Creating Opportunities with Captives

J Smith Lanier LogoJ. Smith Lanier & Co., founded in 1868, is the oldest privately held insurance brokerage in the Southeastern United States and one of the 25 largest of public and privately held insurance brokerages in the country. With 19 offices in five Southeastern states and nearly 600 associates, Lanier serves a wide variety of industries and clients including domestic, international, private, public, for-profit, non-profit, and governmental entities.

“We started working with Intuitive Captive Solutions in 2010,” says Steve Norton, Senior Vice President of Alternative Risk Financing at J. Smith Lanier & Co. “We wanted to offer leading edge and innovative enterprise risk captive products to our clients. Since that time, we have established several captives with Intuitive and have several others in the pipeline.”

Norton feels that offering captives helps to reinforce the firm’s relationships with existing clients and also helps to establish new client relationships. “We researched enterprise risk captives very thoroughly, and we scrutinized the risk pool models that are out there,” says Norton. “We found Intuitive’s model to be just that – ‘Intuitive’. It has the measures and controls in place we felt were necessary to protect our valued clients and their investments while offering real value to the captive owner.”

Keeping an eye on the captive market

Norton sees quite a bit of growth ahead for captives. As his firm continues to develop more business, clients are starting to ask more questions about captives. Norton believes there are firms out there promoting very questionable pooling facilities that are begging for a challenge by the IRS and their scrutiny is only going to increase. Intuitive’s facility has been tested and is closely monitored by their actuary and tax counsel.

“The team at Intuitive and their deliverables are very professional, thorough and well designed,” says Norton. “Intuitive is a great partner for J. Smith Lanier & Co. and we look forward to helping more of our clients achieve their financial goals with their assistance.”

Case Study – A Captive Solution for an Energy Company

Recently, we worked with a publicly traded energy production company. This “C” corporation has annual revenues of approximately $140 million and is profitable. They know that their commercial insurance program covers them for most catastrophic events, but they also realize that they have a number of self-insured risks—risks not covered by third-party insurance, and wanted to know how they might be able to cover these.

Re-evaluating insurance options

The energy company was making adjustments every year to reduce premium expenses while pushing for marginally broader coverage. Adjusting the caps on coverage amounts, deductibles, and exclusions at renewal to squeeze out additional value is an annual process. The company doesn’t buy all insurance available as they are large enough to self- insure several types of risk, and they work hard to grow the bottom line and continually look for proven ways to increase shareholder value.

With all this in mind, we worked with the energy company to review their insurance program and recommended a new captive insurance company. Upon review of the study, they instructed us to form a new captive – a domestic private insurance company – to sell selected lines of property, casualty and liability insurance to the energy company. The integrated insurance review resulted in several recommended adjustments to the existing commercial insurance program that created immediate cash savings to the company by lowering annual P&C premiums. The captive – a subsidiary of the parent – issued a supplemental commercial insurance policy to the energy company in exchange for a fully tax deductible annual premium of $1,190,000. Though this is both in addition to – and substantially more than – the annual third-party insurance premium expense, it accomplished several goals:

  • Created a profit center where there once was only unfunded self-insured risk
  • Gave the management peace of mind by broadening their enterprise risk management coverage
  • Reduced total premium dollars going to third-party insurers
  • Reduced current income taxes and created additional wealth for the shareholders

New benefits through captives

Forming the captive helped the energy company restructure its risk outlook. With the captive, they now had a new business segment with additional net profit budgeted to exceed $3 million over six years. They saw a reduction in annual third-party insurance premiums by eight percent. There was an anticipated distribution of the captive’s profits to the parent company at more favorable tax rates and the company could now be a recipient of a reinsurance payments on losses that otherwise would have been totally self-insured.

Lyons Companies and Captives: Education is Key

Lyons Companies is a risk management firm serving middle-market businesses on the east coast. Founded in Wilmington, Delaware, in 1984, Lyons has more than 55 employees. The company’s philosophy is centered on relationship building, creating proactive solutions to reduce costs and improve profits through smart risk management.

Joe Valerio, an executive vice president with Lyons, has been in the business for 17 years. At Lyons, Valerio works with clients in the non-profit and social services sector, construction, private schools and education, financial services firms, banks, and manufacturing.

Taming risk = taking control

“Risk and insurance is more than just paying premiums and getting coverage,” says Valerio, “For companies, it’s more about taking control of a situation and being able to take more risks in order to move forward.”

