CAPTIVE

1

• CAPTIVE
• INSURANCE COMPANIES

J. Michael Roney Regional Representative Roney
and Company 140 S. Lake Ave, Suite 305 Pasadena,
CA 91101 [phone] Roneyco_at_pacbell.net
DISCLOSURE UNDER IRS CIRCULAR 230 THIS
COMMUNICATION IS NOT INTENDED TO AND DOES NOT
COMPLY WITH THE U.S. TREASURY DEPARTMENT'S
TECHNICAL REQUIREMENTS FOR A FORMAL LEGAL
OPINION. CONSEQUENTLY, IT CANNOT BE USED BY A
TAXPAYER TO AVOID ANY PENALTY THAT MIGHT BE
IMPOSED ON A TAXPAYER. NOTHING IN THIS
COMMUNICATION MAY BE USED OR REFERRED TO IN
PROMOTING, MARKETING, OR RECOMMENDING A
PARTNERSHIP OR OTHER ENTITY, INVESTMENT PLAN OR
ARRANGEMENT TO ANY PERSON.
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• Orange County, CA
• Tortola, British Virgin Islands
• Pasadena, CA
• Las Vegas, NV
• Phoenix, AZ
• Chicago, IL (Opening 2007)
• Troy, MI (Opening 2007)
• Orlando, FL
• Houston, TX
• Kansas City, MO

British Virgin Islands
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• Captive Benefits
• Wealth Accumulation
• Favorable Tax Treatment
• Control Risk
• Minimize Insurance Costs
• Asset Protection

4

• Qualification Metrics
• Operating Entity
• Appropriate Profitability
• Requisite Risk
• Financial Suitability

5
CAPTIVE STRATEGY Transfer Uninsured Risk to
Captive
UNINSURED RISK Businesses Self-Insure Risk
INSURED RISK Third-Party Risk Transfer
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80 of the SP 500 utilize captives A captive is
an insurance company organized primarily for the
purpose of insuring or reinsuring the liabilities
of the owner.
Shareholders
Shareholders
Parent Company
Captive IRC 831(b) U.S. 953(d)
Premiums
Insurance Policies
Investments
Sub
Sub
Sub
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• Typical Structure

Insurance Premium
Independent Insurance Company 1
Parent Company
MGMT
PROF
LEGAL
GENL
BUS
EPLI
CONST
Reinsurance Premiums
Captive
1 Each Line of Insurance is Pooled in order to
Achieve Homogenous Risk Distribution and 3rd
Party Risk 2.5 Pooling Rate
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• Captive Lines of Coverage
• Exclusions
• Deductible Reimbursement
• Administrative / Regulatory Acts
• Construction Defect
• Product Liability
• Product Warranty
• Mold
• Subsidence
• Wrongful Acts
• Professional Liability
• Litigation Defense
• Employment Practices

9

• Internal Revenue Code
• Captive IRC 831(b)
• 1.2 million premium income is exempt from
  taxation
• Taxed exclusively on investment gains

Shareholders
Shareholders
1.2 Million Tax-Exempt Premiums
Parent Company
Captive IRC 831(b) U.S. 953(d)
Insurance Policies
Investments
Sub
Sub
Sub
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• IRS Position on Captives
• Post June 2001 (Rev. Rul. 2001-31)
• Discards economic family doctrine
• Adopts facts and circumstances test
• Will address captive transactions on a
  case-by-case basis
• Will attack captives with
• Thin capitalization
• Parental guarantees and hold harmless agreements
• Insufficient risk distribution

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• IRS Position on Captives
• Insurance Defined
• RISK SHIFTING
• RISK DISTRIBUTION
• Revenue Ruling 2002-89 and 2002-90
• Revenue Ruling 2005-40
• Safe harbors
• Guidelines to follow
• Defines risk shifting and risk distribution

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• Establishing Your Captive
• Feasibility Analysis
• Examine Insured and Uninsured Risk
• Quantify Risk Premium Range
• License Application
• Insurance License
• Incorporate Insurance Company
• Transact Insurance Operations
• Capitalize Company
• Pay Premiums
• Alta Provides Complete Turnkey Services

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• IRS Revenue Ruling Safe Harbors
• Multiple Subsidiaries (12 Subsidiaries)
• Greater than 50 Third Party Risk

