1. MERGER OF CAYMAN CAPTIVES

2. Kay Carter: Solomon Harris
Janet Hale: Alliant Insurance Services
Lisa Havens: Baylor Scott & White Health
Julie Robertson: Honigman Miller Schwartz and Cohn

3. Introduction
Merger and acquisition activity leads to need to evaluate, rationalize and consolidate insurance programs
We’ll be discussing considerations in doing so, from the perspective of the owner/insured and the insurance consultant
We’ll also address the tax and legal considerations in the structuring and implementation, from a U.S. perspective and a Cayman perspective

4. It Begins . . . . Analysis during due diligence phase
Key items to be aware of before date of merger
Work after merger
Assemble the right team (integration team and service providers)

5. It Begins . . . . Begin the due diligence process
Access materials already provided or prepared
Looking for
Differences and similarities in programs (funding and reserving; insurance program structure; policy terms, processes, carriers)
Potential areas of concern (tax; regulatory; disputes with insureds/owners (former/current), reinsurers; unfunded liabilities)
Opportunities for efficiencies/cost savings
Address any confidentiality/antitrust issues
Determine the timeline
What must be accomplished at close?
How soon afterwards will there be a unified program?
Objective: Determine whether to keep multiple captives or consolidate programs? And if consolidation, in what manner?

6. Keeping Multiple Captives
Less common
More costly to operate
Less efficient from an administrative standpoint, even if captives are in same domicile
May be inconsistent with goals of integration at owner level
Harder to achieve savings in insurance costs
But may be useful
One captive has liabilities the other doesn’t want to assume
Owner desires multiple vehicles for different purposes
Insurance provided by geographic area
Different structures may be useful in future (e.g., cell captives, U.S./non U.S. captives/RRGs)
Different allowable coverages in different domiciles (TRIA, punitive damages, ERISA benefits)
One for taxable, one for tax-exempt risk
Intent is to “spin-off” one part of the business in the future
Maintain relationships in multiple domiciles
Cannot obtain necessary consents to consolidation

7. For a Combination Preliminary considerations Domicile for survivor?
Any segregated portfolio companies?
Third party consents required?
Tax considerations
Need to understand tax status and positions of both captives CFC, PFIC, Non-CFC, Non-insurance company, U.S. corporation/953(d) election, pass-through entity / "check the box" election / IRS Form 8832)
Conduct due diligence on state, federal, domicile tax matters
Determine whether it’s possible to structure as tax-free reorganization under Section 368 of the U.S. Tax Code
Consult tax advisors early in process to ensure documentation supports tax treatment

8. For a Combination
Options from a legal perspective
Loss portfolio transfer
Merger or consolidation (Cayman or foreign law)
Scheme of arrangement (Cayman law)
Loss Portfolio Transfer (like asset/liability transfer)
Transfer approved by captive boards and generally shareholders
Regulatory approval
Third party consents
Subsequent dissolution
Generally takes less than three months (excluding dissolution)

9. Baylor Scott & White Health
Resulted from the merger of two Texas based system, Baylor Health Care System and Scott & White, in 2013
Baylor Health Care System, founded in 1903 and based in Dallas, Texas
Scott & White Healthcare, founded in 1897 and based in Temple, Texas
Both nonprofit systems
Over one year from the first announcement to the effective date of the merger

10. Baylor Scott & White Health

11. Baylor Scott & White Health
Both had Cayman Islands captives
Baylor’s captive primarily was used as a pass through for reinsurance
Scott & White’s captive retained risk and was used to write excess/access reinsurance
After the affiliation, looked to integrate programs
Decision was not to keep two captives
Then had to decide: merger or consolidation?

12. Merger or Consolidation
Merger: surviving company is a constituent
Consolidation: consolidated company is a new company
Procedures are identical
Good standing and solvent
No constitutional prohibition of merger or consolidation
No tainting
Consent of secured creditors
All regulators approve
Effective Date
Filing date or date up to 90 days later

13. Merger Procedure Authorisations and Consents
Directors - approve merger and draft Plan of Merger
Shareholders - pass special resolution (unless vertical merger)
If meeting, 2/3 of voting shareholders must pass
If resolution in writing, must be passed unanimously
All regulator(s) must approve in principle/take no objection
All secured creditors must consent; if not, may apply to Court to waive requirement

14. Merger Procedure Documents Required
Special resolution
Plan of Merger
Declaration or affidavit of director
Undertaking
Fees

