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Investing for Captive Insurance Companies “ 101” From Policy to Implementation Oppenheimer & Co. Investing for Captive Insurance Companies “ 101” From Policy to Implementation Oppenheimer & Co. Inc. Jack Meskunas Senior Director – Investments Captive Insurance Asset Management Advisor Institutional Investment Group Tel: 203 -975 -2084 jack. [email protected] com

A Minute on Me § § Specialize in Captive Insurance Asset Management at Oppenheimer A Minute on Me § § Specialize in Captive Insurance Asset Management at Oppenheimer Cover Captives in Bermuda, Cayman, and other jurisdictions Twice a speaker at CCF, educational talks in Bermuda and Cayman Primary focus has always been “offshore” so I speak your language For Investment Professional Use Only 2

Captive Managers have a lot to do! Setting up new captives Responding to the Captive Managers have a lot to do! Setting up new captives Responding to the needs of the captive Financial reporting Meetings And now… – Thinking about investments? – Is it too much? § You don’t need to “know everything” but you do need to know what to look for and what to ask! § § § For Investment Professional Use Only 3

Some Observations—The Opportunity Most small captives are in cash or co-mingled investments Either no Some Observations—The Opportunity Most small captives are in cash or co-mingled investments Either no return, or poor returns with high fees There are other options, and a better way Being “informed” on asset management options for captives makes you a more valuable account executive/captive manager § And it shows your clients that you are looking out for them – And it keeps the assets in the captive – Which lowers uncertainty in the case of claims – And makes the captive a “better insurance company” § § For Investment Professional Use Only 4

The Steps to a Captive Portfolio § § § IPS Asset Allocation* Investment Manager The Steps to a Captive Portfolio § § § IPS Asset Allocation* Investment Manager Selection Managing the managers Adjusting Asset Allocations – Market Adjustments – Captive Size, liquidity needs, etc. *The use of an Asset Allocation suggestion does not guarantee a profit or protect against a loss in declining markets. For Investment Professional Use Only 5

IPS § Crafting an IPS – Try to allow as much flexibility as possible IPS § Crafting an IPS – Try to allow as much flexibility as possible § Revamping/updating an existing IPS § The needs of the captive – Liquidity needs – Long tail vs short tail – Severity of claims – Frequency of claims – Jurisdictional rules and regulations – Considering the desires of the parent company/owners For Investment Professional Use Only

IPS in Existing Captives § Review IPS – Does it still make sense? – IPS in Existing Captives § Review IPS – Does it still make sense? – Does it need to be updated? – Does it honor current market conditions § Review manager for compliance and performance § Ask pointed questions during board meetings For Investment Professional Use Only

All these factors get you to your “allocation” § § Bonds Stocks Alternatives (if All these factors get you to your “allocation” § § Bonds Stocks Alternatives (if allowed) Cash For Investment Professional Use Only 8

Manager Selection § Working with an Advisor § Alpha vs Beta – Active vs Manager Selection § Working with an Advisor § Alpha vs Beta – Active vs Passive investing § “Captive Friendly”—My term and what it means § Beware the “local trap” – Many “local managers” don’t manage money For Investment Professional Use Only 9

Managing your Managers § § Compare holdings to IPS Creating the correct “Benchmarks” for Managing your Managers § § Compare holdings to IPS Creating the correct “Benchmarks” for your Manager Compare performance to Benchmarks Consider volatility as one of the attributes of the portfolio For Investment Professional Use Only 10

What’s in the Portfolio--Fixed Income/Bonds § Bonds will undoubtedly be most of your assets What’s in the Portfolio--Fixed Income/Bonds § Bonds will undoubtedly be most of your assets – Not all are equal – Credit risk vs Interest rate risk in a rising rate market – SMA vs Bond Funds…performance and costs • Stated Maturities vs No Maturity – Duration risk § Speculating with “conservative” asset classes – Knowing what you own and why § How will your captive make money in FI? For Investment Professional Use Only 11

