ISK ANAGEMENT ROUNDTABLE AM - Foley & Lardner...©2008 Foley & Lardner LLP RISK MANAGEMENT ROUNDTABLE 9:45 AM Eric Blanchard, United Stationers Inc. Ann Gariti, Aon Corporation Greg

©2008 Foley & Lardner LLP

RISK MANAGEMENT ROUNDTABLE 9:45 AM

Eric Blanchard, United Stationers Inc.

Ann Gariti, Aon Corporation

Greg Hoff, ServiceMaster

Mary Ann Hynes, Corn Products International

Thomas Krebs, Foley & Lardner LLP

John Landis, Foley & Lardner LLP

Harlan Loeb, FD/Ashton Partners

James McGuire, Accume Partners

Scott Mitchell, OCEG

Randall Nornes, Aon Risk Services

Janice Ochenkowski, Jones Lang LaSalle


ERIC A. BLANCHARD SENIOR VICE PRESIDENT, GENERAL COUNSEL AND

SECRETARY United Stationers Inc.

Eric A. Blanchard has served as Senior Vice President, General Counsel and Secretary at United Stationers, Inc., a leading wholesale distributor of office supplies, since January 2006. From November 2002 until December 2006 he served as the Vice President, General Counsel and Secretary at Tennant Company. Previously Mr. Blanchard was with Dean Foods Company where he held the positions of Chief Operating Officer, Dairy Division from January 2002 to October 2002, Vice President and President, Dairy Division from 1999 to 2002 and General Counsel and Secretary from 1988 to 1999. Education: J.D., Harvard Law School, Major: Law

Bachelors Degree, University of Michigan, Major: Business Administration


ANN GARITI MANAGING DIRECTOR OF

SALES Aon Corporation

Current Responsibilities: Managing Director of Sales, Aon Risk Services of Illinois Special Areas of Expertise: eSolutions Technology Prior Industry Experience: Aon eSolutions (2006 – 2007) Director, US Business Development Responsible for revenue growth of Aon RiskConsole and SafetyLogic offerings across the U.S. Product Development committee for RiskConsole Responsible for Marketing CS STARS (2001-2006) Senior Vice President, Midwest Sales Manager Aon (1987-2001) Entry Level to Vice President

Hired for summer position while in college and ultimately participated in the summer Intern program. Gained strong foundation on insurance brokerage offerings and services.

Spent a few years working on an account team in ARS of IL before making the move to RMIS where she:

o Grew and managed the largest book of RMIS business within Aon eSolutions

Education/Professional Designations/Affiliations: Northeastern Illinois University, BS Business Administration CPCU-In progress


GREG HOFF

VICE PRESIDENT ServiceMaster

Greg Hoff is the Vice President of Risk Management at ServiceMaster. ServiceMaster owns nine leading brands including Terminix, TruGreen, Merry Maids, American Home Shield, and ServiceMaster Clean. Greg is responsible ServiceMaster's risk management programs which are designed to protect the company's assets and earning power, ensure legal requirements are met, and support it's commercial contracting ability. Greg has been in the risk management and insurance field for 20 years. Prior to joining ServiceMaster in 2002, he held positions at companies such as Risk Labs, Marsh, Harrah's Entertainment, and Holiday Inn Worldwide. Greg is a graduate of the Risk Management & Insurance program at the University of Georgia and the Executive MBA program at the University of Memphis.


MARY ANN HYNES VICE PRESIDENT, GENERAL COUNSEL AND

CORPORATE SECRETARY Corn Products International

Mary Ann Hynes was appointed as vice president, general counsel and corporate secretary of Corn Products International, Inc. in 2006. She came to Corn Products with a wealth of experience in the role of vice president, general counsel and chief legal officer as she has served at IMC Global Inc. from 1999-2004, Sundstrand Corporation from 1998-1999, and Wolters Kluwer U.S. Corporation from 1996-1998. Mary Ann began her career with CCH Incorporated and rose to Vice President and General Counsel in 1979 and continued until it was acquired by Wolters Kluwer in 1995. Mary Ann serves on the board of directors for The Doctor Scholl Foundation (where she is Chair of its Audit and Governance Committee), The Association of Corporate Counsel and the Women’s Bar Foundation. Most recently, Mary Ann was appointed as a Trustee of John Marshall Law School. She is a member of many professional associations and is an active volunteer. Mary Ann received a bachelor’s degree from Loyola University of Chicago, a Juris Doctorate degree in 1971 and a Legal Letters Master’s degree in Taxation in 1975 from John Marshall Law School in Chicago, IL, and an executive master’s in business administration (MBA) from Lake Forest Graduate School of Business in Chicago, IL. She was admitted to the Illinois Bar in 1971. She resides in Niles, Illinois.


THOMAS P. KREBS PARTNER Foley & Lardner LLP

Thomas P. Krebs is a partner with Foley & Lardner LLP, where he is a member of the firm's Securities Litigation, Enforcement & Regulation Practice. Mr. Krebs’ practice focuses primarily on complex securities and commodities litigation. Mr. Krebs has represented companies, officers and directors in federal securities fraud class actions and shareholder derivative lawsuits. He also has represented banks, broker-dealers, clearing firms and futures commission merchants in disputes before various self-regulatory organizations and state and federal courts.