Lyons Companies insurance

Lyons Companies

Valerio is passionate about helping clients. “You hate to see a client leave money on the table when they can control their environment more effectively through good claims management, safety, culture, and changing the way they think,” he says, adding, “if you can get your clients to embrace that kind of thinking, you’re differentiating yourself.”

Captives are a natural for Valerio. “I’ve always gravitated toward alternative financing mechanisms,” he says, noting, “Some clients think that they’re too small for something like a captive, but it’s more of an education process, and once you show them that even if they’re smaller, they can still take advantage of an enterprise risk captive and gain more control over risk, even at their size, they’re really interested.”

“Insurance and risk management is a relationship business,” says Valerio. “At the end of the day, there are very few deliverables – you’re delivering on promises that if something bad happens, you are going to be there to make them whole again.”

Education through conversation

Valerio admits that the sales cycle on captives takes longer. “There is a lot of education involved. Most of our clients don’t necessarily think about captives because they haven’t hit that critical mass yet, he says. But when the time is right, he is glad to start the conversation, and often turns to Intuitive for help with specifics.

“There’s a lot of trust in this business, and you have to trust the people you’re working with. That’s why we like working with Intuitive,” says Valerio. “We have that feeling of trust with Intuitive, so we have no problem connecting them with our customers.”

Captives offer Insurance Broker an Updated Approach to Risk Management

Sullivan Curtis Monroe Insurance Services, LLC, (SCM), is an insurance and risk management broker in Southern California. With several hundred employees, and three offices, SCM is a regional firm offering a just-right approach to companies that feel they are too big for a local broker, but still want personalized attention that they couldn’t get from a mega-broker. SCM has practice groups that service clients in real estate, construction, auto dealerships, the food and beverage industry, environmental chemical and engineering, manufacturing, and distribution.

Steve Paulin is a senior vice president at SCM who has been in the business for 35 years as a risk management and insurance expert. Paulin had been familiar with captives, but when he saw that they had been restructured to be more cost-effective for middle-market clients – the base he currently works with at SCM – he decided to learn more about them.

Discovering the benefits of enterprise risk captives

SCM Insurance “I was introduced about four years ago to the enterprise risk captive concept. I saw it was a wonderful opportunity for me to bring additional value to my clients, and differentiate myself from the competition. This led me to learn more about captives and gain the necessary knowledge and competency to introduce and educate my clients and prospects.”

Paulin spent a year vetting and understanding how captives could benefit his clients. “I went to conferences, clinics, and attended webinars. I had some introductory conversations with clients and the positive response was gratifying.” He spent additional time studying and having deeper conversations, which developed opportunities for feasibility studies and captive formations.

Timing was on Paulin’s side.  As he’s been learning more and more about captives, his clients have been climbing out of the recession – now, as clients are making more profits, Paulin is ready with answers about captives.

“The captives we’ve put together so far have been primarily for manufacturing clients,” says Paulin, who is planning to expand the captive offering to more practice areas in his firm shortly.

Working with clients on captives

Paulin finds that his competition hasn’t really caught on to the benefits of enterprise risk captives yet, so he is generally the first one to introduce this topic to his clients. “Being the first to do this, along with periodic follow-ups has positioned me to get the call for further discussion. I walk clients through a short presentation that incorporates many of the points I’ve gleaned from working with Intuitive,” he says. “I talk with the client about captive benefits that are relevant to their operation, such as the ability to cover risks that are excluded or they decided not to buy. Then, I tie in the tax advantages and wealth management benefits through creating a captive.”

“I explain to clients that the work I do involves assessing and evaluating their programs, which has been a core competency of mine, and that we partner with Intuitive who handles the management aspects of the captive.” This usually leads to a more detailed presentation by Intuitive.

A new way for clients to look at risk management

Paulin credits captives with enhancing his practice. It offers the opportunity to have a different conversation with business owners about how they can better manage risks and gain profit in the process. “Captives have helped me feel very confident that I’m offering new alternatives to help structure effective risk management programs for my clients,” he says.

Future growth

Even after four years, Paulin finds it’s more of a pull than a push. “There isn’t a lot of awareness yet about captives,” says Paulin. “There are business owners who have a perception of a captive for certain types of coverage, like workers’ compensation, but they don’t have a working knowledge or a deep understanding of it. It’s an opportunity to educate business owners.”

