NEVADA CAPTIVE INSURANCE ASSOCIATION

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NEVADA CAPTIVE INSURANCE ASSOCIATION

• REDOMESTICATION OF CAPTIVES
• INTO NEVADA
• CLARK COUNTY LIBRARY
• LAS VEGAS, NEVADA
• FEBRUARY 24, 2006
• P. BRUCE WRIGHT, ESQ.
• PARTNER
• LeBOEUF, LAMB, GREENE MacRAE LLP

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REDOMESTICATION OF CAPTIVES

• BACKGROUND
• REASONS TO REDOMESTICATE
• TYPES OF OPERATIONS
• TAX ISSUES
• STRUCTURES ALTERNATIVES
• GENERAL BUSINESS ISSUES
• REGULATORY ISSUES
• CORPORATE ISSUES
• GROUP CAPTIVES

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REASONS TO REDOMESTICATE

• GEOGRAPHIC
• DECISION TO MOVE ONSHORE
• PATRIOTIC
• TRIA
• OTHER (NOTE TRAPPED LOSSES)
• PROVISIONS IN STATE LAW
• LLC CAPTIVE (REITS)
• NOT-FOR-PROFIT PROVISIONS (CHARITY)
• RENT-A-CAPTIVE

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REASONS TO REDOMESTICATE

• REGULATORY CONCERNS
• DOMICILE MAY CHANGE ITS POSITION ON TYPE OF
  BUSINESS
• DECISION TO INCREASE/DECREASE UNRELATED BUSINESS

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TYPES OF OPERATIONS

• TERMINOLOGY
• FOREIGN
• ALIEN
• FOREIGN CAPTIVE INSURANCE COMPANY
• FOREIGN SPONSORED CAPTIVE
• FOREIGN CELL

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TYPES OF OPERATIONS

• ALIEN CAPTIVE INSURER
• ALIEN CAPTIVE INSURER WITH DOMESTIC (IRC 953(d)
  ELECTION
• ALIEN CAPTIVE INSURER WITH ENGAGED IN TRADE OR
  BUSINESS ELECTION (IRC 953(c)(3)(C))
• ALIEN CELL

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STRUCTURE ALTERNATIVES

• MERGER
• CORPORATE ENTITY MOVES WITH ALL ATTENDANT ASSETS
  AND LIABILITIES
• ASSUMPTION REINSURANCE
• CEDANT AGREES TO LOOK ONLY TO NEW CAPTIVE AND
  RELEASE OLD CAPTIVE
• OLD CAPTIVE CEDES RESERVES AND RISK PREMIUM TO
  NEW CAPTIVE
• REINSURER RELEASED BY OLD CAPTIVE AND AGREES TO
  PAY TO NEW CAPTIVE

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STRUCTURE ALTERNATIVES

• ASSUMPTION REINSURANCE
• OLD CAPTIVE IS LEFT WITH CAPITAL AND TRADE
  LIABILITIES
• OLD CAPTIVE IS LIQUIDATED
• RUN OFF OF OLD CAPTIVE
• OLD CAPTIVE IS MAINTAINED AND RUNS OFF EXISTING
  BOOK OF BUSINESS

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STRUCTURE ALTERNATIVES

• RUN OFF OF OLD CAPTIVE
• REINSURANCE (WITH CONTINGENT PROFIT COMMISSION)
• THIRD PARTY
• NEW CAPTIVE
• FORMATION OF NEW CAPTIVE WHICH INSURES/REINSURES
  ALL NEW BUSINESS

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BUSINESS CONSIDERATIONS

• MERGER
• UTILIZATION OF EXISTING CAPITAL
• COMPARATIVE REDUCTION OF ONGOING EXPENSE
• LIKELY NOT AVAILABLE IF EXISTING OPERATION IS A
  CELL OR SPONSORED CELL
• ASSUMPTION REINSURANCE
• MAY REQUIRE INFUSION OF CAPITAL

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BUSINESS CONSIDERATIONS

• ASSUMPTION REINSURANCE
• MAY NOT BE PRACTICAL IF CONSENTS ARE NOT
  AVAILABLE FROM ALL INSUREDS
• DIRECTORS OFFICERS
• UNRELATED BUSINESS
• OTHER

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BUSINESS CONSIDERATIONS

• RUN OFF OF OLD CAPTIVE
• MOST FLEXIBLE
• ADDITIONAL CAPITAL NECESSARY FOR LONG TERM
• ADDITIONAL EXPENSE
• MANAGEMENT
• ACTUARY
• ACCOUNTING

