Carlos H. Yturzaeta Chairman , Marine Underwriters Association of the Philippines, Inc. (MUAP)

1. CAPTIVE BASIC WORKSHOP Hotel Intercontinental, Singapore September 16-17, 2009 INTRODUCTION TO CAPTIVES Carlos H. Yturzaeta Chairman,Marine Underwriters Association of the Philippines, Inc.(MUAP)

2. PRESENTATION OVERVIEW HISTORY OF CAPTIVES WHAT IS A CAPTIVE TYPES OF CAPTIVE ADVANTAGES/DISADVANTAGES WHO SHOULD CONSIDER A CAPTIVE? SETTING UP A CAPTIVE SELECTION OF DOMICILE MANAGEMENT OF CAPTIVE CONVINCING MANAGEMENT ACKNOWLEDGEMENT

3. HISTORY OF CAPTIVES • 1800’s – New England textile formed a captive that became Factory Mutual • 1929 – Church Insurance Co., one of the earliest group captives, was formed by the Episcopal Church • 1935 – Mahoning Insurance Co., established by Youngstown Sheet & Tube Co.

4. HISTORY OF CAPTIVES • 1960’s – About 100 captives were formed. • 1970’s - Captives became popular as a vehicle for every large national and multinational companies to insure difficult-to-place risks and to combat “hard market” • 1980’s – Captive has grown nearly 300% more than double the commercial market due to liability insurance crisis.

5. HISTORY OF CAPTIVES • 2000 – About 5,000 captives worldwide generating US$28 billion. • Today, there are close to 5,000 captives in different domiciles all over the world and being one of the biggest sources of capacities* in the RI market with premiums about US$50 billion and assets of about US$250 billion • Developing Asian Market for captives. *In some years, Bermuda and other domiciles provided at least 30% capacity.

6. WHAT IS A CAPTIVE? • A closely held insurance company whose original purpose is/was to insure its shareholders risks. • A closely held insurance company whose insurance business is primarily supplied by and controlled by its owners, and in which the original insureds are the principal beneficiaries.

7. WHAT IS A CAPTIVE? • A captive insurance company primarily insures the risk of its owners and sometimes related or affiliated firms and returns underwriting profit and investment income. • A captive insurance company’s insureds have direct involvement and influence over the company’s major operations, including underwriting, claims management policy and investments.

8. WHAT IS A CAPTIVE? • A captive is a genuine insurance or reinsurance company, owned either by a non-life insurance company, a group of insureds or others wishing to insure or reinsure primarily the risks of the owners of their affiliates.

9. TYPES OF CAPTIVES • Single Parent, i.e. Petron, San Miguel, Smart. • Association – Lawyers, Accountants, Engineers, Religious, Other professionals, etc. • Industry – Shipping, Oil, P&I, Banking,Telecommunications, Hotels, Pharmaceuticals, etc. • Rent-a-captive • Protective Cell

10. SINGLE PARENT CAPTIVE Pure ( only writes parent’s, subsidiaries and affiliates’ like Petron’s Overseas Ventures Insurance Corp in Bermuda.)‏ Monitored by Parent(at and from the principal office of the captive owner) Managed by a Domiciled Company (day-to-day administration) normally called Captive Manager.

11. PETROGEN Philippines OVINCOR Bermuda LOCAL AND FOREIGN REINSURERS FOREIGN REINSURERS (Europe, Scandinavia, Lloyds) Reinsurance Placement Under a Captive Arrangement PETRON CORPORATION PRINCIPAL/ORIGINAL INSURED LOCAL INSURER/FRONTING COMPANY CAPTIVE/OFFSHORE REINSURER

12. ADVANTAGES OF A CAPTIVE • INSURANCE EXPENSE/COST CENTER TURNED INTO A PROFIT CENTER • STABILIZATION OF PRICING VS. FLUCTUATING INSURANCE COSTS • CUSTOMIZED INSURANCE COVER (TAILORED FIT INSURANCE PROGRAM) • ACCESS TO GLOBAL REINSURANCE MARKETS

13. ADVANTAGES OF A CAPTIVE • REDUCED RELIANCE ON COMMERCIAL INSURANCE MARKET. • IMPROVED CLAIMS HANDLING & CONTROL OF CLAIMS ADMIN COSTS. • REDUCTION FROM BUREAUCRATIC GOVERNMENT REGULATIONS. • OPPORTUNITIES FOR OTHER BUSINESS ENDEAVORS. • SAVINGS FROM IMMEDIATE TAX ON PROFIT

14. DISADVANTAGES OF A CAPTIVE • ADMINISTRATION – Time, Talents & Efforts • FINANCIAL – Expertise, investment, profitability DON’T YOU THINK THIS BEAUTIFUL PLACE FAR OUTWEIGHS THE DISADVANTAGES?

15. WHO SHOULD CONSIDER A CAPTIVE? • Any organization that spends about US$1 million in insurance premiums and desires to recover* a portion of that thru a risk financing vehicle called, captive. • An organization whose insurance cover needs to be tailored fit (special risks). • An organization whose insurance program is greatly affected by market cycles (hard market, lack of capacity, etc). *Petron was able to recapture average of 38% or approx. P1 Billion of its insurance premium in the last 12 years.

16. INSURANCE EXPENSE RECOVERED AS SAVINGS

17. WHO SHOULD CONSIDER A CAPTIVE? • An organization with a good loss record/loss ratio and is proud to share in its own risks, a proof that the company is managed professionally. • An organization that invests in a comprehensive Enterprise-wide Risk Management Program and is able to sustain it through a risk finance vehicle called, captive.