Mr. Krebs received his law degree from the Ohio State University School of Law (J.D., with honors, 1995) and received his bachelor's degree in economics from the University of Notre Dame (B.A., magna cum laude, Phi Beta Kappa, 1990).

He is a member of the Chicago, Illinois, and American Bar Associations.


JOHN R. LANDIS PARTNER Foley & Lardner LLP

John R. Landis is a partner with Foley & Lardner LLP, and is a member of the firm's Securities Litigation, Enforcement and Regulation Practice. Mr. Landis’ practice includes advising and representing his clients in securities regulatory and enforcement proceedings, internal corporate investigations, commercial litigation and dispute resolution and general business matters (including corporate governance). Mr. Landis’ clients include a number of Fortune 500 corporations, investment banking and municipal finance firms, broker/dealers, mutual funds, hedge funds, insurance companies and banks. Mr. Landis also works with a number of civic and non-profit organizations, including the Kohl Children’s Museum of Greater Chicago.

Prior to joining Foley, Mr. Landis practiced for three years with Cravath, Swaine & Moore in New York City. He graduated from the University of Minnesota School of Law (J.D., magna cum laude, 1988), where he was a member of the law review, after which he clerked for two years for the Hon. James M. Rosenbaum, U.S. District Court, District of Minnesota. Mr. Landis also practiced with the Twin Cities firm Maun & Simon.

A native of Appleton, Wis., Mr. Landis received his undergraduate degree in mathematics from Lawrence University in 1984. He is admitted to practice in Illinois, New York, Minnesota, and Oregon.


HARLAN LOEB MANAGING DIRECTOR FD/Ashton Partners

Harlan leads FD’s enterprise risk and litigation practice. He has counseled dozens of clients on matters that pose significant reputational threats to enterprise value and has devised integrated and creative solutions. Harlan brings over 11 years of legal practice both in the private and public sector to his position with FD, including 5 years as Counsel for the ADL. Harlan is a frequent resource for national print and broadcast media on crisis management and high profile litigation and he has lectured internationally on enterprise risk and corporate governance. He will be a featured speaker at the 2nd Annual Corporate Governance Congress later in March in Dubai. Harlan is a member of the adjunct faculty of Northwestern Law School and an honors graduate of the University of Minnesota Law School.


JAMES B. MCGUIRE PRESIDENT AND CHIEF

EXECUTIVE OFFICER Accume Partners

James B. McGuire is Accume Partners’ President and Chief Executive Officer responsible for the overall management of the firm’s operations, including business unit operations, infrastructure, branding and marketing, and human capital development.

Jim manages development and implementation of strategic objectives and firm-wide initiatives, and has the responsibility for the day-to-day management of profitability, operations, and infrastructure – which spans practice operations, professional development, information technology, administrative operations, and compensation strategy. He also interacts with clients and the investor community, briefs interested parties about the firm, and represents the firm in industry and client forums.

With over 33 years in the professional services industry, Jim has experience with Fortune 1000, middle market, start-up, and entrepreneurial clients. Prior to joining Accume Partners, he was President and CEO of UHY Advisors, where he successfully led the repositioning of UHY. Previously, he spent over two decades at KPMG Consulting, where he began his career in the auditing practice (formerly Peat Marwick) before transferring to its management consulting practice. Jim held various managerial positions as the firm evolved to the KPMG brand, and became the CEO of KPMG Consulting’s U.S. business in 1997. He was appointed the first global leader of KPMG Consulting’s worldwide business in 1999 and was instrumental in the 2001 IPO and the conversion of its global brand to BearingPoint.

Jim has spoken at various conferences about current trends in the accounting, internal audit, and consulting industries. He was designated as one of the Top 100 Most Influential Accountants by Accounting Today magazine in 2004 and was designated as one of the Top 25 Most Influential Consultants by Consulting magazine in 1997. He received a Bachelor of Business Administration degree in Accounting from the University of Notre Dame.


SCOTT MITCHELL CHAIRMAN AND CHIEF

EXECUTIVE OFFICER OCEG

Mr. Mitchell serves as the Chairman and CEO of a nonprofit think tank called the Open Compliance & Ethics Group (www.oceg.org). OCEG provides objective standards, guidelines and online resources to help organizations Drive Principled Performance® by integrating governance, risk management, internal control, compliance (GRC) and ethics processes. OCEG’s community of practice includes over 12,000 practitioners from a number of professions and industries. Mr. Mitchell is a recognized leader in corporate governance, risk management, compliance, ethics, eLearning and information technology. Mr. Mitchell was recently appointed to the Committee of Sponsoring Organizations (COSO) Task Force and was recognized two years in a row by Business Finance Magazine as one of the “Top 60 Influencers” in corporate finance. Treasury & Risk Magazine named him to the list of “Top 100 Must Influencial People in Finance” and he was recognized two years in a row by Human Resource Executive Magazine as one of the top 20 thought leaders regarding the future of human resource management. Mr. Mitchell is also the Chairman of DoubleDrum Capital, a venture capital firm that focuses on early stage technology companies. Over the past 7 years, Mr. Mitchell has founded and funded a number of small and mid-sized technology companies where he serves on the board. Mr. Mitchell began his career by using his education in both accountancy and computer science at the Small Business Administration, Arthur Andersen, and Andersen Consulting (Accenture). Throughout his career, he has spent equal time in the board room, in the c-suite, and in the trenches consulting Fortune 500 clients including GE Capital, American Express, VISA, HP, IBM, Avnet, E*Trade, Marriott and others. A technologist at heart, Mr. Mitchell was recently awarded patents in business simulation technology.


RANDALL NORNES EXECUTIVE VICE

PRESIDENT Aon Risk Services

Randy is Executive Vice President of Aon Global Americas. He has been with Aon for over 20 ears in a variety of leadership and client advisory capacities. He is considered one of Aon’s leading authorities on Enterprise Risk Management, Corporate Governance, Strategic Risk Management and Integrated Insurance. He currently leads a team of professionals dedicated to helping companies implement strategic risk processes. Randy is a frequent speaker at a variety of finance industry events including the American Bankers Association Conference, the Business Week European Risk Conference, Fortune Risk Management Forum, Financial Executives Institute conferences, Treasury Management Association Conference, CFO Risk Conference, Risk & Insurance Management Society events, CFO “Excellence in Finance” Series, the AICPA Controllers Workshop, the CFO Summit, NC State ERM Roundtable Series and the International Captive Conference. Education: Randy received a Bachelor of Individual Studies degree in Finance and Economics, Magna cum Laude, from the University of Minnesota. He also earned a Masters of Business Administration from the University of Minnesota’s Carlson School of Management. He has also completed additional executive education at INSEAD in Fontainebleau, France.


JANICE OCHENKOWSKI MANAGING DIRECTOR Jones Lang LaSalle

Ms. Ochenkowski is a Managing Director with responsibility for risk management at Jones Lang LaSalle, a global real estate services and financial management company that employs more than 30,000 employees in over 50 countries. She directs a team of insurance and claim experts in their work with internal businesses to assess risks of existing and new opportunities and to create innovative insurance and risk solutions to business problems for the benefit of Jones Lang LaSalle and its clients. She has written white papers on the impact of TRIA to property owners, the property insurance market, and most recently, buying insurance for Green Buildings. Ms. Ochenkowski is a member of the company’s Global Operating Committee which provides enterprise solutions to corporate issues. She is the President of the Risk & Insurance Management Society, an international organization of risk managers. In 2007, Business Insurance named her one of the year’s “Women to Watch” and in January, 2008 she was named one of twenty “People to Watch in 2008” by the same publication.

Global 1500: A Captive Insight

2

ContentsKey Insights 3

Captive Growth 4

Captive Formation 7

The US 9

European Single Market 11

Domicile Choice 12

Domicile Choice by Parent Company Location 15

The Onshore versus Offshore Debate 17

G1500 Industry Sector Focus 20

Trends and Future Predictions 24

Methodology 25

IntroductionAon Global Risk Consulting (AGRC) has undertaken independent research into the proliferation of captives amongst the current Global 1500 companies (G1500). The research concentrates on parent companies, and not their subsidiaries, as owners of captives, and does not include cell captive structures.

3

Key Insights

Captive growth overall does not appear to be slowing and has not reached •saturation point: more than half (53%) of G1500 companies do not have a captive at parent level. Growth has been steady over the last 20 years and appears not to be influenced by the underwriting cycle.

There is considerable room for captive growth, even amongst the top 1500 •companies globally, especially from companies in locations such as Asia. For example, Japan has 243 G1500 companies but only 34 of these have a captive. There is also potential in more mature markets such as the US, where, for example, 42% of the largest companies do not own a captive.

The rate of growth is currently increasing in US onshore domiciles and this trend •is likely to continue into the future. Vermont dominates with four times the number of G1500 captives than all the other US onshore domiciles put together.

Bermuda is still the most favoured domicile, with over a quarter of all G1500 •captives, but its growth has been slowing in recent years. Vermont, on the other hand, has seen strong growth, licensing more than twice as many captives as its nearest rival Ireland in the last five years.

In terms of industry sectors, many large mining and manufacturing companies •still do not own a captive, with take-up rates of 61% and 45% respectively. Notably, there is a low take-up rate in the communications sector, at just 38%. For communications we can speculate that members of the G1500 list are more recent entrants, they have less legacy issues and are still developing their optimal risk financing strategies.

In recent years the gap between onshore and offshore captive growth in the •Americas has narrowed and continues to do so. The trend for large US companies is clearly to favour establishing a captive onshore in the US. Around two thirds of US parented captives established in the last five years were based in US onshore domiciles.

There is some evidence of a move to favouring local domiciles by Asia Pacific •companies – half of the captives formed by them in the last 5 years were local, compared to just one-third in the previous 5 years.

Out of the 140 captives domiciled in EU/EEA territories, where direct writing has been •actively promoted, 50 are owned by companies from outside of the Single Market, suggesting that many of these are taking advantage of EU passporting opportunities.

4

Captive Growth

In a previous study by Aon, it was shown that more than one-third of Global 500 (G500) companies did not have a captive. This was surprising given that it has often been suggested that the captive market is close to reaching saturation point, and that the focus in the future should be on attracting small and medium sized enterprises to the captive concept. But even more surprising is that over half (53%) of G1500 companies do not have a captive at parent level. Just 705 companies (representing 47%) have a captive at parent level (we refer to this as the take-up factor).

The G1500 as a group owns 1061 captives, which means an average of 1.5 captives per company (we refer to this as the utilisation factor). The total number of captives owned by the G1500 represents around 21% of the total captive count in 2006 worldwide1, as compared to the G500 which accounted for around 10% of the total.

A regional breakdown of the G1500 shows 640 companies (43%) are from the Americas, 497 (33%) from EMEA (Europe, Middle East and Africa) and 363 (24%) from Asia Pacific. Of the 705 captive owners in the G1500, 353 (50%) are headquartered in the Americas, 291 in the EMEA (41%), and 61 (9%) in Asia.

There is little difference between the EMEA (58%) and the Americas (55%) in terms of the take-up rate. However, the take-up rate for Asian companies is just 17%. Interestingly, the three G1500 companies from Africa all own captives. It is surprising that in a mature market such as the US, around 42% of G1500 companies do not own a captive, stressing again the scope for captive growth.

The following table identifies the take-up and utilisation factors for countries that have at least 10 members of the G1500 listing.

1 Source: Business Insurance 2007 survey identified total captive count of 4,936

5

Table 1. Captive Growth by Geography

Country Companies in G1500

Companies with a captive

Total number of captives

Take-up factor

Utilisation factor

United States 564 325 515 58% 1.58

Japan 243 34 39 14% 1.15

United Kingdom 118 93 133 79% 1.43

Germany 84 34 46 40% 1.35

France 79 54 83 68% 1.54

Canada 43 18 24 42% 1.33

Netherlands 42 28 46 67% 1.64

Korea (Republic of) 39 2 2 5% 1.00

Italy 33 5 6 15% 1.20

Australia 26 19 27 73% 1.42

Switzerland 25 16 27 64% 1.69

China (PRC) 24 2 2 8% 1.00

Sweden 22 17 30 77% 1.76

Spain 21 11 16 52% 1.45

Brazil 16 2 4 13% 2.00

Belgium 12 5 11 42% 2.20

Taiwan 12 0 0 N/A N/A

Finland 10 6 9 60% 1.50

Other 87 34 41 39% 1.21

Total 1500 705 1061 47% 1.50

In some countries, the use of captives by the largest companies is extremely high. The UK, for example, has a take-up factor of 79%. Other countries with a high take-up of captives amongst G1500 companies include Sweden (77%) and Australia (73%). Italy has a very low take-up rate (15%), with just five of its 33 G1500 companies owning a captive, as does Brazil with just 2 of its 16 G1500 companies owning a captive. Regulatory restriction is one issue that some G1500 companies have to overcome if they wish to pursue a captive strategy for domestic risks.

Asian companies have an extremely low take-up rate. Japan in particular has 243 G1500 companies but only 34 of these have a captive. China has 24 G1500 companies, and only 2

6

of these have a captive. The Republic of Korea has 39 G1500 companies and again just two of these have a captive, Taiwan has 12 G1500 companies, none of which have a captive. This could be a reflection of the maturity of the insurance market in Asia and the general perception and take-up of insurance products.

Asia Pacific companies accounted for 74 captives, of which nearly a third were based in Singapore, and a quarter based in Bermuda. Around half are based in Asia Pacific domiciles. There is some evidence of a move to favouring local domiciles by Asia Pacific companies – half of the captives formed by them in the last 5 years were done so in domiciles more proximate to the parent, compared to just one-third in the previous 5 years.

Figure 1. Growth Rate by License Date – Regions

0

100

200

300

400

500

600

Num

ber

of

cap

tive

s

1980 1985 1990 1995 2000 2005Year

AmericasEMEAAsia Pacific

Whilst many companies in the G1500 do not own a captive, many of those that do have more than one captive. Indeed, 218 companies have more than one captive, and 87 have three or more. Three companies have six captives, spread across four domiciles, while one company (US parented) has 10 captives, of which nine are based in Vermont.

Often these multiple captives are split between US and European domiciles, or between onshore and offshore domiciles. However, there are instances where one location is favoured above all others, with one company having four captives, all based in Vermont, and another with four captives all based in Luxembourg.

We have revenue figures for 92% of the G1500, and of these, a significant proportion (56%) of companies are in the revenue bracket $1bn – $10bn, followed by 35% with revenue between $10bn – $100bn. However, when looking at captive ownership, the majority (47%) fall in the $10bn – $100bn revenue bracket, compared to 45% with revenue of $1bn – $10bn.

7

Captive Formation

Out of the 1061 captives in the G1500 we could trace the license date of 998 of these (94%).

Figure 2. Total Number of Captives by License Date

0

200

400

600

800

1000

1200

Num

ber

of

cap

tive

s

1980 1985 1990 1995 2000 20102005Year

As with the G500, there has been steady growth in the captive market over the past 20 years or so, suggesting that the state of the insurance market does not play a major role in the decision to set up, or indeed close down, a captive. The volatility of the underwriting cycle does not appear to greatly influence the decision of G1500 companies, except in so far as to smooth the long-term effects of the cycle. However, the hard or soft state of the market does not result in a surge, or a decline, in captive formations for that period.

There has been steady growth since the 1980s, with 1985 seen as a major starting point for expansion. The biggest growth was between 1995 and 2000 (69%), followed by the period between 2000 and 2005 (45%).

