets. The com-pany has eight strategic locations in the dealer markets they serve in Arizona, California, Colorado, Kansas and Washington.

Spencer Capital also knew SouthWest well because its rein-surance firm, Spencer Re, which focuses on American auto dealers, has worked with the company, Shubin Stein said.

Under the deal, which is immediately accretive to Spencer Capi-tal, SouthWest Dealer will keep its name and continue to oper-ate as it has for more than 25 years with no personnel changes.

Spencer Capital’s financial and operational support will al-low the company to grow its presence and expand its client capabilities. Spencer Capital plans to help SouthWest build a “coast-to-coast footprint,” Shubin Stein said.

Dealers will benefit because of increased and efficient ac-cess to products and services across the Spencer platform, including from Spencer Capital’s Spencer Re and indepen-dent captive insurance provider USA Risk Group.

Also driving the acquisition was consolidation in the auto industry, Shubin Stein said.

“As larger dealer owners are getting bigger, it’s important that the agents and other people that help auto dealers run their businesses well also increase in scale,” he said. Advan-tages are accruing to larger business in all sorts of ways, in-cluding being able to offer extra products and services that will help them run their businesses more profitably, he said.

Spencer Capital is actively looking to do more acquisitions in which they can be long-term partners. In particular, the company sees opportunity in buying businesses from baby boomers who own all or the majority of the stock in their companies and are looking for someone to sell them to as they get older, Shubin Stein said.

Spencer Capital is following the Berkshire Hathaway model,

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in which it plans to hold on to the acquired business for-ever.

“We’re the anti-private equity firm,” he said. “They sell them in a few years. In our case, we’re the exact opposite.”

According to its website, Spencer Capital uses a scientific approach to investing that delivers “above the market, risk adjusted returns over the long-term.”

Spencer Capital announced its acquisition of Vermont-based USA Risk Group, an independent captive insurance manager with $9 billion in assets under management, in February (Best’s News Service, Feb. 2, 2015).

(By Marie Suszynski, Best’s News Service correspondent) (April 7, 2015)

Willis Appoints Chairman for Bermuda Operations

Willis Group Holdings announced the appointment of Paul Scope as chairman of Willis Bermuda.

In his new role, Scope will oversee Willis’s Bermuda-based operations “in a move designed to further enhance collabo-ration and build upon Willis’s seamless client value proposi-tion in Bermuda,” the broker said in a statement.

Before joining Willis, Scope was chairman and chief execu-tive officer of JLT Park, the Bermuda-based specialty reinsur-ance and insurance division of U.K. broker Jardine Lloyd Thompson. He has spent 30 years in the Bermuda market and 40 years in the insurance industry.

Between 2003 and 2007, he was chairman and CEO of Park Group. In 1989, Scope established Park International Ltd., one of the first major independent wholesale brokers in Bermuda, which later became Park Bermuda and was acquired by JLT in 2007.

Willis has had a presence in Bermuda since 1979 and em-ploys about 35 full-time staff, where it focuses on activities including alternative risk transfer, direct insurance, reinsur-ance, captives, life insurance and annuity.

Among its most recent management moves, Willis ap-pointed Marc Paasch global head of alternative risk transfer solutions (Best’s News Service, March 23, 2015). Paasch will help strengthen the customized risk solutions operation, which allows businesses to transfer traditionally uninsurable risks to a third-party balance sheet, according to Willis.

Earlier this month, Willis said it had given its affinity busi-ness a new global remit with a focus that will include North America and the United Kingdom and tap similar opera-tions in those areas for possible investment and expansion. Affinity most heavily focuses on manufacturing, utilities, finance, telecommunications and car dealerships (Best’s News Service, March 9, 2015).

Ranked by total revenues, Willis in 2013 was the world’s third-largest insurance broker with revenues of $3.65 bil-lion, according to Best’s Review.

Shares of Willis Group Holdings (NYSE: WSH) were trading

at $48.40 on the afternoon of April 2, up 0.06% from the previous close.

(By David Pilla, international editor, BestWeek: David.Pilla@ambest.com)

(April 3, 2015)

UK Insurance Manager Charles Taylor Posts 38.5% Rise in Pretax Profit

Describing a “strong performance,” insurance manager and service provider Charles Taylor Group plc reported £9.6 million (US$14.1 million) in pretax profit in 2014, up 38.5% from £6.9 million in 2013.

