Risk Distribution for Single-Owner Captives

Risk Distribution for Single-Owner Captives

financial-riskAn important consideration in differentiating a simple transfer of risk from bona fide insurance is the extent of risk distribution. The underlying concept is that insurance involves the sharing of risk among insureds, which increases the predictability of losses. Capstone uses multiple strategies, which we continue to refine, to obtain risk diversification. Among the strategies, Capstone uses a risk pooling arrangement to help client's captive insurance companies gain greater risk distribution and to provide stop-loss protection for direct written policies.

PoolRe is a Capstone-administered insurance company that participates above a given threshold of losses borne by the underlying policies on a stop-loss basis in most of the direct insurance policies issued by Capstone-administered captives. An endorsement to each of the policies stipulates both the premium split of 18.5% that is paid directly to PoolRe and the amount of excess protection that is provided. PoolRe is currently covering these stop-loss provisions on over 365 policies.

PoolRe reinsures 100% of its underwritten stop-loss risks on a pro-rata basis with the participating captive insurers; at present there are over CAPTIVE_FORMATIONS captives participating in the pool. Each captive assumes the risk in proportion to its PoolRe stop-loss premiums (see chart below). The result of the pooling is a more diversified book of insurance held by each captive insurer as a consequence of being in the pool.

If you are interested in learning more about how Capstone would utilize captive planning for your risk management program, please contact us.


Importance of the Feasibility Study

The first -- and among the important --undertaking by your Capstone team is the formal feasibility study, which evaluates the advisability of establishing a captive insurance company or an other alternative risk management mechanism. The analysis is usually based on an initial site visit and review of insurance records and related financial information of the proposed insureds.

The feasibility study is an important part of the application for formation of the insurance company in the selected domicile, particularly the sections describing the business operations and the pro forma business plan. However, the study also serves to analyze whether the factors exist with the insured, the captive owner, and the affiliated operations to make the captive a success.

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Captive Insurance in the News

The popularity of captive insurance continues to grow and its prevalence among middle market companies continues to gain headlines in the U.S. business press.

On August 22, 2007, Fortune Magazine published an article highlighting the continuing trend of businesses to embrace captive insurance as an alternative risk solution. Below are a few key excerpts from the article:

Regarding growth of the captive market:

"Across the nation, small-business owners are already finding captive insurance an alternative to the commercial market. You don't have to run a company in Hurricane Alley to understand why: For manufacturers, contractors, and professional-service firms, property and liability insurance has become a pricey and uncontrollable variable--a wild card that can break a small business."

Regarding alternative risk planning design, implementation and related captive formation:

"How does it work? A group creates an insurance company, providing enough capital to cover a set amount of risk. Day-to-day management is usually outsourced to a specialized company[.] Over time, if there are no large losses, excess reserves can come back to the owners as dividends. 'When you take in more premiums than your maximum loss, the profits go back to your own company,' explains Walter Bell, Alabama's insurance commissioner."

"Superior risk management is a key advantage for captives-and the path to lower rates, says Henry Witmer, assistant vice president of A.M. Best, an insurance rating agency (ambest.com). 'Captives offer much stronger risk management, because they can really focus on issues of the group,' he says. 'That leads to reduced losses and reduced costs and therefore lower rates.'"

Since 1998, Capstone together with its legal team at The Feldman Law Firm LLP has specialized in the turnkey design, implementation and operation of captive insurance planning for middle market companies. Capstone currently operates in excess of fifty such companies.


Capstone Completes Largest Initial Public Offering in Canada

Capstone Completes Largest Initial Public Offering in CanadaJune 29, 2007

The Houston Chronicle, along with other publications recognized our efforts in the recently completed Northstar Healthcare transaction. Together with our affiliated The Feldman Law Firm LLP, Capstone recently completed the largest initial public offering in Canada to-date for 2007.

The Northstar transaction began in 2005 and was a sophisticated cross-border income strip of U.S. earnings into the hands of Canadian shareholders on a tax advantageous basis. Together with our related law firm, Capstone lead a team of U.S. and Canadian accountants and lawyers along with the top four Canadian investment banking houses in designing and implementing this roll-up of two Houston-based surgery centers. Most unusual in this transaction was that Northstar had no material income outside of Houston. Our experience in U.S.-Canadian transactions over the last 25+ years resulted in this highly successful $165 million public offering.

In addition to being one of the largest Northstar shareholders, a Capstone affiliate was among the selling shareholder in the offering.

Capstone and its affiliates provide specialized financial services to owners of closely held businesses. In addition to cross-border financings, Capstone's financial engineering is more generally directed towards enhancing the enterprise value of its clients' businesses. Through Capstone Associated Services, we are one of the largest and most prominent providers of turnkey services for closely-held insurance companies from our beginnings in 1998. Related divisions operate domestic international sales corporations (Export Assurance) with another division providing specialized factoring services for long-term financial receivables and life settlements. All of Capstone's operations draw upon the resources of The Feldman Law Firm LLP, Houston, TX.


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