8

The statistics clearly suggest that the G1500 have tended to form captives for other reasons than a simple reaction to market price. As we stated in the G500 report, these reasons may include:

A greater focus and more strategic approach towards risk retention, risk capital •allocation and risk tolerance;A practical need to manage businesses globally from an insurance buying •perspective – i.e. managing the interface between group headquarters and the business divisions/units;An interest in finding alternative solutions where capacity is otherwise limited•A greater desire to take control of the subsidiaries’ risk-financing strategies in order •to realise economies of scale and scope across large multinational organisations;Concerns over the financial strength and credit quality of insurance and •reinsurance companies;For some sectors insurance contract wording is not sufficient.•

9

The US

US companies account for just over a third (38%) of the G1500, but in terms of G1500 companies owning a captive, US companies account for nearly half (46%). US companies also have a high utilisation factors (1.58), with 325 companies owning 515 captives. Of the ten G1500 companies with 5 or more captives, seven are US parented.

US companies clearly favour Bermuda and Vermont. Indeed, these two domiciles account for nearly three-quarters of all G1500 US parented captives. Interestingly, Ireland is the next most popular, coming above a number of other US onshore domiciles, who have relatively low numbers of captives. In part this may simply represent the fact that G1500 companies favour the larger, traditional, established domiciles. However, the positioning of Ireland clearly indicates flexibility for US companies to use a captive strategy for European assets and liabilities.

Figure 3. US Domiciles of Choice

BermudaVermontIrelandCaymanHawaiiBarbadosGuernseyNew YorkSouth CarolinaLuxembourgArizonaOther

1%1%1%1%2%2%

3%3%

6%

35%

39% 6%

As far as US onshore domiciles are concerned, the picture is dominated by Vermont. Indeed, Vermont (201 captives) has four times the number of G1500 captives as all the other US onshore domiciles put together (51). Hawaii is the next most popular with 20 captives. Of the 12 US onshore domiciles with G1500 captives, only Vermont and Hawaii have any non-US parented captives. Around 12% of Vermont’s captives are non-US parented, and 15% of Hawaii’s.

10

Table 2. US Onshore Domiciles

US Onshore Domicile Number of captives

Number of US parented captives

Vermont 201 177

Hawaii 20 17

New York 7 7

Arizona 6 6

South Carolina 6 6

Michigan 3 3

Nevada 3 3

Wisconsin 2 2

Colorado 1 1

Kansas 1 1

Texas 1 1

Washington DC 1 1

Total 252 225

It would seem that apart from Vermont and Hawaii, the other US onshore domiciles have yet to establish themselves amongst the G1500, but many of these domiciles are relatively new to the scene. While US G1500 companies appear to favour the established domiciles in the US, some of the newer domiciles such as Arizona, which only passed captive legislation in 2001, and South Carolina (2000) have the potential for greater growth.

In the last five years (2002-2006), 127 G1500 US parented captives were established, of which 84 were based in US onshore domiciles. Indeed, in the last two years, 80% of G1500 US parented captives were set up in US onshore domiciles.

Vermont has been the clear favourite in formations in the last five years, accounting for nearly half (61) followed by Bermuda (23). However, Bermuda licensed just two US parented captives in 2006, just one in 2005 and two in 2004. The trend for large US companies is clearly to favour establishing a captive onshore in the US.

11

European Single Market

The European Single Market, which covers the 27 European Union (EU) members plus the three members of the European Economic Area (EEA), opened up the possibility of so-called ‘passporting’. This is where a captive located in the EU/EEA is able to write business throughout the EU/EEA without the need to be separately licensed in each member state. Passporting is reported to be particularly suitable for employee benefits, and for US multinationals, and potentially Asian multinationals, operating throughout the EU.

EU members that are recognised captive domiciles include Ireland, Gibraltar, Malta, Sweden, Germany, France, Denmark, Luxembourg, the Netherlands and Belgium. EEA members that are home to G1500 captives include Liechtenstein and Norway. Out of the 140 captives domiciled in EU/EEA territories, where passporting has been possible2, 50 are owned by companies from outside of the Single Market, 35 have US parents, whist six have Japanese parents and four have Swiss parents. It can be assumed that many of these are taking advantage of the passporting opportunities and writing the insurance business of all their EU-based subsidiaries via the one captive.

It has been suggested that some large multinationals in the US use their captive in Ireland to insure EU subsidiaries which is then reinsured (in part) through either a Bermudian or Vermont captive. Of the 35 captives that are owned by US companies, 31 are based in Ireland, two in Gibraltar and two in Sweden. Twelve companies with a captive in Ireland also have a captive in Bermuda or Vermont. There are five multinational companies that have two captives, both of which are based in Ireland, indicating diversified use of captive structures.

Table 3. EU/EEA Domiciles

EU/EEA Domiciles Number of captives Number of non-EU/EEA parented captives

Ireland 99 42

Sweden 14 2

Netherlands 9 0

Gibraltar 5 3

Liechtenstein 3 3

Germany 3 0

France 2 0

Denmark 2 0

Norway 2 0

Belgium 1 0

Total 140 50

.

2 Note – Technically, direct writing is possible from Luxembourg. However, to date this location with 111 captives from the G1500 has developed as a reinsurance captive domicile.

12

Domicile Choice

The top five domiciles for the G1500 as at the end of 2005 were Bermuda, Vermont, Luxembourg, Ireland and Guernsey. These account for 74% of the total captive share of the G1500. When compared with the top domiciles for the total captive market, it is evident that there is some difference between the preferences of the G1500 and the wider captive market.