Paulin has spent so much time reading and learning about captives, he’s accumulated an archive, and has written a whitepaper. “I find I get to a plateau and I think I know all the info about captives,” he muses, “But then I’ll read an article and I’ll think, ‘Oh, here’s something I haven’t thought of about a particular use of the captive.’ There’s a need for ongoing education, and this is an opportunity to structure a program in a new way.”

To handle the interest in captives, SCM recently hired a marketing specialist to build a program around captives. “We plan to formalize a marketing program using Salesforce, and Benchmark emails distribute white papers, Executive Briefings and other information including webinar invitations. The ability to touch a lot of people with relevant information once a month will help increase awareness,” he says.

Captive Case Study – Auto Dealerships | Intuitive Captive Solutions

 

The Situation

Our client is an auto dealership group with multiple brand dealerships. Their operations have expanded steadily due to successful operations over the past 30 years.

The Challenges

The group’s expansion has magnified risks in a number of ways. They’re now exposed to risks that are not currently insured in the third-party marketplace. The commercial insurance market is experiencing price increases and tightening capacity for perils such as directors & officers liability and environmental liability. Increased annual revenues have made the exposure to non-insured risks – like financial guarantees for floor plan – more pronounced. At the same time, new threats emerge regularly that require more coverage, including cyber liability and employment practices issues.

The Solution

The auto dealership group engaged Intuitive Captive Solutions to prepare a feasibility study to review their organizational structure, insurance program, loan documents, and personal guarantees. The study resulted in the identification and quantification of several new personal liability risks and adjustments to the existing commercial insurance program that offset the tightening insurance market conditions. Upon review of the study, the group instructed Intuitive Captive Solutions to form three new 831(b) captives – domestic private insurance companies – to insure selected property, casualty, and personal liability risks.

The captives – controlled by the owners – issued three supplemental commercial insurance policies to the company in exchange for combined fully tax deductible annual premiums in excess of $2,100,000. Though this is in addition to the annual third-party insurance premium expenses the company currently pays, it accomplished several goals:

  • Created a profit center to cover previously unfunded self-insured risk.
  • Gave the owners peace of mind by broadening their insurance coverage.
  • Offset premium dollars going to third-party insurers.
  • Reduced current income tax obligations and created potential additional wealth for the owners and their families.

The Benefits

Three new businesses with additional net profits were formed. The captives resulted in a reduction in current income taxes to the owners of more than $825,000, and also provide an anticipated distribution of the captives’ profits to owners at more favorable tax rates. The auto dealership group is already in receipt of a reinsurance payment on a loss that otherwise would have been totally self-insured.

If we can help you with similar coverages through an 831(b) captive, please contact us.

longboat key

Captive Case Study – Real Estate

The Situation

Our client is a real estate investment and property management company serving self-managed private equity funds and investment partners.  Following a decade of no or minimal revenue growth, the multifamily industry appears to be in a healthy recovery phase.

The Challenges

While they recover, the company is still impacted by capitalization rates that are being driven to historically low levels resulting from unsustainably low interest rates.The commercial insurance market is seeing price increases and tightening capacity for perils such as wind damage. Additionally, multifamily loan documents introduced in 2011 by Fannie Mae materially expand the risk of recourse exposure to borrowers and loan guarantors. The company is also exposed to additional personal liability risks, which have increased substantially.

One Solution

The client engaged Intuitive Captive Solutions (Intuitive) to prepare a feasibility study to review their organizational structure, insurance program, loan documents, and personal guarantees. The study resulted in the identification and quantification of several new personal liability risks and adjustments to the existing commercial insurance program that offset the tightening insurance market conditions. Upon review of the study, they instructed Intuitive to form a new 831(b) captive – a domestic private insurance company – to insure selected property, casualty, and personal liability risks.

The captive – controlled by the owners of the real estate investment company – issued a supplemental commercial insurance policy to the company in exchange for a fully tax deductible annual premium of $1,190,000. Though this is in addition to the company’s annual third-party insurance premium expense, it accomplished several goals:

  • Created a profit center to cover previously unfunded self-insured risk.
  • Gave the owners peace of mind by broadening their insurance coverage.
  • Offset premium dollars going to third-party insurers.
  • Reduced current income tax obligations and created potential additional wealth for the owners and their families.

The Benefits

Now, the company has a new business with additional net profit budgeted to exceed $3 million over six years. Forming the captive created a reduction in current income taxes to the owners of nearly $475,000 and there is an anticipated distribution of the captive’s profits to its owners at more favorable tax rates. The company may also be a recipient of reinsurance payments on losses that otherwise would have been totally self-insured.