Equities § § § Large, Mid, and Small Cap Investing Globally Emerging Markets Long-only Equities § § § Large, Mid, and Small Cap Investing Globally Emerging Markets Long-only vs Long/Short SMA vs Funds vs Hedge Funds ETFs (Beta) vs Active Management (Alpha) For Investment Professional Use Only 12

Alternatives § § When a captive gets larger, Alternatives may make sense Hedge Funds Alternatives § § When a captive gets larger, Alternatives may make sense Hedge Funds Take advantage/protect in both up and down markets Usually less volatile – Be aware of liquidity issues For Investment Professional Use Only 13

And clients need consider… § Liquidity needs of the captive? § Are you “Paying And clients need consider… § Liquidity needs of the captive? § Are you “Paying for Alpha” or “Buying Beta”? – The NASDAQ took 15 years to regain a high-point – $1 invested 3/2000 is back to $1 on 23 April 2015! – Mutual Funds expose you to investment decisions of unsophisticated investors For Investment Professional Use Only 14

It comes down to this: What do you own…and WHY? § What is it It comes down to this: What do you own…and WHY? § What is it that the captive owns? § Risk VS Reward, are you getting rewarded for the risk you take? § Are the captive’s investments in the best interest of the captive? – Are the investments dictated by the parent? § Keeping money in the captive – Robust management gives them a reason not to dividend or loan back the excess capital – The captive needs “real” investments—not cash! • This might be a tough conversation to have…but you need to have it! For Investment Professional Use Only 15

Fees—What to look for Retail vs. Institutional Many captives pay retail fees Multiple layering Fees—What to look for Retail vs. Institutional Many captives pay retail fees Multiple layering of fees Ancillary charges (these can really add up!) Custody issues and fees – Don’t use outside custodians unless mandated as they add 10 -30 bp/year § Fees to wire money in or out § Transparency is the most important aspect of fees—Know what you are paying —read the “fine print” § § § For Investment Professional Use Only 16

Wrapping Up: Here is how I can help! Help to craft or review the Wrapping Up: Here is how I can help! Help to craft or review the IPS Select managers with measured Alphas (returns) Offer full transparency of all investments Utilize an understandable and reasonable fee structure that honors the “institutional relationship” that a captive insurance company deserves! § Provide timely reporting & 3 rd party verification § § For Investment Professional Use Only 17

Wrapping Up: Resources I provide § Market Commentary and Strategy – Please review the Wrapping Up: Resources I provide § Market Commentary and Strategy – Please review the current commentary § OAM Monthly commentary – Sample provided § Portfolio creation and monitoring § Third-Party objective analysis of existing strategies and fee analysis – I will review a captive’s current strategy at no charge For Investment Professional Use Only 18

Disclosures: § This overview was written by the Oppenheimer & Co. Inc. (“Oppenheimer”) employee Disclosures: § This overview was written by the Oppenheimer & Co. Inc. (“Oppenheimer”) employee identified herein for illustrative purposes. Their opinions do not necessarily reflect those of Oppenheimer and are subject to change without notice. The information set forth herein has been derived from sources believed to be reliable: does not purport to be a complete analysis of the topic presented any market segments discussed; and it does not represent legal or tax advice. § Every state in the United States and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, some of the securities/strategies may not be available to every interested investor. This commentary is provided for informational purposes only, and does not constitute an offer or solicitation to buy or sell any services, securities, or issuers discussed herein in any jurisdiction where such an offer or solicitation would be prohibited. Oppenheimer & Co. Inc. Transacts Business on All Principal Exchanges and Member SIPC. G 42090916 SM 1 For Investment Professional Use Only 19

Time for Q&A jack. meskunas@opco. com 203 -975 -2084 For Investment Professional Use Only Time for Q&A jack. [email protected] com 203 -975 -2084 For Investment Professional Use Only 20