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FOREIGN (U.S.) CAPTIVE

• STRUCTURES
• MERGER, ASSUMPTION REINSURANCE AND RUN OFF
  CAPTIVE ARE ALL GENERALLY AVAILABLE
• MERGER
• FEDERAL TAX ISSUES
• STRUCTURE AS A TAX-FREE REORGANIZATION (USUALLY A
  STATUTORY MERGER)
• REDOMESTICATION (F REORG)
• GENERALLY NO U.S. FEDERAL TAX IMPLICATION

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FOREIGN (U.S.) CAPTIVE

• STRUCTURES
• MERGER, CONT
• REGULATORY ISSUES
• CONSENT IN JURISDICTION OF OLD CAPTIVE (OC)
• FILING WITH INSURANCE DEPARTMENT OC
• FINAL REPORTS, TAX RETURNS IN OC
• FORMATION OF NEW CAPTIVE (NC) IN NEVADA
  OUTLINING BUSINESS PLAN, PROPOSED MERGER, ETC.

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FOREIGN (U.S.) CAPTIVE

• STRUCTURES
• MERGER, CONT
• CORPORATE ISSUES
• PLAN OF MERGER
• APPROVAL BY BOARDS OF OC AND NC
• FILING OF CERTIFICATE OF MERGER IN BOTH OC AND NC
  JURISDICTIONS
• FILING OF APPROVAL OF INSURANCE DEPARTMENTS
  (SOMETIMES)

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FOREIGN (U.S.) CAPTIVE

• STRUCTURES
• ASSUMPTION REINSURANCE
• TAX ISSUES
• MAY BE TREATED AS TAX-FREE REORGANIZATION, SEE
  PVT LTR RULS. 9541025, 9335045
• STRUCTURED AS A REINSURANCE TRANSACTION

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FOREIGN (U.S.) CAPTIVE

• STRUCTURES
• ASSUMPTION REINSURANCE
• REGULATORY ISSUES
• CONSENT IN OLD CAPTIVE JURISDICTION
• APPROVAL IN NEVADA IN CONNECTION WITH FORMATION
  OF NEW CAPTIVE
• LIQUIDATION OF OLD CAPTIVE
• CONSENTS BY ALL INSUREDS
• CONSENTS BY MULTIPLE JURISDICTIONS IF DIRECT
  BUSINESS

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FOREIGN (U.S.) CAPTIVE

• STRUCTURE
• RUN OFF OF OLD CAPTIVE
• REGULATORY ISSUES
• RUN OFF OF OLD PROGRAM
• ASSUMPTION REINSURANCE WITH THIRD PARTY
• COMMUTATION
• CORPORATE ISSUES
• FORMATION OF NEVADA ENTITY
• LIQUIDATION OF OLD ENTITY (ULTIMATE)
• ESTABLISHMENT OF ELIMINATION OF LIABILITIES
• ASSUMPTION/COMMUTATION

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FOREIGN (U.S.) CAPTIVE

• STRUCTURE
• RUN OFF OF OLD CAPTIVE
• TAX ISSUES
• PROFIT OR LOSS IN NEW ENTITY CONSOLIDATED
• REGULATORY ISSUES
• NOTIFICATION IN OC JURISDICTION OF CESSATION
• FORMATION OF NEW CAPTIVE
• CAPITAL
• NEW POLICIES
• NEW PROGRAMS
• REINSURANCE OF OLD PROGRAMS(?)

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FOREIGN (U.S.) CAPTIVE

• REDOMESTICATION
• MOVEMENT OF CORPORATE ENTITY
• REQUIRES COMAPRABLE LOCAL LAW
• TREATED AS AN F REORGANIZATION FOR TAX PURPOSES

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FOREIGN (U.S.) SPONSORED CAPTIVE OR CELL

• STRUCTURES
• MERGER (NOT AVAILABLE)
• ASSUMPTION REINSURANCE
• RUN OFF

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ALIEN (NON-U.S.) CAPTIVE

• STRUCTURAL ISSUES
• MERGER
• REDOMESTICATION
• ASSUMPTION REINSURANCE
• RUN OFF

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ALIEN (NON-U.S.) CAPTIVE

• MERGER
• ADDITIONAL REQUIREMENTS OF FOREIGN JURISDICTION,
  e.g., BERMUDA PUBLICATION ISSUES
• STATUTORY MERGER PER TREAS. REG.
  1.368-2(b)(1)(ii) IF STATE LAW ALLOWS
• STATUTORY MERGER MAY NOT BE AVAILABLE
• B REORGANIZATION (EXCHANGE OF STOCK FOR STOCK,
  ACQUIRING COMPANY OBTAINS CONTROL)