Find out more about how we can help you restructure your risk in this changing market. Contact us.

1099 or 12 image Lowe's

W-2 or 1099 – You’d Better Have your Answer Handy

Many employers have trouble understanding the difference between a contract employee and a payroll employee. The definitions are outlined in this article, Form 1099-MISC & Independent Contractors published by the IRS, which opens by admitting how complex the issue is. Many employers think a 1099 employee is a part-time employee, or an employee who works occasionally or seasonally. In reality, the central difference between a 1099 and payroll employee is who controls how the worker performs his or her services. At stake for the employer is a good deal of savings on payroll fees and taxes if the employee can be classified as a contractor.At stake for the worker are important benefits and employment perks – such as worker’s compensation coverage.

Compensating for high’s and Lowe’s

A class action lawsuit brought by roughly 4,029 installers and 949 installation companies argues that Lowe’s supplied the materials and the place of work for the installers, and that Lowe’s “had the right to control the performance of the installers’ work.”  The workers who contract with Lowe’s charge that they are being miscategorized as contractors under California law – the suit was filed in U.S. District Court in Oakland. While Lowe’s strongly denies the allegations, they have offered a $6.5 million settlement.

The letter of the law

The IRS’s definition of contractors is, indeed, a head-scratcher, leaving all kinds of companies open to interpretation of their employment policies, and potentially to the type of suit that Lowe’s faced. This is not just a question for the contracting industry. Tech companies and big corporations have 1099 employees seated in assigned desks, working hours dictated by the company, in clear violation of the spirit of the IRS’s definition. On the other hand, there are plenty of companies who diligently establish corporate policies about the differences between payroll and contract employees who may be just as vulnerable.

Companies that get stuck in a regulatory defense suit in an area this murky and grey might be forced to settle. Consider what might be at stake – legal fees, a class action settlement, and a fundamental shift in how your workforce is structured – and work with your legal team now to do the best possible job of achieving compliance, but back up your decisions with enough coverage to be able to withstand a suit if it were filed. Captive insurance was designed to meet challenges like this one. If we can help you structure a Captive, please contact us.

Gary Warrn, Valley Forge Captive Advisors, photo

A Risk Management Solution to Believe In

Valley Forge Captive Advisors is a subsidiary of McConkey Insurance & Benefits. Specializing in group domestic captive products, Valley Forge is focused on group captives for mid-to large-sized businesses.  Gary W. Warren, CPCU, ARM, is the President and Principal at Valley Forge Captive Advisors.

valley-forge-captive-advisorsWarren is a proponent of domestic captives as a risk management tool for businesses. “One of the nice things about a captive is that it can offer coverage that clients cannot buy in the regular market – or have chosen not to buy in the market,” says Warren. “We have clients that have risk management needs that regular insurance can’t meet. Rather than having to turn them down, I can work with them to create a captive.”

It’s not just about the tax advantage

Warren finds that captives are a new idea to some clients. “When people first hear about captives, they sometimes focus on the tax advantages,” says Warren, “But it’s important that they understand that captives provide coverage and a solution for risk.”

While he’s been working with enterprise risk management captives for the last few years, it’s only recently that his clients have been able to take advantage of them. “People were interested, but couldn’t take advantage of captives because their businesses weren’t profitable enough these last few years. But now that the economy has improved, businesses are starting to have the kind of profits it takes to create a captive.”

Enterprise risk captives are such a specific market, Warren believes that there are only a few really good sources for education on them. “A captive manager like Intuitive provides excellent education,” he notes, adding with a laugh, “You had better learn about them – if you don’t, someone else will sell one to your clients.”

New lines of business

Warren enjoys having another inroad for new business. “Working with Intuitive has helped me to see that there are a lot of different captive models. I like the way Intuitive does it – they have enough risk sharing to really make sure that, if the client is ever audited, Intuitive has done a good job of demonstrating that they’re a risk transfer mechanism, not just a way to avoid taxes.”

“There are still a lot of companies out there that don’t know enough about captives. It’s a great differentiator for a firm like ours. When you come to the table with a product like a captive, it’s a financial mechanism to reduce costs – it’s something I definitely enjoy explaining to clients. I’ve been doing this for almost 20 years, and it’s definitely a way of handling insurance that I believe in.”