Captives

2018—Leaving a Legacy!

It’s hard to believe that 2018 is coming to an end! It’s time we take a step back and realize why we chose this path, the work it took to get here, and ask what 2019 holds for Legacy and the ownership of a captive insurance company.

At the summer board meeting in Banff, Canada, we discussed the momentum we have, and the top initiatives ending out the year and rolling into 2019. At Leavitt Group we are committed to preparing and focusing on the process of turning risk into profit.

Together we strive and commit to the underlying principles of that process:

  1. Product excellence delivered with passion! We are on offense. All the time!
  2. Driving innovation! Our business is changing, so assume nothing. We look to control and create.
  3. Be with like-minded people. The goal is zero claims, with little disruption to the company! By committing to owning an insurance company you are committing to hit that mark, and we have companies that are hitting that mark!
  4. Focus on operational execution at the highest level day in and day out!

Let’s play with some numbers relating to the captive industry and specifically Legacy thru Q3.

  • There are approximately 6,800 captives globally writing over $140b in gross premiums annually with $408b in assets under management (AUM). Independent research firms expect that number to increase to nearly 10,000 captives in 2020.
  • Approximately 90%+ of Fortune 500 captives have established some alternative to risk management.
  • The onset of new major risks (i.e. cyber and fiduciary liability) will swell the captive growth 5-6% over the next five to seven years on that risk alone.
  • The eight major industry segments (financial services, health care, retail, manufacturing, construction, transportation, tech and telecom, and power and utilities) control 77% of the global captives by entity.
  • From renewable energy to cannabis to driverless cars, captives are responding to the change and technology and attempting to be innovative and creative on the front line of an ever-changing landscape.
  • Quote from a captive member: “Joining this group captive was the very last day I worried about insurance being a sunk cost . . . instead I spend the time and energy elsewhere in the company, making it better and making it safer, and I am loving it!”

Where does Legacy Insurance PIC fit in? We are committing to be, what our actuary calls, the best start to a captive he has seen! Thru Q3 our simple loss ratio as a group stands at 6%, off annual premium! