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REINSURANCE OF DOMESTIC AND INTERNATIONAL EMPLOYEE BENEFITS WITH CAPTIVE INSURERS

ABA SECTION OF TAXATION, MAY MEETING 2014. REINSURANCE OF DOMESTIC AND INTERNATIONAL EMPLOYEE BENEFITS WITH CAPTIVE INSURERS. Carol A. Weiser Partner Sutherland Asbill & Brennan LLP Washington, DC. P. Bruce Wright Partner Sutherland Asbill & Brennan LLP New York, NY. 23873317.1.

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REINSURANCE OF DOMESTIC AND INTERNATIONAL EMPLOYEE BENEFITS WITH CAPTIVE INSURERS

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  1. ABA SECTION OF TAXATION, MAY MEETING 2014 REINSURANCE OF DOMESTIC AND INTERNATIONAL EMPLOYEE BENEFITS WITH CAPTIVE INSURERS Carol A. Weiser Partner Sutherland Asbill & Brennan LLP Washington, DC P. Bruce Wright Partner Sutherland Asbill & Brennan LLP New York, NY 23873317.1

  2. ISSUES - DOMESTIC • BACKGROUND • FEDERAL INCOME TAX • STATE REGULATORY ISSUES RELATING TO PLACEMENT • ERISA ISSUES • REGULATORY ISSUES RELATING TO CAPTIVE INSURER • EXPEDITED EXEMPTION PROCEDURE • MEDICAL PROGRAMS • FOREIGN STRUCTURES

  3. FEDERAL INCOME TAX - DOMESTIC • UTILIZATION OF UNRELATED BUSINESS • PARENTAL RISK • CORPORATE STRUCTURE • OTHER FACTORS • REV. RUL. 2002-89, 2002-2 C.B. 984. • REV. RUL. 2002-90, 2002-2 C.B. 985. • REV. RUL. 2002-91, 2002-2 C.B. 991. • ESTABLISH SAFE HARBORS FOR TAX DEDUCTIONS • RAISES QUESTION AS TO WHETHER UNRELATED BUSINESS MUST BE HOMOGENEOUS WITH RELATED RISK

  4. P PREMIUM FOR EMPLOYEE BENEFITS 100% I FEDERAL INCOME TAX - DOMESTIC • REV. RUL. 92-93

  5. INSURANCE LAW STATE REGULATORY ISSUES RELATING TO PLACEMENT - DOMESTIC • DIRECT WRITING PER REV. RUL. 92-93 • UNLICENSED PLACEMENTS • DIRECT PLACEMENT STATUTES • INDUSTRIAL INSURED STATUTES • REINSURED PROGRAM • LICENSED PLACEMENT • EXISTING PROGRAM • ADMINISTRATION

  6. ERISA - DOMESTIC • PLAN • WELFARE BENEFIT PLAN • PARTY IN INTEREST • EMPLOYER • 50% OR MORE OWNED COMPANY BY VOTE OR VALUE • PROHIBITED TRANSACTION, ERISA § 406 • DIRECT OR INDIRECT FURNISHING OF SERVICES BETWEEN A PLAN AND PARTY IN INTEREST • VOLUNTARY PLAN • VOLUNTARY PROGRAM/NO PLAN • PERMIT INSURER TO PUBLICIZE • COLLECT PREMIUM VIA PAYROLL DEDUCTION • REMIT PREMIUM • NO CONSIDERATION

  7. ASHLAND OIL, INC. 100% INTEGON LIFE INSURANCE COMPANY ERISA - DOMESTIC • VOLUNTARY PLAN • DOL ADVISORY OPINION 83-3A(JANUARY 17, 1983) • NOT A PLAN

  8. X CO. VOLUNTARY PROGRAM INDEP. 100% REINSURANCE X. INS. CO. ERISA - DOMESTIC • VOLUNTARY PLAN • DOL ADVISORY OPINION 83-28A (JUNE 9, 1983) • VOLUNTARY PROGRAM A PLAN • EMPLOYER INVOLVEMENT

  9. ERISA - DOMESTIC • PROHIBITED TRANSACTION • ADVISORY OPINION • CLASS EXEMPTION • PRIVATE EXEMPTION

  10. ERISA - DOMESTIC • PTE 79-41 • PARTY IN INTEREST • LICENSED TO SELL INSURANCE IN ONE OF THE STATES* OR D.C. • CERTIFICATE OF COMPLIANCE OBTAINED FROM DOMICILIARY STATE AT EARLIER OF 18 MONTHS PRIOR TO TRANSACTION OR WHEN CERTIFICATES WERE LAST AVAILABLE • NO MORE THAN ADEQUATE CONSIDERATION PAID BY PLAN • NO SALES COMMISSIONS • HAS UNDERGONE A STATE EXAM WITHIN 5 YEARS OF THE TRANSACTION OR EXAMINED BY A CPA IN ITS LAST YEAR • PERCENTAGE OF PREMIUMS TEST