Whilst Ireland and Luxembourg do not feature in the top five locations for the wider market (beyond the G1500) they do for the G1500. The top five locations of the wider market includes the Cayman Islands and British Virgin Islands. However, for the G1500, Cayman only has 28 captives, while the British Virgin Islands has just one G1500 captive. This is largely explained by the fact that these domiciles tend to attract smaller companies, and niche sectors such as healthcare.

Table 4. Top Five Domiciles G1500

Domicile 1980 1985 1990 1995 2000 2005

Bermuda 48 55 70 90 212 256

Vermont 2 11 39 70 120 192

Luxembourg 0 3 38 67 76 100

Guernsey 3 5 24 44 68 95

Ireland 0 0 3 26 52 91

Bermuda is clearly the domicile of choice for G1500 (with over a quarter of all G1500 captives). However, its biggest growth was in the period between 1995 and 2000 when it grew by 136% in terms of G1500 companies establishing captives in the domicile (and by 400% in respect of the G500 companies in the same period). In the period between 2000 and 2005 it grew by just 21%, whereas Vermont grew by 60% in the same period, and Ireland grew by 75%.

13

These growth rates of the domiciles in terms of the G1500 are brought into focus if one looks at the number of captives licensed in the last five years (i.e. 2002-2006). Vermont licensed more than twice as many captives (70) than Ireland (33), with Bermuda licensing 30 captives. In the last two years (2005-2006) Vermont licensed 23 G1500 captives compared to 15 for Luxembourg and five each for Arizona, Guernsey and Ireland. Bermuda gained just three in the period.

Figure 4. License Date by Domicile

0

50

100

150

200

250

300

Num

ber

of

cap

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1980 1985 1990 1995 2000 2005Year

BermudaVermontLuxembourgGuernseyIreland

Figure 5. Top Five Domiciles

26.1%

18.9%

10.5%

9.3%

9.1%

26%

Other

Guernsey

Ireland

Luxembourg

Vermont

Bermuda

14

In figures 4 and 5 it is demonstrated that Bermuda is still at the top of the league table. However, it should be noted that many of these are long-standing captives and as we have seen, share size is not necessarily reflective of growth. Vermont is a strong contender for Bermuda and is representative of the general growth currently being experienced by US domiciles.

Table 5. Leading Domicile Choice (Data as at February 2007)

Domicile Number of captives Percentage of total captives

Bermuda 277 26.1%

Vermont 201 18.9%

Luxembourg 111 10.5%

Ireland 99 9.3%

Guernsey 97 9.1%

Isle Of Man 41 3.9%

Barbados 35 3.3%

Cayman 28 2.6%

Singapore 25 2.4%

Switzerland 25 2.4%

Hawaii 20 1.9%

Sweden 14 1.3%

Netherlands 9 0.8%

Australia 7 0.7%

Netherlands Antilles 7 0.7%

New York 7 0.7%

Arizona 6 0.6%

South Carolina 6 0.6%

Gibraltar 5 0.5%

New Zealand 4 0.4%

15

Domicile Choice by Parent Company Location

The following charts show a number of domiciles with the parent location, and clearly show that as far as the choice of domicile is concerned, the location of the parent is very important. Domicile choice may have as much to do with cultural factors and personal preferences, not to mention geography, as business considerations. We have chosen the countries most represented in the G1500, two from EMEA (UK and Germany), two from the Americas (US [see Figure 3 in the US section] and Canada) and one from Asia (Japan).

Figure 6. Canada

67%

17%

4%

4%

4%

4%BarbadosBermudaVermontLuxembourgIrelandCayman

The top choice for Canadian companies is Barbados, with a staggering 67% of all Canadian captives established there. Most Canadian parents have chosen to establish in the traditional captive domiciles.

Figure 7. Japan

26%

28%

3%5%

5%

8%

10%15%

Singapore

Bermuda

Ireland

Guernsey

Hawaii

Vermont

Luxembourg

Hong Kong

The top domicile of choice for the Japanese is Singapore, not surprisingly, as it is in Asia and as there is vast room for growth of the captive concept amongst Japanese-owned companies, the numbers in Singapore should continue to grow.

16

Singapore’s attractions as a domicile for new formations include: • Stronginfrastructure; • Availabilityofexpertise; • MostestablishedcaptivedomicileinAsiaPacific.

Figure 8. Germany

German companies are clearly drawn to well established and regulated domiciles, with EU domiciles favoured greatly. Interestingly, Bermuda is one of the less popular domiciles for German G1500 companies, despite it being the global leader of the captive market as a whole.

Figure 9. United Kingdom

Not surprisingly, UK companies favour their local domiciles, Guernsey and Isle of Man. Bermuda accounts for 14% of UK parented captives, but over two-thirds of these were established more than ten years ago, and no G1500 UK parented captives have been established in Bermuda since 2002.

22%

41%

13%

9%

7%

4%2%

2% Luxembourg

Ireland

Guernsey

Bermuda

Germany

Vermont

Sweden

Cayman

22%

40%

14%

9%

5%

4%

4%2%

GuernseyIsle Of ManBermudaIrelandVermont

Other

CaymanLuxembourg

17

The Onshore versus Offshore Debate

There has been much debate in the captive sector over the benefits of establishing a captive onshore, against the benefits of going offshore. In the early days of captives, the trend was clearly offshore, but the rise of Vermont ensured that the onshore/offshore debate gathered pace.

