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.