How a Captive Insurer Helps Companies Build Value

Captive Insurer - Building value with your captive

Options for Investing Captive Assets

A captive insurer makes profit in two ways: (1) through underwriting activities (premiums minus claims) and (2) investment activities. A captive insurer must comply with the investment requirements prescribed by the insurance regulator of the licensing domicile. Typically, the regulator restricts investments that impair the solvency or liquidity of the insurer. There are wide differences in allowable assets, required minimum capitalization, reserve calculations and investment and dividend restrictions among domiciles.

Traditional Investments of a Captive Insurer

Regarding investment of the captive insurer's assets, many of our clients choose to leave the monies within the captive and earn a return on, for example, U.S. Treasury investments, agency bonds, high quality corporate bonds or other forms of debt instruments. Some jurisdictions also allow an investment in a diversified pool of publicly traded equities. Often this basket is limited. Other “approved investments” may also include certain types of life insurance.

Corporate Loans

Large property and casualty insurance companies, such as Hartford, AIG, Chubb, CNA, or Travelers, have long included corporate loans as part of their diverse investing activities. Depending upon the regulations governing the captive and the nature of the insurer's other investments, a captive insurance company may have the option to make corporate loans. Solvency regulations, in all cases, differ from jurisdiction to jurisdiction and the admissibility of corporate lending differs accordingly. Loans should be made on an arm's length, secured basis and under commercially reasonable terms with appropriate loan documentation. Over time, successful captives can become an important source of liquidity for our clients' operating business.

Professional Management Is Critical

Because the captive's operational issues are critical to the planning's success, our clients have Capstone, together with our affiliated law firm, The Feldman Law Firm LLP, administer the insurer on a turnkey basis, all of course under the direction of the owner-officers of the captive. The client separately manages the cash and other investments of the captive, usually through their preferred bank or investment house, which also acts as funds' custodian.

Capstone's responsibility in regards to investments is to provide ongoing guidance on the regulatory acceptability of the various categories of investments and the various limitations for stocks, bonds, equities, life insurance and corporate lending. In all instances, the captive should not be looked upon as an extension of your personal checkbook. Rather, it is an operating insurance company whose premium revenue significantly comes from companies that you own. As with all insurance companies, investments of premium revenue are an extension of the captive's insurance operations.

Captive Insurance In The News

There has been an increase in articles on alternative risk/captive planning as the concept has become more widely known. Articles have been published by The Wall Street Journal, American Bar Association, The Houston Business Journal, and The CPA Journal. We have previously passed these articles along to you. In “Captivating Captives,” from the November 2009 issue of Financial Planning magazine, (published since 1970 for independent financial planners), the benefits of alternative risk planning were outlined.

Here are a few excerpts:

“Forming captives may be one of the best risk management and wealth planning tools available to business owners”
“Captives are one of the best--if not the very best--asset protection tools available to business owners.”
“But for the right owners, establishing a captive can be one of the best financial decisions they make.”

“But for the right owners, establishing a captive can be one of the best financial decisions they make. For instance, a business owner paying $1 million in premiums to a captive will receive a business deduction for the insurance payment, but the captive won't pay tax on the payment, nor will the shareholders of the business or the captive pick up additional current taxable income. This may result in a $400,00 or greater income tax savings each year of premium payments.”

Capstone is the leader in both U.S. and offshore captive insurance formation and management. Call WEB_TEL to speak with one of specialists or complete this short form. We also offer free webinars on captive insurance every month that may interest you.

This article was written by Stewart A. Feldman, CEO and General Counsel of Capstone Associated Services, Ltd.


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