18. Who are into Captives in the Philippines • *PETRON CORPORATION (Bermuda) - 1995 • Standard Insurance Company (Bermuda) - 1997 • SMART PHILS (Grand Cayman) - 2000 • SAN MIGUEL CORP (Bermuda) - 2004 • ZUELLIG PHARMA CORP (HK) - 2005 • MANILA ELECTRIC COMPANY - 2007 *Petron’s OVINCOR, Bermuda has started with US$1.5 M. in Nov. 1995. Now it has a Networth of over US$13 Million. Petron’s “controlled” insurer, PETROGEN, a fronting company for OVINCOR started with P100 M in 1996 and has reached a paid up a capital of about P1Billion. From such success story, Saudi Aramco started its captive, STELLAR, Bermuda in 2001 with a capital of US$10 million. It was gathered that Stellar pumped in another US$200 million early 2007 to be able to increase retention and write some more of its subsidiaries and affiliates.

19. SETTING UP A CAPTIVE • Feasibility Study & Management Approval • Roadshow and get commitment from existing major reinsurers for support. • Captive Application (suggested domicile –Asian?) • Selection of Captive Manager and other service providers like auditor, corporate secretary, legal counsel, depository bank

20. SELECTION OF DOMICILE • REGULATORY ENVIRONMENT • REASONABLE CAPITALIZATION • PROFESSIONAL SERVICES • EFFICENT PROCEDURES • TAXATION

21. SELECTION OF DOMICILE • LOWER OPERATING COSTS • LOCAL LANGUAGE, CURRENCY AND CUSTOMS • ECONOMIC, POLITICAL AND SOCIAL STABILITY • STRATEGIC LOCATION

22. SELECTION OF DOMICILE • TIME ZONE • STABLE BUSINESS ENVIRONMENT • INFRASTRUCTURE • OTHER CONSIDERATION - Telecommunications - Rest & recreation - Golf and Shopping

23. Some Popular Domiciles • BERMUDA • CAYMAN ISLANDS, BARBADOS • USA DOMICILES-VERMONT • HONGKONG & SINGAPORE • LABUAN, MALAYSIA • GUERNSEY, ISLE OF MAN

24. MANAGEMENT OF CAPTIVE • CAPTIVE MANAGER • Independent • Working for Parent/Owners • “All-in-one-packaged service” • “One stop shop” • SELF MANAGEMENT

25. CONVINCING MANAGEMENT • LONG-TERM COMMITMENT • WELL-PLANNED • IN-HOUSE EXPERTISE • IF DECIDED, we, and all other service providers in this basic workshop are committed to serve your needs!

26. CAPTIVE BASIC WORKSHOP Hotel Intercontinental, Singapore September 16-17, 2009 ACKNOWLEDGEMENTS • Bermuda Captive Forum, Sponsored by Petron Corporation, Petron Building, Makati City, Philippines, 1997 • Guam Captive Forum,, Sponsored by Pacific Risk Managers (Guam), Inc, Tower Club, Makati City, Philippines, May 2004 • Captive Forum, Sponsored by Sinser of Sweden at the JW Marriott Hotel, Hongkong, 1998 • Asia Pacific Rendezvous, Sponsored by RIRG/Captive Review/Pageant Media of UK at the Marina Mandarin Hotel, Singapore, July 2008 • Captive: Alternative Risk Finance Forum, Sponsored by Zurich Financial Services, Inc, J. W. Marriott, Jakarta, Indonesia, November, 2006 • Basic Captive Presentation, Sponsored by the Insurance Commission of the Philippines, Manila, June 2008 • Captive Insurance Companies Association (CICA) seminars in Arizona, USA, 1994-1995

27. SPEAKER PROFILE CAPTIVE BASIC WORKSHOP CARLOS H. YTURZAETA • Certified Public Accountant (CPA); Bachelor of Science in Commerce, Accounting. • Current Involvment: • Lecturer, Insurance Institute of Asia & the Pacific (IIAP • Chairman, Marine Underwriters Association of the Philippines, Inc (MUAP) • Director, Philippine Register of Shipping, Inc (PRS) • Director, Environment & Risk Management, Philippines, Inc. • Active Member: Association of Certified Public Accountants in Public Practice (ACPAPP) and Philippine Institute of Certified Public Accountant (PICPA) • Consultant/Speaker Trainor on: Enterprise Wide Risk Management/Captive Insurance/ Accounting, Audit and Tax/Property Management/Estate Planning, DMP, Crisis Mgnt, Claims Admin. Systems and Procedures, Emergency Management, Business Continuity • Established the first Philippine Captive in Bermuda (Overseas Ventures Insurance Corp.or OVINCOR)‏, a single-parent captive reinsurance company, 1995. • Established/Gen. Manager of-the first “controlled” Phil. Insurer (Petrogen Insurance Corporation), a fronting company for OVINCOR, 1996. • 25 years in the largest oil & energy conglomerate in the Philippines-mostly in finance, audit & accounting, government reports & compliance, property & records management and risk and insurance management.

28. CAPTIVE BASIC WORKSHOP Hotel Intercontinental, Singapore September 16-17, 2009 Thank You!Enjoy the rest of the day! CARLOS H. YTURZAETA, CPA Chairman, Marine Underwriters Association of the Philippines, Inc (MUAP) Email: < carlos_yturzaeta@yahoo.com.sg > Cellphone/Mobile: +63 917 536 0937