In recent years, the general view has been there is a growing trend towards the use of onshore captives. Certainly there has been growth amongst US state domiciles, both in terms of numbers of captives, and the number of domiciles appearing on the scene.

As far as the G1500 is concerned, the issue appears to be split between domiciles in the Americas and EMEA3/Asia Pacific parented captives. For the Americas, the trend is very much towards onshore captives. For our purposes, domiciles described as offshore Americas include Bermuda and the Caribbean domiciles.

From the following charts it is clear that there is a notable preference for offshore captives in Asia Pacific4, whereas in EMEA onshore captives dominate. In the US, however, it is much less clear with only a slight preference for offshore captives.

Figure 10. Onshore/Offshore Asia Pacific

71%

29%

Onshore Asia PacificOffshore Asia Pacific

3 Note – The vast majority of EMEA-parented captives are based in Europe4 Note – Onshore locations are considered to be Australia and New Zealand

18

Figure 11. Onshore/Offshore EMEA

67%

33%

Onshore EMEAOffshore EMEA

However, when one looks at Figure 13 it is clear that there is a convergence between onshore and offshore domiciles in the Americas. The suggested trend is that onshore domiciles will overtake offshore domiciles in terms of number of G1500 captives within five years. This would appear to tie in with the perception that larger companies in the US are favouring onshore domiciliation because of perceived greater scrutiny over taxation and regulation, and growing corporate governance requirements. It may also simply reflect the growing number of US onshore state domiciles and the ease of establishment.

Figure 12. Onshore/Offshore Americas

43%

57%

Onshore AmericasOffshore Americas

19

Figure 13. Onshore vs Offshore Americas

Num

ber

of

cap

tive

s

Year

100

150

200

250

300

350

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Offshore AmericasOnshore Americas

In Europe, onshore domiciles continue to grow strongly, which may partly reflect the desire to write into the Single Market. However, the popularity of offshore domiciles in Europe does not appear to have diminished. For our purposes, offshore domiciles in Europe include Guernsey, Isle of Man, and Switzerland, while onshore domiciles include Ireland, Luxembourg, Gibraltar, Sweden, Malta and the Netherlands.

Figure 14. Onshore vs Offshore EMEA

100

150

200

250

300

20102009200820072006200520042003200220012000

Nu

mb

er

of

cap

tive

s

Year

Offshore EMEAOnshore EMEA

20

G1500 Industry Sector Focus

Our research also examined captive ownership within the G1500 in relation to industry sector (using Standard Industrial Classification (SIC) coding to allocate an industry sector to a company). The biggest sectors represented in the G1500 are finance, insurance and real estate, and manufacturing. The figures show that 55% of manufacturing companies and 45% of G1500 finance, insurance and real estate companies do not have a captive.

The sector with the lowest take-up rate of captives is wholesale trade at just 28%. The sector with the highest take-up rate is mining5, with 61% of companies having a captive. It is also the sector with the highest utilisation factor, with approximately two captives per company.

Table 6. Sector Analysis

Industry Number in G1500

Percentage share of G1500

Number with a captive


Take- up factor

Utilisation factor

Division A: Agriculture, Forestry and Fishing

4 0.3% 2 3 50% 1.50

Division B: Mining 33 2.2% 20 39 61% 1.95

Division C: Construction

39 2.6% 18 28 46% 1.56

Division D: Manufacturing

429 28.6% 191 279 45% 1.46

Division E: Transportation, Communications, Electric, Gas and Sanitary Services

179 11.9% 71 109 40% 1.54

Division F: Wholesale Trade

94 6.3% 26 33 28% 1.27

Division G: Retail Trade

114 7.6% 48 66 42% 1.38

Division H: Finance, Insurance and Real Estate

503 33.5% 278 428 55% 1.54

Division I: Services 95 6.3% 47 72 49% 1.53

Division J: Public Administration

10 0.7% 4 4 40% 1.00

Total 1500 100% 705 1061 47% 1.50

5 Note – Mining includes oil and gas extraction

21

The following graph shows the growth rate by date of formation for the top 5 industry sectors.

Figure 15. Top Five Industry Sectors

0

50

100

150

200

250

300

350

400

1980 1985 1990 1995 2000 2005Year

Division H: Finance, Insurance and Real Estate Division D: ManufacturingDivision E: Transportation, Communications, Electric, Gas and Sanitary Services Division I: ServicesDivision G: Retail Trade

Num

ber

of

cap

tive

s

For these sectors, the main period of growth was 1995-2000, and the period 2000-2005 saw a slowing in growth.

Specific Industry Sector AnalysisIf the sectors are further broken down into industries, then it is clear that the use of captives varies considerably. At the top end, 60% of pharmaceutical and chemical manufacturing companies have a captive, though it is perhaps a surprise that 26 of such companies do not own a captive at parent level. At the bottom end, just 38% of communications companies own a captive, suggesting considerable room for growth. It is clear that the state of the insurance market varies considerably by sector with regard to the quantity and quality of product that is available. Irrespective of price, the ability of the insurance market to respond to clients’ insurable needs is also a driver of captive utilisation.