Charles Taylor reported increases in adjusted earnings per share and profits from professional services. It said net debt was “in line” with that of 2013. The group also outlined plans to raise £30.6 million in new equity through a rights issue.

“We’re very pleased with the performance in 2014,” David Marock, group chief executive officer, told Best’s News Ser-vice. “It was a good, strong set of results.”

The main activity of the London-based group is the provi-sion of professional insurance services. Charles Taylor also is active in insurance management, loss adjusting, claims management and captive management.

Earnings per share increased to 19.4 pence from 14.2 pence. The interim dividend was unchanged at 3.25 pence. The second dividend rose to 7.5 pence from 6.75 pence. The full-year dividend was set at 10.75 pence.

The increase in the dividend — “always a delight for investors” — came after flatness over a number of years, Marock said. “We’ve reintroduced our progressive dividend policy,” he said, “and that’s to reflect the positive direction in earnings growth and the confidence the board has into the future.”

Revenue rose by 8.1% to £122.8 million from £113.6 million. Charles Taylor said the negative effect from the strength of the U.K. pound, noted at the half-year mark, eased by the end of 2014.

When he joined the group about three and a half years ago, Marock said, Charles Taylor launched a three-part strategy of optimizing its business operations, growing core activities, and exploring strategic options. “That involved looking at acquisitions,” he said.

Charles Taylor said the group’s adjusting services business was affected in 2014 by an “unusually low level of large in-sured claims across the insurance market.” The group said it made “two carefully targeted acquisitions” in 2014, followed by two more early this year. “A further acquisition [is] due to complete shortly,” the group said in a statement.

Marock said the planned rights issue is driven by the group’s sense that opportunities for acquisitions and joint ventures are increasing. “We want to have the financial resources in place to capitalize on those opportunities,” he said. “So we are in discussions with companies across all of

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the lines of our business.”(By Robert O’Connor, London editor:

Robert.OConnor@ambest.com) (March 20, 2015)

National Interstate CEO: ART Programs Gain Ground as Auto Claims Costs Rise

Commercial automobile claims inflation and alternative risk transfer business development are among the biggest cur-rent issues for National Interstate Corp., which does a lot of its business in the commercial auto insurance market in competitive times, said the group’s chief executive officer.

Speaking at the New York Society of Security Analysts an-nual insurance conference in New York City, President and CEO David W. Michelson said a combination of falling pre-mium volumes and rising claims costs have been affecting U.S. commercial auto markets since 2011. He added under-writing discipline, combined with a careful growth strategy, are important in such a competitive market.

“Our primary focus has always been on underwriting profit-ability, with a secondary focus on growing our business,” said Michelson, who added National Interstate’s last big acquisition was in 2010.

Commercial auto liability is National Interstate’s primary line of business and has been one of the most challenging sectors in the property/casualty industry for several years due to continuing high severity rates, said Michelson. The group’s second-biggest line is workers’ compensation, he added.

While severity of claims can be volatile, frequency is less of an issue for the carrier, Michelson said, adding the com-pany’s current commercial auto products have a “predict-able” frequency. “Our business really is and always has been frequency driven; it’s predictable frequency. It’s the lack of predictive nature of the severity and how it’s climbed over the last half dozen years that’s really gotten us and our competitors.”

Michelson added in addition to rate softening this year, “a combination of economic and societal conditions” are lead-ing to a rise in claims severity. That combination of lower premium income and rising claims costs are leading to ris-ing combined ratios for the industry as a whole, he said.

The effect of that trend was seen in National Interstate’s fourth-quarter results, as net income fell to $4.9 million from $8.5 million a year earlier (Best’s News Service, Feb. 25, 2015). Full-year net income was $11 million, compared with $17.5 million in the prior year. The fourth-quarter combined ratio rose 3.7 points to 102.5, while the full-year figure rose 1.5 points to 103.9.

Premium rates for commercial auto liability had declined overall between 2005 and 2010, putting pressure on indus-trywide profitability in that segment, said Michelson. The cumulative rate-level decrease over that period “was a chal-lenge to overcome,” he said.

Rates have been rising steadily since 2011, but in 2015 there is some softening in certain segments of commercial

auto National Interstate is operating in, Michelson said.

