1050 n. lindbergh blvd. | st. louis, missouri 63132 | 314.983.1200 1551 wall st., ste. 280 | st....
TRANSCRIPT
1050 N. Lindbergh Blvd. | St. Louis, Missouri 63132 | 314.983.1200 1551 Wall St., Ste. 280 | St. Charles, Missouri 63303 | 636.255.30001000 Broadway, Ste. 300 | Highland, IL 62249
888.279.2792 | www.bswllc.com
Captive Insurance Companies
Marty Doerr, CPA314.983.1350 | [email protected]
Bill Goddard, CPCU 314.983.1253 | [email protected]
© 2010 Brown Smith Wallace All Rights Reserved
October 13, 2010
2
Captive Insurance Company
© 2010 Brown Smith Wallace All Rights Reserved
What is a Captive Insurance Company?
o Insurance company formed to insure the risks of its owners
What do Captives typically insure?o Risks that are difficult or expensive to insure in traditional market
• Earthquake/Flood
• Environmental
• Professional Liability
• Warranties
• Product Liability
• Terrorism
• Cyber Liability
• Worker’s Compensation
• Employment Practices Liability
• Contamination
• Trademark Defense
• Deductibles
3
Captive Insurance Company
© 2010 Brown Smith Wallace All Rights Reserved
Typical Captive Structure
4
Captive Insurance Company
Insurance Advantageso Optimization of risk management processo Ability to smooth insurance costs between hard and soft marketso Access to reinsurance marketso Insurance coverage for difficult risk at reasonable priceo Retained profits can be used for future losses
Tax Advantageso 831(b) – Internal Revenue Code• Underwriting profits are tax free if premium is less than $1.2 million
o Accelerated tax deductions for reserves for losseso Premiums paid to captive are tax deductible for the insured company
Wealth Transfer Advantages Captive accumulates earnings Captive can be owned by next (or following) generation Captive underwriting profits are tax free
© 2010 Brown Smith Wallace All Rights Reserved
5
Qualifying as an Insurance Company
IRS has been working with the Captive Concept for over 35 years
Challenges have been litigated and guidelines are fairly clear
Captive must:o Insure insurance risks (not investment or business risks)o Actually be shifting the risk to the captive (“risk shifting”)o Appropriately distribute the risks among sufficient number of insured's
© 2010 Brown Smith Wallace All Rights Reserved
For Federal Income Tax Purposes
It is the position of the IRS that a captive insuring the risks of its parent does not achieve the requisite risk shifting unless there is sufficient unrelated business (see below)
Two ways to satisfy risk distribution requirements for favorable treatment under IRS safe harbors:
o Insures 12 or more brother/sister companies (case law – 6 brother/sister companies are sufficient).
o Insure 50% or more unrelated third parties (case law – 30% unrelated risk is sufficient).
Qualifying as an Insurance Company
6 © 2010 Brown Smith Wallace All Rights Reserved
7
2010 2011 2012 2013 2014INCOMEPremiums written 1,100,000 1,100,000 1,100,000 1,100,000 1,100,000 Less: Premium ceded 0 0 0 0 0
Net written premium 1,100,000 1,100,000 1,100,000 1,100,000 1,100,000 Less: Change in Unearned Premium (1,100,000) 0 0 0 0
Net Earned Premium 0 1,100,000 1,100,000 1,100,000 1,100,000 Less: Losses 0 (400,000) (400,000) (400,000) (400,000)
Underwriting Profit 0 700,000 700,000 700,000 700,000
General and Administrative Expenses: Captive manager 25,000 26,000 27,040 28,122 29,246 Audit and tax 30,000 31,200 32,448 33,746 35,096 Actuarial 25,000 26,000 27,040 28,122 29,246 Legal Services 7,500 7,800 8,112 8,436 8,774 Feasibility Study 35,000 0 0 0 0 Premium Taxes 7,500 7,500 7,500 7,500 7,500 Miscellaneous 7,500 5,000 5,000 5,000 5,000
Total General and Administrative Expenses 137,500 103,500 107,140 110,926 114,863
Investment Income 0 66,000 86,040 106,500 127,320
Net Income before Income Taxes (137,500) 662,500 678,900 695,574 712,457 Federal Income Tax 0 (22,440) (29,254) (36,210) (43,289)
Net Income (137,500) 640,060 649,646 659,364 669,169
Assumptions0% Premium growth; coverages will be reduced if necessary to remain at constant premium level4% annual increase in expenses3% Net Investment Yield
ABC Insurance Company Pro Forma
© 2010 Brown Smith Wallace All Rights Reserved
Income Statement
8
2010 2011 2012 2013 2014ASSETS
Cash 1,212,500 100,000 100,000 100,000 100,000 Investments 0 2,175,000 2,831,460 3,497,781 4,174,028 Premiums Receivable 0 0 0 0 0 Other Assets 0 0 0 0 0
Total Assets 1,212,500 2,275,000 2,931,460 3,597,781 4,274,028
LIABILITIES
Taxes Payable 0 22,440 29,254 36,210 43,289 Net Loss Reserves 0 400,000 400,000 400,000 400,000 Unearned Premium Reserves 1,100,000 1,100,000 1,100,000 1,100,000 1,100,000
Total Liabilities 1,100,000 1,522,440 1,529,254 1,536,210 1,543,289
CAPITAL
Paid in Capital and Surplus 250,000 250,000 250,000 250,000 250,000 Earned Surplus (137,500) 502,560 1,152,206 1,811,571 2,480,739
Total Equity 112,500 752,560 1,402,206 2,061,571 2,730,739
Total Liabilities and Capital 1,212,500 2,275,000 2,931,460 3,597,781 4,274,028
ABC Insurance Company Pro Forma
© 2010 Brown Smith Wallace All Rights Reserved
Balance Sheet
Captive Evaluation Cross functional process – tax, insurance, legal, senior management Corporate structure – Do you have a sufficient number of insurers to qualify for risk
distribution (or 3rd party businesses) Administrative issue –Do we have the expertise in house or do you need an outside
advisor
Financing Captive Minimum capital required - $250,000 Retained Earnings – grow over years What to do with retained earnings
Dividend to captive owners Loan back to captive owner Invest in business Invest in other ventures
How do you get started in your company
9 © 2010 Brown Smith Wallace All Rights Reserved
Economic Value Analysis – Go or No Go If Go – services to get captive operational
o Domicile choiceo Coverages to be insuredo Calculate premium for selected coverageso Obtain advice with respect to structure to ensure conformity with Federal tax lawo License captive with chosen domicile
Ongoing operationalo Annual audito Annual meetingo Tax returns/adviceo Issue Policies
Next Step
10 © 2010 Brown Smith Wallace All Rights Reserved