22

Table 7. Specific Sector Analysis

Industry Number in G1500

Number with a captive


Take-up factor

Utilisation factor

Finance/Insurance 490 273 421 56% 1.5

Retail Trade 114 48 66 42% 1.4

Pharmaceutical and Chemical Manufacturing

65 39 61 60% 1.6

Transportation 55 29 40 53% 1.4

Communications 47 18 27 38% 1.5

Oil and Gas (Extraction) 28 17 32 61% 1.9

Health Services 10 6 7 60% 1.2

As far as domiciles are concerned, it is clear that for the above industries, with the exception of finance/insurance and health services, the favoured domiciles are Bermuda and Vermont. Indeed, these two domiciles account for 64% of retail trade companies, 60% of transportation companies, 56% of communications companies, 54% of oil and gas (extraction) companies, and 49% of pharmaceutical and chemical manufacturing companies. Health services companies not surprisingly opt for the Cayman Islands (57%).

But for finance/insurance the picture is very different. Bermuda and Vermont account for just 31%, while Luxembourg accounts for 15%, Guernsey for 14% and Ireland for 9%. In total, finance/insurance captives are spread across 28 domiciles around the world. This may reflect the wider spread of international business that finance/insurance companies have, as well as the fact that their use of captives or captive type vehicles can be less traditional and more focused on specific business initiatives driving profits rather than financing retained risk.

23

Figure 16. Domicile Choice of Finance/Insurance Companies

15%

14%

13%

9%6%

5%

4%

2%

2%

12%

18%

Bermuda

Luxembourg

Guernsey

Vermont

Ireland

Isle Of Man

Switzerland

Barbados

Singapore

Netherlands

Other

Clearly, for the finance/insurance industry, the numbers involved are much larger, but when one looks at manufacturing, the next biggest sector in terms of captives, it too shows that Bermuda and Vermont dominate, accounting for 53% of the captives, despite the spread being across 23 domiciles.

Figure 17. Domicile Choice of Manufacturing Companies

32%

5%1%

2%3%3%

3%

3%4%

8%15%

21%

BermudaVermont

Ireland

Luxembourg

Guernsey

Barbados

Cayman

Singapore

Hawaii

Sweden

Isle Of Man

Other

24

Trends and Future Predictions

This research clearly disproves the theory that growth in the captive market is slowing down and that saturation point may be on the horizon. The figures show that a staggering 53% of G1500 companies do not have a captive at parent level. The study also shows that captive growth overall does not appear to be slowing and that its growth is not aligned with the underwriting cycle, nor with major insured losses in the insurance market.

There are currently 1061 captives owned by G1500 companies, some which have multiple owners. We predict that this total number could increase to over 1200 by the year 2010.

The potential for captive growth is seen in some surprising areas. For example, the take-up of captives amongst communications and retail trade companies is surprisingly low. Similarly, the take-up by US companies is just 42%. As with the G500, the greatest potential for captive growth appears to be in Asia where the take-up is very low.

The study has revealed a number of interesting trends, such as the convergence between onshore and offshore domiciles in the Americas. In recent years, Vermont has been growing rapidly in the last five years, gaining nearly twice as many G1500 captives as any other domicile. Bermuda is still the preferred domicile by some margin, but its growth has slowed considerably in the last five years.

Another trend is that some companies are taking advantage of the Single Market by using an EU/EEA based captive to write into the EU. In particular, US companies appear to be taking this approach.

It is evident that many companies have numerous captives. Indeed, nearly a third of those with captives have more than one captive. This may be potentially for legislative reasons or due to a desire to segregate the group’s risks, however in some cases this may be inefficient.

The fact that the captive concept has been slower to take off in Asia may be down to cultural considerations, but the potential is undoubtedly there. Perhaps more surprising is the divergence in popularity of the concept between industries within the G1500. As well as focusing on geographic areas, the captive industry may benefit fromtargeting certain industries that currently do not fully embrace the captive as a riskfinancing tool.

25

Methodology

The research into the G1500 was carried out using a combination of our local domicile knowledge and publicly available information. In no circumstance, however, do we disclose the identity of any individual captive owner as part of this analysis.

It should be noted that the analysis has focused on the current G1500 and therefore observations do not look at captive utilisation associated with any historical movement of the G1500 membership itself. Rather, it concentrates on those entities that have aspired to reach the G1500 listing over their trading life to date.

As far as sector analysis is concerned, each member of the current G1500 listing has been allocated an industry sector according to an SIC coding. Then it has been established whether the company has a captive, if there is more than one captive in operation, where it is domiciled and the year of license. We have also reviewed each company in terms of its revenue ranking within the G1500 listing.

This initial work, along with the previous research on the Global 500 by Aon Global Risk Consulting (AGRC), is the beginning of a series of research documents looking into the world of captives, their take-up, trends and utilisation by size of company, geography and sector. The intention is to widen the scope of research in due course. One of the key deliverables of this research series will be useful benchmarking information for captive owners.

Sources: AM Best 2007 AGIM Captive Statistics 2007 Business Insurance Captive Spotlight Report 2007 Captive Review Annual Domicile Directory (CRADD) 2006 Fortune Global 500 (www.cnnmoney.com) Global 500: A Captive Picture (Published by Aon 2006) Hoovers (www.hoovers.com)

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