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ALIEN (NON-U.S.) CAPTIVE

• MERGER
• STATUTORY (CONT)
• C REORGANIZATION (EXCHANGE OF STOCK FOR
  SUBSTANTIALLY ALL OF THE PROPERTIES)
• D REORGANIZATION (TRANSFER OF ASSETS TO ANOTHER
  CORPORATION, AFTER WHICH TRANSFEROR OR TRANSFEROR
  SHAREHOLDER IS IN CONTROL, IF ASSETS OF ACQUIROR
  ARE TRANSFERRED PURSUANT TO A PLAN)

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ALIEN (NON-U.S.) CAPTIVE

• MERGER
• REDOMESTICATION (F REORGANIZATION CHANGE IN
  IDENTITY, FORM, OR PLACE OF ORGANIZATION)
• TAX ISSUES
• IMMEDIATE TAXATION OF ANY UNTAXED EARNINGS AND
  PROFITS, IRC 367(b)
• IF WRITING ONLY POST-1986 OF NON-DOMICILE RISKS
  (WHETHER RELATED OR NON-RELATED) LIKELY NO TAX
  ISSUE
• NOTE GROUP CAPTIVE PRE-1986
• NOTE SINGLE PARENT CAPTIVE PRE-1984

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ALIEN (NON-U.S.) CAPTIVE WITH DOMESTIC ELECTION

• CORPORATE AND REGULATORY FOLLOW ALIEN (NON-U.S.)
  WITHOUT A DOMESTIC ELECTION
• TAX FOLLOWS FOREIGN (U.S.) CAPTIVE

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ALIEN (NON U.S.) CAPTIVE WITH ELECTION UNDER IRC
953(c)(3)(C)

• CORPORATE AND REGULATORY FOLLOW ALIEN (NON-U.S.)
  WITHOUT A DOMESTIC ELECTION
• TAX FOLLOWS ALIEN (NON-U.S.) EXCEPT FOR REPORTED
  INCOME (i.e., RPII)

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ALIEN (NON-U.S.)CELL OPERATION

• CORPORATE AND REGULATORY FOLLOW FOREIGN CELL
• TAX
• REPORTED INCOME
• NON-REPORTED INCOME
• RUN OFF OPTION

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GROUP CAPTIVES

• GROUP CAPTIVE CONCERNS
• SOURCE OF MEMBERSHIP/NON-LIABILITY RISKS
• MAINTAIN NO TAX ON NON-U.S. PARTICIPANTS WITH NO
  953(c)(3)(C) ELECTION

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GROUP CAPTIVES

• GROUP CAPTIVE CONCERNS
• SOURCE OF MEMBERSHIP/NON-LIABILITY RISKS
• FACILITATE ACCESS THROUGH FORMATION OF A RISK
  RETENTION GROUP
• SUBSIDIARY

FOREIGNGP CAP
MEMBERS INSUREDS EXISTING GP CAP CAPITAL
TO FORM RRG GENERALLY NO LOC
NONLIABILITY (INCLUDING W/C)
R/I
100
RRG
MEMBERS
LIABILITY
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GROUP CAPTIVES

• GROUP CAPTIVE CONCERNS
• SOURCE OF MEMBERSHIP/NON-LIABILITY RISKS
• FACILITATE ACCESS THROUGH FORMATION OF A RISK
  RETENTION GROUP
• BROTHER/SISTER

SEPARATION OF MEMBER/ INSUREDS WITH FOREIGN GP
CAP. NEW CAPITAL NEEDED FOR RRG/OR DIVIDEND
FOLLOWED BY CAPITAL INFUSION SECURITIES LAW
ISSUES LIABILITY BUSINESS CEDED IN PART TO
FOREIGN GP CAP
MEMBERS
NON-LIABILITY BUSINESS CEDED TO FOREIGN GP CAP
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GROUP CAPTIVES

• GROUP CAPTIVE CONCERNS
• MAINTAIN NO TAX ON NON-U.S. PARTICIPANTS WITH NO
  IRC 953(c)(3)(C) ELECTION
• OFFSHORE CAPTIVE
• RPII APPLICATION TO U.S. SHAREHOLDERS
• IRC 953(c)(3)(C) COMPANY LEVEL TAX ON RPII
• ADDITION OF RRG
• ACCESS TO MEMBERSHIP IN U.S.
• FOREIGN RISK REMAINS IN FOREIGN CAPTIVE