Michelson said alternative risk transfer is the group’s largest business component, representing 54% of overall gross premi-ums written. He said ART programs created for transportation companies are in high demand, given the customized solutions required by such companies. He added risk-sharing programs between transportation companies and the insurer can be customized in a number of ways to minimize loss costs.

In identifying potential ART programs, Michelson said “we strive to identify markets that are difficult to serve, hard to identify and sometimes too small for traditional insurance.” He added National Interstate’s ART programs cover group captives, national accounts and agency captives.

Another component of National Interstate’s portfolio is in-surance for recreational vehicles, which comprises less than 10% of the group’s total premiums but like ART solutions, also speaks to the specialized nature of the demand for such insurance, said Michelson. He added that Hawaii and Alaska represent the bulk of the group’s demand in this line.

As for National Interstate’s own level of satisfaction in its commercial auto business, Michelson said “we’ve been fear-less and we’ll continue to be fearless” in terms of keeping the kind of business it wants to write, despite rising claims levels.

“We know we’re probably going to grow some” in a difficult market, especially with the amount of ART business the group does, he said. Michelson added rate increases should overcome some of the less profitable business the group will need to keep on its books, especially in long-haul trucking lines.

National Interstate Insurance Co. currently has a Best’s Financial Strength Rating of A (Excellent).

(By David Pilla, news editor, BestWeek: David.Pilla@ambest.com)

(March 18, 2015)

First Caymans Portfolio Insurance Company Formed Following New Legislation

The Cayman Islands insurance domicile’s first portfolio insurance company was incorporated following the recent adoption of legislation allowing the formation of such incor-porated cell companies, according to the company’s owner.

The legislation was adopted in January and allowed segre-gated portfolio companies to form PICs — the Cay-man model for incorporated cell companies, said Ascension Insurance Services Inc. in a statement. The PIC, AARIS Insur-ance Co. Ltd., was established by California-headquartered Ascension to allow a portfolio of agribusiness clients to participate as a group in a risk transfer mechanism for their workers’ compensation coverages.

Ascension said it was assisted by Willis Management (Cay-man) Ltd., Cayman law firm Solomon Harris and U.S. law firm McDermott Will & Emery.

“The formation of AARIS creates unique and unprecedented opportunities for us as an insurance brokerage to provide

21

even greater service through alternative risk management solutions, to both our existing and new clients,” said Joe Tatum, Ascension Insurance Services president and chief executive officer, in a statement. “As we continue our expan-sion, PICs are a groundbreaking offering that will be an im-mense value-add, not just to our agribusiness partners, but to all the clients across multiple industries we do business with, now and into the future.”

The Cayman Islands captives industry grew 2.5% last year after 22 new captive insurers received licenses, accord-ing to statistics released by the Cayman Islands Monetary Authority (Best’s News Service, Feb. 10, 2015). The new captives brought the total number of domiciled captives to 759 as of Dec. 31, 2014. Cayman captives wrote premiums totaling $12 billion and held total assets of $51.5 billion.

CIMA statistics show captive growth on the islands occurred annually from 1994, when there were 352 captives licensed, until 2009, when the total reached 780. In 2010, however, the number dropped to 738 and growth of only three captives occurred in 2011 and 2012 combined. But the total number of captives grew by 19 in 2013 and 22 last year.

The Cayman Islands government enacted the Portfolio Insurance Companies Regulations 2015 along with related sections of the Insurance Amendment Law 2013 (Best’s News Service, Feb. 2, 2015). According to the Insurance Managers Association of Cayman, the regulations enhance the insurance statutory framework and enable insurers incorporated as SPCs more flexibility. IMAC said the leg-islation is considered more robust than incorporated cell company structures offered in other jurisdictions.

Under the recently passed legislation, an SPC insurance company will be able to incorporate one of its cells by establishing a PIC under it. Once the PIC is registered with the Cayman Islands Monetary Authority, it may write insur-ance business in its own name, as a separate legal entity — an exempted company limited by shares.

(By David Pilla, international editor, BestWeek: David.Pilla@ambest.com)

(February 26, 2015)

China Railway Approved to Set Up Nonlife Captive Company

China Railway Corp., the government-owned national railway operator, has gained regulatory approval to set up a captive company for nonlife insurance, according to the China Insurance Regulatory Commission.

