Transform Your Practice Using Captives

1. Transform Your Practice Using Captives R. Wesley Sierk, III CLU, ChFC, ARM, ACI Risk Management Advisors, Inc. 110 Pine Ave, Ste 310 Long Beach, CA 90802

2. Agents always looking for ways to sell big ticket insurance policies Captives can provide Large income tax deductions Gift and Estate tax free transfers Large life insurance premium sales

3. Agenda • What is a captive insurance company? • How is the property / casualty marketplace structured? • What are the IRS rules and regulations? • How can you use captive insurance companies to increase your life insurance premiums and save your clients money? • Case Studies

4. The IRS has adversely impacted most of the tax advantaged uses of life insurance Equity Split Dollar Deferred Compensation 412(i) Plans 419A(f)(6) VEBAs

5. A Captive insurance company could be the perfect solution for mid-market companies who want to take large deductions

6. What is a Captive? Insurance company wholly owned and controlled by its insureds Insurance company that insures the risks of the parent company

7. • Association Captives • Cell Captives • • • Program Business Captives Risk Retention Groups Single Parent Captives • Self-Insured Retention Plans (SIRs) • Risk Purchasing Groups • Loss Sensitive Insurance Plans • Guaranteed Cost Insurance Plans Assessing the Captive Frontier MAXIMUM RETENTION R e t a i n e d R i s k Alternative Market Primary Market ZERO RETENTION Complexity from Buyers’ Perspective LEAST COMPLEX MOST COMPLEX

8. Growth of Captive Industry* 1970 – 2006 Captive Growth Market Cycle 4000 3000 2000 1000 0 1970 1980 1990 2000 *Captive Insurance Company Reports Estimate

9. Business Risk Profile UNINSURED RISKS Exclusions Many Insured & Uninsured business risks can be insured through a Captive Insurance Company We work primarily with the INSURED RISKS! Punitive Damages Deductibles Intentional Acts Contract Claims Mold D&O Earthquake Construction Defect Workers Comp Fin. Guarantee General Liability Health Ins. Excess E & O INSUREDRISKS

10. How do we structure them? Begin with traditional insurance coverage Property & Casualty Experts Highly Credentialed Published nationally on the subject of Captives and Alternative Risk Transfer Mainly Domestic Captives Mostly Single Parent Captives

11. What Some Promoters’ Plans Do • Insure only currently uninsured risks • Improper use of risk distribution rules • Cross insure between clients • Charge excessive premiums for unnecessary insurance (i.e., terrorism, sexual harassment) • Non-disclosure of tax aspects of plans • Improper Promotional Material – One promoter’s material calls it “discriminatory, deductible, deferred compensation program”

12. Two Main Taxation Types- • 831(b) • First $1.2 M of premiums tax free • Corporate taxes on investment earnings • Use COLI to defer taxes on earnings • Regular Insurance Companies • Captive recognizes premium as income • Deduction for reserves and IBNR • Corporate taxes on investment earnings • Use COLI to defer taxes on earnings

13. Types of Captives: Rent-A-Captive Protected Cell Captive Single Parent Captive Industry Captives Association Captives Risk Retention Group Captives Agency Captives

14. Why aren’t they widely used? Nature of Property & Casualty Conflict of Interests Negative Perceptions Offshore Abuses Only for Large Companies Too Expensive Sophisticated Purchaser / Broker

15. Onshore vs. Offshore Nearly 50 domiciles have passed captive insurance legislation Taxation: 954(d) election Risk - Real vs. Perceived

16. IRS Rules and Regulations Long standing legislative approval IRS is clear on what works and what doesn’t work Rev. Rul. 2005-40 ‘Safe Harbors’

17. Case Studies

18. Commercial Property Prospect: Property Owner/Developer Industry: Real Estate Income: $3,110,000 in profits Needs: Strategies to protect assets and reduce tax Planning: Multiple LLCs

19. Property Owner/Developer

20. Health Insurance Captive Prospect: Profitable business owner Industry: Wholesale and retail flooring distribution Revenue: $40,000,000 in company revenue Needs: Reduce cost of 150+ life group medical plan Planning: C-Corp, Blue Cross HMO & PPO Plan

21. Health Insurance Captive

22. Health Insurance Captive – Employer Benefit • Reduce (stabilize in some circumstances) current premium outlay for health coverage (currently 10% of GDP, projected to be 25% of GDP by 2015) • Transform millions of dollars from health insurance premiums into insurance company reserves they own and control • Ability to use detailed claims payment histories to negotiate better pricing with reinsurers

23. Health Insurance Captive – Owner’s Benefit • Company executives are 20% owners of captive insurance company • Executives use captive ownership as an addition to their retirement planning • When Executives retire, sell captive shares back to the Company as long-term capital gains • Potential estate / gift tax savings

24. Other Prospects • Developers • General Contractors • Subcontractors • Manufacturers • Professional Services Firm • Franchisees • Restaurant / Hotel Chains • Family Offices / Estate Planning • Garment Industry

25. Captives Can Transform Your Practice Open better cases with bigger prospects and larger premium opportunities (Recently traveled to Florida with an NFP producer, eight meetings in two days, each prospect had a net worth in excess of $100 Million. The producer used captives as a differentiator) $20,000 Agent Referral Fee Life Insurance Commission (no splits)

26. Coming Nov 2007-preorder available attakencaptive.com

27. Next Steps – How to Work With Us • Call us to discuss new cases – tell us the client’s “story” 2. Gather census data, client “wish list”, and current plan information 3. We will prepare a proposal and/or “narrative” and discuss with advisor and client 4. We will prepare final numbers based on client and/or advisor feedback 5. Plan implementation begins. You may reach us at 877-RMA-CAPTive (877-762-2278) or send an e-mail to info@riskmgmtadvisors.com