  11. ERISA - DOMESTIC • PTE 79-41, COMMENTARY AN INTENT BY A PLAN TO PURCHASE A CONTRACT FROM AN UNRELATED INSURER WITH AN UNDERSTANDING IT WILL REINSURE WITH AN ENTITY THAT IS A PARTY IN INTEREST “WOULD BE A PROHIBITED TRANSACTION.” • THUS REINSURANCE NOT COVERED • PRIVATE EXEMPTION

  12. ERISA - DOMESTIC • PRIVATE EXEMPTIONS WITH MORE THAN 50% THIRD-PARTY BUSINESS • PTE 96-95 (ZIONS) ZIONS LIFE INSURANCE COMPANY (ARIZONA) ZIONS BANCORPORATION AND AFFILIATES AMERICAN BANKERS LIFE INSURANCE COMPANY

  13. ERISA - DOMESTIC • PRIVATE EXEMPTIONS WITH MORE THAN 50% THIRD-PARTY BUSINESS • PTE 96-95 (ZIONS) • PARTY IN INTEREST • LICENSED TO SELL INSURANCE IN ONE STATE • CERTIFICATE OF AUTHORITY FROM DOMICILIARY STATE • EXAMINATION BY INDEPENDENT CPA FOR TAX YEAR IMMEDIATELY PRIOR • FINANCIAL EXAM WITHIN LAST 5 YEARS BY ARIZONA • NO MORE THAN ADEQUATE CONSIDERATION • UNRELATED LIFE AND HEALTH PREMIUM > 50% • ALL PREMIUM • EXISTING BUSINESS • NOTE: AUGMENTATION OF BENEFITS ISSUE

  14. ERISA - DOMESTIC • PRIVATE EXEMPTIONS WITH MORE THAN 50% THIRD-PARTY BUSINESS • PTE 96-49 (FIRST SECURITY) • PTE (UNION CARBIDE) • SUBARU OF AMERICA (PTE 10-15) • VERIZON (PTE 11-12) • ADM (2013) • PRIVATE EXEMPTIONS WITH LESS THAN 50% UNRELATED BUSINESS • HISTORY • BURLINGTON INDUSTRIES (PTE 84-6) • CSX • CALDOR

  15. ERISA - ERISA • PRIVATE EXEMPTIONS WITH LESS THAN 50% UNRELATED BUSINESS • PTE 2000-48 (COLUMBIA ENERGY GROUP) COLUMBIA INSURANCE COMPANY LTD. (BERMUDA) COLUMBIAENERGY GROUP EMPLOYERS INSURANCE OF WAUSAU LICENSE/ BRANCH INVERMONT

  16. ERISA - DOMESTIC • PRIVATE EXEMPTIONS WITH LESS THAN 50% UNRELATED BUSINESS • PTE 2000-48 (COLUMBIA ENERGY GROUP) • REQUIREMENTS • CICL IS A PARTY IN INTEREST • CICL IS LICENSED TO SELL INSURANCE IN AT LEAST ONE STATE • CICL HAS A LICENSE FROM ITS DOMICILIARY STATE (BERMUDA) • CICL HAS BEEN AUDITED BY A CPA FOR ITS LAST COMPLETED YEAR; OR HAS UNDERGONE AN EXAM BY VERMONT WITHIN 5 YEARS • CICL IS LICENSED BY A STATE (VT) WHICH REQUIRES ANNUAL REVIEW OF RESERVES BY ACTUARIES

  17. ERISA - DOMESTIC • PRIVATE EXEMPTIONS WITH LESS THAN 50% UNRELATED BUSINESS • PTE 2000-48 (COLUMBIA ENERGY GROUP) • REQUIREMENTS • PLAN PAYS NO MORE THAN ADEQUATE CONSIDERATION • NO COMMISSIONS PAID WITH RESPECT TO THE DIRECT SALE OF THE CONTRACT OR REINSURANCE THEREOF • IN THE INITIAL YEAR OF CICL, REINSURANCE A BENEFIT TO PARTICIPANTS • FORMULA TO CALCULATE PREMIUM BY INSURER SIMILAR TO WHAT OTHERS USE • PREMIUM REASONABLE/COMPARABLE TO PREMIUM CHARGED BY INSURER AND COMPETITORS WITH THE SAME OR A BETTER RATING FOR THE SAME COVERAGE UNDER COMPARABLE PROGRAMS

  18. ERISA - DOMESTIC • PRIVATE EXEMPTIONS WITH LESS THAN 50% UNRELATED BUSINESS • PTE 2000-48 (COLUMBIA ENERGY GROUP) • REQUIREMENTS • INDEMNITY REINSURANCE • INSURERS WITH A BEST’S RATING OF A • INDEPENDENT FIDUCIARY TO ANALYZE TRANSACTION TO DETERMINE ABOVE REQUIREMENTS AT COLUMBIA’S EXPENSE • NOTE APPLICATION • AUGMENTATION APPLICABILITY • UNIONS