The captive insurer, named China Railway Property Cap-tive Insurance, will become the second captive insurance company in China. The new captive is based in Beijing with a registered capital of 2 billion yuan (US$320 million), ac-cording to the CIRC.

The CIRC said China Railway’s captive insurance unit needs to complete its establishment of the operation in a year’s time. Founded by the Ministry of Railways, China Railway operates passengers, freight and other services across China.

China’s regulatory gave approval for China’s largest oil and

gas producer and supplier, China National Petroleum Corp., to set up the first captive insurer in China. Beijing-based China National Petroleum Corp. and its subsidiary Petro Chi-na Co. Ltd. jointly developed the captive company in west-ern China’s Karamay City, in Xinjiang Uyghur Autonomous Region, with registered capital of 5 billion yuan, according to the CIRC. China’s move for the launch of its first locally incorporated captive insurer as an alternative risk financing option, was viewed as a sign that the country’s businesses were developing more sophisticated risk management strat-egies (Best’s News Service, Jan. 23, 2013).

Although China’s captive market is in the beginning stage, its growth prospects would be tied to business expansion of the Chinese enterprises and their “increasing willingness to retain more risks due to improved risk management,” ac-cording to Central University’s report.

In 2014, Hong Kong’s Legislative Council approved a profit tax break for captive insurers in a bid to encourage com-panies, especially those coming from mainland China, to establish captives in the domicile (Best’s News Service, March 25, 2014).

(By Iris Lai, Hong Kong bureau manager: Iris.Lai@ambest.com)

(February 11, 2015)

Reports

A.M. Best Special Report: New Reserve Financing Rules Unlikely To Eliminate XXX, AXXX Captives

A.M. Best has released a new report exploring the impact of a new captive reserve financing framework for certain products subject to XXX and AXXX reserve requirements. Actuarial Guideline XLVIII (AG 48), which was adopted by the National Association of Insurance Commissioners (NAIC) in December 2014, defines the rules for new life XXX and AXXX reserve financing transactions executed af-ter Jan. 1, 2015. For the most part, the rules do not apply to transactions executed before that date, and are not intended to apply to “conventional” reinsurance transactions involv-ing XXX and AXXX reserves ceded to accredited reinsurers. However, such insurers still must meet specific criteria to avoid treatment under the new AG 48.

The Best Special Report titled, “New Reserve Financing Rules Unlikely To Eliminate XXX, AXXX Captives,” states that this new framework is effectively a “stopgap” measure intended to regulate captive financing structures until the long-awaited implementation of a principles-based reserving (PBR) frame-work, which very likely would significantly diminish the need for XXX and AXXX captive financing structures for new business issued after the implementation date. Consistent with that intent, the NAIC’s new XXX and AXXX reserves financing framework includes a sunset provision tied to the implemen-tation of PBR. However, given the uncertain timeframe for adoption of PBR, AG 48 has the potential to be the regulatory standard for XXX and AXXX captives for some time.

Some observers have speculated that the changes currently being implemented by the NAIC will bring an abrupt end to XXX and/or AXXX financing transactions, but the stated goal of the NAIC’s Principle-Based Reserving Implementation Task

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Force, which oversees this initiative, is not to eliminate the use of such structures.

Rather, its intent is to provide greater transparency and al-leviate concern related to certain perceived

issues that have arisen with these transactions, such as the

use of parental guarantees, letters of credit (LOC) and other LOC-like assets (e.g., credit-linked notes) rather than tradi-tional admitted assets to back reserves.

For a copy of this special report, please visit: http://www3.ambest.com/bestweek/purchase.asp?record_code=233347 .(February 12, 2015)

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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

A.M. Best Europe—Rating Services Limited6th Floor, 12 Arthur Street

London, EC4R 9AB+44 (0) 207-626-6264

A. M. Best Asia-Pacific LimitedUnit 4004 Central Plaza,

18 Harbour Road ,Wanchai, Hong Kong+852-2827-3400

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

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#40-02B, Singapore 049909 +65 6589 8400

Dr Edem Kuenyehia, Associate Director, A.M. Best Europe - Rating Services Ltd. Telephone: +44 (0) 207 - 397 -0280

or Email: Edem.Kuenyehia@ambest.com