Parent Company
Captive
Sub
Sub
Sub
Sub
Sub
Sub
Sub
Sub
Sub
Sub
Each Sub Comprises 5-15 of Risk
49 of Risk
51 of Risk
Parent Company
Unrelated Company
Captive
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Achieving 50 Third Party Risk Pooling Flowchart
1,000,000 Premium
U.S. Risk Associates 1
Parent Company
MGMT
PROF
LEGAL
GENL
BUS
EPLI
CONST
975,000 Reinsurance Premiums
Captive
1 Each Line of Insurance is Pooled in order to
Achieve Homogenous Risk Distribution and 3rd
Party Risk 2.5 Pooling Rate
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Risk Profile Policy Issued to Captive
Captive Responsible for 1st Tranche of Risk (1st
250,000 for each claim)
Pool Responsible for 2nd Tranche of Risk
(750,000 in excess of the 1st 250,000)
Probability of Occurrence
250,000 500,000 750,000 1,000,000
Estimated Loss
Dollar Amount can change as a result of
underwriting and actuarial analysis of insured
risks
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Premium Timetable Phase I
1,000,000 Premium
Independent Insurance Company 1
Parent Company
MGMT
PROF
LEGAL
GENL
BUS
EPLI
CONST
Reinsurance Contract for this part of risk
477,750 Payment to Captive1
Captive
1 net of 2.5 pooling rate
250,000 500,000 750,000 1,000,000
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Premium Timetable Phase II
1,000,000 Premium
Independent Insurance Company 1
Parent Company
MGMT
PROF
LEGAL
GENL
BUS
EPLI
CONST
Reinsurance Contract for pooled risk
497,250 Minus Pooling Claims/Rates1
Captive
1 net of 2.5 pooling rate
250,000 500,000 750,000 1,000,000
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CASE 1 BUILDER
1,230,000 Premiums
Independent Insurance Company 1
Parent Company
Owner
Key Employees
Previously Self Insured Risk Construction
Defect Mold
Water Damage Subsidence
Pollution
Deductible Reimbursement Litigation Defense
Employee Practices Liability Other
Self Insured Risk
LLC
1,200,000 Tax-Exempt Premiums
90 10
Captive IRC 831(b) U.S. 953(d)
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CASE 2 MANUFACTURER
U.S. Risk Associates 1
2,460,000 Premiums
Parent Company
1,200,000 Tax-Exempt Premiums
1,200,000 Tax-Exempt Premiums
Partner 1
Partner 2
Previously Self Insured Risk Warranty
Liability Product Liability
Key Supplier Liability Key
Distributor Liability Deductible Reimbursement
Employee Practices Liability Litigation
Defense Credit Default
AR Concentration Intellectual
Property
Captive IRC 831(b) U.S. 953(d)
Captive IRC 831(b) U.S. 953(d)
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CASE 3 PROFESSIONAL SERVICES FIRM
U.S. Risk Associates 1
Parent Company
3,690,000 Premiums
Partner 1
Partner 2
Partner 3
Previously Self Insured Risk Error and
Omissions Directors and Officers Liability
Licensure/Regulatory Liability Deductible
Reimbursement Litigation Defense
Employee Practices Liability Other Self Insured
Risk
Captive IRC 831(b) U.S. 953(d)
Captive IRC 831(b) U.S. 953(d)
Captive IRC 831(b) U.S. 953(d)
1,200,000 Tax-Exempt Premiums
1,200,000 Tax-Exempt Premiums
1,200,000 Tax-Exempt Premiums
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• What Services Does Alta Provide?
• Feasibility analysis
• Create insurance company
• Maintain knowledge of domiciles and regulations
• File and obtain insurance license
• Develop business plan and forecast
• Underwrite policies
• Analyze insurance/self-insurance need

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• What Services Does Alta Provide?
• Monitor regulatory requirements
• Review and submit quarterly statements
• Monitor solvency requirements
• Review actuarial reserves/balance sheet
• Manage reinsurance
• Administrate third party treaties

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• The Alta Advantage
• Over 20 years of direct Captive expertise
• Our past experience comes from the Major
  Houses in insurance, accounting and law.
• Ongoing management by the people who designed it
• Expertise in reinsurance business
• Tailored to your specific needs
• Strong relationships with domiciles

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• Contact Information

J. Michael Roney Regional Representative Roney
and Company 140 S. Lake Ave, Suite 305 Pasadena,
CA 91101 [phone] Roneyco_at_pacbell.net
DISCLOSURE UNDER IRS CIRCULAR 230 THIS
COMMUNICATION IS NOT INTENDED TO AND DOES NOT
COMPLY WITH THE U.S. TREASURY DEPARTMENT'S
TECHNICAL REQUIREMENTS FOR A FORMAL LEGAL
OPINION. CONSEQUENTLY, IT CANNOT BE USED BY A
TAXPAYER TO AVOID ANY PENALTY THAT MIGHT BE
IMPOSED ON A TAXPAYER. NOTHING IN THIS
COMMUNICATION MAY BE USED OR REFERRED TO IN
PROMOTING, MARKETING, OR RECOMMENDING A
PARTNERSHIP OR OTHER ENTITY, INVESTMENT PLAN OR
ARRANGEMENT TO ANY PERSON.