15. Merger Procedure Foreign Captives
Declaration or affidavit by director of the Cayman surviving company
May be the surviving company
If so, cannot be against the public interest to permit the merger
Need equivalent of Certificate of Good Standing from foreign registry/registries
CIMA may require evidence of good standing from foreign regulator(s)

16. Merger Procedure Filing
Plan of Merger signed by a director of each constituent captive
Certificates of Good Standing for each constituent captive
Declarations/Affidavits of director on behalf of each constituent captive
Undertaking
Letters from regulator(s)
Fees

17. Merger Procedure Dissenting Shareholders
Dissenting shareholder entitled to be paid fair value of shares
Must follow procedure in Companies Law
Constituent captive or surviving company obligated to offer to purchase dissenting shareholder’s shares
Purchase price must be paid to dissenting shareholder in cash

18. Scheme of Arrangement Can do merger or division
Must apply to Grand Court
Court may order a shareholder(s) meeting to consider
Documents required:
Scheme of Arrangement (similar to Plan of Merger)
Explanatory Memorandum
Petition to commence action
Affidavit of director
Approvals of BoD and shareholder(s) (special resolution)
Reporting affidavit
Approval of regulator(s)
Cost

19. Baylor Scott & White Healthcare
Captives merged 7/1/14
The wrinkle: also converted surviving company to segregated portfolio company
“Onshore” education and governance
Assembling the new team
Integrating the insurance programs

20. Key Risk Financing Issues
Best Practice Perspective
No right way/ wrong way
Opportunity to “re-imagine” with changing healthcare environment
Blank Sheet of Paper Approach
Resolution of Variances
Culture
Program Structure
Reinsurers
Vendors
Marketing a Consolidated Program
Objective Criteria
Subjective Criteria
What potential markets want to know
Manuscripting a New Policy Form
Key Focus Areas
Checklist Items

21. Best Practice Perspective
Resist the tendency to pick one program over the other
Use as opportunity to totally re-evaluate risk as it relates to the new healthcare environment
“Managed Care” activities
“Financial Loss” Triggers
JV’s/ Affiliations
Research
Employed Physicians
Ebola
Determine commonalities and variances
Opportunity to combine “best practices” of each merger partner

22. Resolution of Variances
Chances are pretty good that you will NOT have the same expiration dates, same captive program structure, same tolerance of risk, same reinsurers, same exposures, and same vendors
Culture Check
Determine the “risk philosophy” that promotes the strategies of the new organization
Compare/contrast current risk philosophies
Benchmarking
Leadership input
Differences in Culture – how will they be resolved?

23. Broker Objectives
Develop a Risk Financing/ Insurance Program that supports the new Combined Entity Risk Profile;
Move towards concurrency for all captive programs;
Consolidate programs where there is consistency in program structure/ philosophy and a cost savings to do so;
Keep parallel programs where it is advantageous to do so; and
Take a “clean sheet of paper” approach to structure the best program for the new organization

24. Resolution of Variances Program Structure
Decisions
Practical Considerations
What Risk is Assumed in the Captive?
No risk assumed in the captive
Traditional GL/HPL/WC?
Additional Lines/ retentions/ coinsurance
Prior Acts – Included? Tail? LPT?
CIMA in Loop
Traditional or Integrated?
Analyze options
Use as opportunity to address new and emerging risk
Retention/ Limit Analysis
Does it make sense to assume more risk?
What is the totality of risk across the enterprise?
Tendency is to increase retentions on all lines of coverage – but need to evaluate losses that trigger multiple policies
Physicians/ In or Out?
Multiple Options need evaluation
Actuarial Analysis
Consolidate programs immediately or in future?
*Consistent Coverage
*Cost Reductions
*Administrative Efficiencies
Normally will not happen on DAY ONE (except D&O)
Change in Control Provisions Need to be Waived
Assignment/ Notification of Reinsurers
Additional Insured Endorsements – new entities
Agreement for pro rata cancellation if midterm consolidation
Compare Reinsurance Certificate Variances
Can some commercial insurance policies be eliminated by rolling into the captive?
Revisit separate commercial placements
SPC Structure – most flexibility
Tail Options

25. Resolution of Variances Reinsurers
Decisions
Practical Considerations
Overlap/ Variances
Compare reinsurance towers
Depending on timing in the renewal cycle – may want to meet with lead reinsurers on integration strategies
Do reinsurers fit into new program structure?
Integration
Physicians
Capacity
Lead Reinsurer Analysis
Claims philosophy
Historical relationship
Capacity for new entity
Reserving/ Claims Philosophy
Contrast reporting requirements for each program
Develop consistent reporting procedures immediately and get reinsurer approval
Contrast internal loss runs and develop a consistent approach and get reinsurer sign off
Selected Date if Excess Consolidation
Advise Reinsurers
Pro – Rata Cancellation or extension agreements

