Insights 2015 - Captive Insurance - Doug MacGinnitie

CAPTIVE INSURANCE COMPANIES

• Many Benefits for Middle Market Business Owners & Their Trusted Advisors

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What is a Captive Insurance Company• An Insurance Company formed by a business to insure:

– its risk – or the risks of related or affiliated businesses

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Captive Insurance Companies

– Companies are exposed to risk…– … a lot more risk than they think!

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…and your commercial insurance program will only address a fraction of the risk you are exposed to…

…the majority of your risk is un-insured or under-insured.

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Small Captive

• 90% of Fortune 1000 Companies have one or more captives to augment their commercial insurance program

• Generally used to insure under- or uninsured low frequency, high impact risks

• Administrative Actions • DIC Liability and Property

• Cyber Risk • Employee Fidelity• Loss of Key Employee • Loss of Key Contract• Employment Practices Liability • Reputational Risk

• Wage and Hour Liability • D & O Liability

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The Benefits of Forming a Captive

• Address UNINSURED RISK in the Business• Retain UNDERWRITING PROFITS• Take advantage of powerful ASSET

PROTECTION and ESTATE PLANNING• Utilize up to $1.2M TAX INCENTIVE annually to

fund for possible losses

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Who Is It For?

• Most closely held businesses that have:– Strong cash flow– Significant fortuitous risk– A desire to create a new profit center

• Construction Companies • Distribution and Logistic Companies

• Finance • Manufacturing Businesses• Hospitality • Real Estate Development• Physician Groups • Retail• Restaurants • And many others…

How does it work?

Risk Management Analysis

• Detailed review and analysis of business operations

• In-depth review of existing insurance program

• Recommendations for CIC program based on a feasibility study and third party actuarial analysis

Trust(s)

General Ledger – Widget Corp.Description Debit

Credit

Insurance Premium Expense

General Ledger – CICDescription Debit

Credit

Premium Income (non-taxable)

$1.2M $1.2M

CIC

Owner(s)

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Model Assumptions

• $1.0M Annual Premiums• Federal Income Tax 39.6%• Federal Capital Gains Tax 23.8%• State Tax 5.80%• Gift and Estate Tax 40%• Average annual costs for captive: $78,000

PremiumsNet IncomePaid Losses

Captive ExpensePre-Tax Earnings

Taxes: FederalState

Net Income

Estate/Gift Tax

Capital Gains – Liquidation

Proceeds to Heirs

$ 1,000,000

$ -$ 50,000$ 950,000$ 78,000$ 872,000

$ -$ -$ 872,000

$ -$ 258,112$ 613,888

$ -

$ 1,000,000

$ 50,000$ 950,000

$ -$ 950,000

$ -376,200$ -55,000$ 518,700

$ 207,480$ -$ 311,220

Status Quo Captive

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Requirements

• To be considered a LEGITIMATE INSURANCE COMPANY– there must be a BUSINESS PURPOSE– as well as RISK SHIFTING– and RISK DISTRIBUTION

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Putting It All Together

• Feasibility Study– Develop complete Risk Management Profile– Determined beneficial Coverages– Actuarial Analysis

• Formation– Select Domicile– Form Entity– Apply for License– Select Financial Institution

• Operation– Turnkey Management Services provided by River Oak Risk– Client Online Portal Access to all relevant information

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Issues

• Real Insurance/Real Premiums• Onshore v. Offshore• Loan Backs to Operating Business• Purchase of Life Insurance• Sufficient Capital• Submission of Claims

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Import/Export Firm

Revenue $42MEmployees 42Premium $945,162• Policies Issued by CIC – 11, including;

– Intellectual Property– General Liability – Excess– Business Interruption – Supply Chain– D&O– Cyber Risk– Business Interruption – Loss of Key Contract

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Heart and Vascular Surgical Practice and Affiliated Businesses

Revenue $24MEmployees 27Premium $706,870• Policies Issued by CIC – 11, including;

– Physicians Professional Liability – Excess– HIPAA Liability– Employment Practices Liability– Business Interruption – Supply Chain– Voluntary Product Recall– Reputational Risk– Cyber Risk

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Commercial Construction Firm

Revenue $58MEmployees 175Premium $1,165,541• Policies Issued by CIC – 14, including;

– Strike Liability– DIC – Liability– Inland Marine– Legal Defense– Wage and Hour

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Financial Service FirmRevenue $41MEmployees 140 Premium $691,780

• Policies Issued by CIC - 10, including:

• Administrative Actions• Cyber Risk• Reputational Risk• Regulatory Risk• Cyber Risk• Employee Fidelity

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Ph: 404.902.5738Email: info@riveroakrisk.com

Website: riveroakrisk.com

DISCLAIMERS:•The information contained in this presentation is for illustration purposes only and not intended to constitute formal tax or legal advice. •The rules imposed by IRS Circular 230 require us to state that, unless it is expressly stated, any opinions expressed with respect to a significant tax issue are not intended or written by the practitioner to be used, and cannot be used by the recipient, for the purpose of avoiding penalties that may be imposed on the recipient or any other person who may examine this correspondence in connection with a Federal tax matter.