  19. ERISA - DOMESTIC 08-17E (DPWNHOLDING) 08-18E (UT)08-22E (SLOAN KETT)09-1E (ADM)09-10E (BANNER) 09-14E (YKK)09-16E (MICROSOFT) 09-17E (DOW)10-11 (COCA-COLA)10-15 (SUBARU OF AMER) 11-12 (VERIZON) 12-03 (R+L CARRIERS) 2012 (VIA CHRISTI) 13-06 (COKE)* 2013 (ADM)*14-03 (INTEL) • PTE 2000-48 (COLUMBIA ENERGY) 03-07 (ADM)03-32E (IP)04-12 (SCA)04-17E (ALCON)W/DRAWN (WHIRLPOOL)05-2E (ALCOA)05-22E (SUN MICROSYSTEMS)06-01E (ASTRA ZENECA)06-11E (AGL)06-4E (HEINZ)07-01E (WELLS FARGO)07-02E (WELLS FARGO) 07-04E (NISOURCE) 08-04E (CEPHALON)08-05E (HEINZ) 08-08E (CONAGRA) 08-16E (ASTRA ZENECA)

  20. ISSUES RELATING TO CAPTIVE INSURER - DOMESTIC • DOMESTIC INSURER • NON U.S. INSURER • ELECTION UNDER U.S. IRC § 953(d) • FORMATION OF U.S. BRANCH (VERMONT REQUIREMENTS)

  21. EXPEDITED EXEMPTION PROCEDURE - DOMESTIC • PTE 96-62 (EXPEDITED EXEMPTION PROCEDURE) • REQUIREMENTS • DECLARATION OF COMPLIANCE UNDER PTE 96-62 • STATEMENT THAT THERE IS LITTLE RISK TO THE PLAN • COMPARISON TO (A) TWO SUBSTANTIALLY SIMILAR PTES GRANTED WITHIN PAST 5 YEARS OR (B) ONE GRANTED IN THE PAST 10 YEARS AND ONE UNDER EX PRO IN THE PAST 5 YEARS • DRAFT NOTICE DESCRIBING THE TRANSACTION AND ABILITY OF PERSONS TO COMMENT TO DOL AND HOW IT WILL BE DISTRIBUTED • DESCRIBE INDEPENDENT FIDUCIARY (INDEPENDENCE, STATEMENT OF WHY PROPOSAL IS IN INTEREST OF PLAN AND PROTECTIVE OF PARTICIPANTS)

  22. EXPEDITED EXEMPTION PROCEDURE - DOMESTIC • PTE 96-62 • REQUIREMENTS • ONCE SUBMISSION IS MADE, A TENTATIVE AUTHORIZATION (UNLESS ADVERSE NOTIFICATION) IS MADE 45 DAYS AFTER SUBMISSION • NOTICE DISTRIBUTED TO INTERESTED PARTIES • COMMENT PERIOD ENDS 25 DAYS AFTER DISTRIBUTION OF NOTICE • IF 5 DAYS AFTER COMMENT PERIOD ENDS THERE IS (A) NO ADVERSE NOTIFICATION; AND (B) NO SUBSTANTIVE ADVERSE COMMENTS, TO WHICH RESPONSE MUST BE MADE, THE AUTHORIZATION IS FINAL

  23. EXPEDITED EXEMPTION PROCEDURE - DOMESTIC • PTE 96-62 • DOL HAS SUSPENDED THE PROCEDURE WITH REGARD TO EXEMPTION REQUESTS REQUIRING AUGMENTATION OF BENEFITS • NOTE: EXEMPTION REQUESTS WITH RESPECT TO CAPTIVES WITH MORE THAN 50% UNRELATED BUSINESS

  24. INTERNATIONAL - POOLING • MULTINATIONAL POOLING • PRIMARILY LIFE, ACCIDENT AND DISABILITY • CAN INCLUDE MEDICAL AND PENSION • MULTINATIONAL POOLING – POOL RISKS ACROSS COUNTRIES/REGIONS TO ACHIEVE: • RISK SMOOTHING • ECONOMIES OF SCALE – IMPROVE COSTS AND TERMS • GREATER TRANSPARENCY • ENHANCED ACCESS • DIVIDEND

  25. INTERNATIONAL - POOLING • NETWORKS TOTAL NO. OF COUNTIES* • ALLIZANZ GLOBAL BENEFITS 84 • GENERALI 126 • IGP 67 • ING 109 • ISUROPE 84 • MAXIS 110 • SWISS LIFE 66 • ZURICH 111 * Towers Watson 2014 Multinational Pooling Matrix, providing information current as of late 2013. The matrix represents only those insurers able to issue locally admitted/authorized contracts in each country.

  26. INTERNATIONAL - POOLING • VARIATIONS • 100% STOP LOSS • PARTIAL STOP LOSS • LOSS CARRY FORWARD 3 – 5 YEARS • INDEFINITE LOSS CARRYFORWARD

  27. INTERNATIONAL - CAPTIVE Local Operations Local Insurers Network Pool Captive

  28. INTERNATIONAL - CAPTIVE INTERNATIONAL - CAPTIVE Local Operations Local Insurers Captive 28

  29. INTERNATIONAL - CAPTIVE • RATIONALE CITED BY EMPLOYERS* • Reduce Cost • Centralize risk management • Better coverage • Control volatility in captive’s book • Third-party business * Presentation by ADM at CICA 2014 International Conference

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