26. Resolution of Variances Vendors
Brokers
Actuaries
Captive Managers
Captive Counsel
Auditors
Investments

27. Marketing a Consolidated Program
Key Issues
Practical Considerations
Objective Criteria
Stratified Loss Information
Exposure Evaluation & Consolidation
Pro-Forma Financials
Integration impact – employees, facilities, physicians, HR, patient safety, quality, etc.
Subjective Criteria
(Most Important)
Senior Leadership
Relationship
Strategy/Vision for a Combined System
Future Acquisitions?
Integration Plan
What Underwriters Want to Know
See Following List

28. Questions from Reinsurers
Strategy/ Vision
Provide an update on the vision for the integration – short and long term?
Discuss the operating environment and business strategies for 2014 as a combined Health System.?
Differences in culture? How are they being resolved?
Senior Management/ Leadership Changes?
Future Mergers/ Acquisitions?
What strategies have been implemented or are in the process of being implemented to address healthcare reform?
Research Dept. initiatives for the new organization
Financial
Financial update and consolidation projections for YE 2014
What is the 2015 financial outlook?
Do you anticipate any capital spending in next 12 months due to the merger?
Please discuss the current status of bonds, and the current amount outstanding. Are there any plans for additional bonds?
Provide some color on financial challenges – government funding cuts, reimbursement issues, bad debt, decreasing patient volume, competition, etc.
Legal/ Regulatory
Describe new compliance & audit program structure
Discuss new Human Resource structure and how this will impact employees
Update on Texas Tort Reform – any expansion to outside TX jurisdictions?
Please discuss any changes to retirement plans and integration of the separate health system plans.
Describe any antitrust concerns with strategy/vision/future of organization
Managed Care/ ACO Exposure – general discussion on current ACO exposure, plans for future growth, etc.

29. Questions from Reinsurers
Operational/Integration Progress
Describe the integration of the overall delivery system
Discussed how employed physicians will be handled within the new organization
Comment on discussions with your healthcare providers in regards to integrating both health systems.
What has been implemented with Medicare/Medicaid?
Discuss how best practices from each organization have been incorporated into the new organization
Describe IT and Back-office integration as well as respects protection of PHI – any cyber related concerns?
Any significant cost reductions including employee layoffs within the next 12 months? Other cost-cutting initiatives?
Updates on efforts for population health management
Patient safety / quality
Engaging physicians in improving the culture of quality/ programs implemented to address
Redesigning care processes – any new products, vendors, programs?
Pay for Performance – ways to evaluate all stakeholders
Risk Management
What has been accomplished in the first 100 days?
What does the integrated Risk Management Dept. look like?
Integration of PCE’s/Reporting – variances and plans to resolve
Reserving practices of the new organization
Update on combined loss history
Risk philosophy of the new organization - level of retained risk before excess attaches?
What will the consolidated excess program structure look like?
Uptick or any changes in lawsuit volume/ trends in lawsuit allegations?
Update on Texas Regulatory Environment – any increase in federal/state/accreditation oversight and what initiatives are in place to handle?
Medical necessity/ billing practices – checks and balances to help identify outlier/irregular billing patterns/ practices; how medical necessity is monitored; any adverse findings from DOJ investigations, etc.

30. Manuscripting a New Policy Form
Focus Areas
Checklist
Who is an Insured?
How are Partnerships/JV’s/Affiliations handled?
How are Physicians covered?
Consistent approach when not the majority owner
Coverage Triggers
Of course GL/PL – but what about business practice exposure/financial loss/ E&O?
Treatment of Managed Care
Entities are now doing “managed care” activities that are not under a traditional Managed Care Organization (MCO)
Re-evaluate this exposure and address either under a traditional MCO Policy – or under the primary/excess captive program
Beware of MCO Exclusions on D&O
Treatment of Research
Meet with Research Depts. to evaluate the new entity’s approach to research
Aviation Revisited
Check Helicopter Contracts
Helipad Exposure
Hangarkeeper’s Liability Exposure
Treatment of Work Related Injury
Occupational Disease Triggers
Rethink Employer’s Liability
Pre-negotiate Tails
6 year options

31. Lessons Learned/Recommendations
Challenges:
Getting the attention of the right people during a very busy, stressful time
Time consuming
Politics
“That’s the way we’ve always done it”
Success factors:
A workplan to identify responsibility and key dates
Good communications with decision makers, advisors
Senior leadership meeting with underwriters was very important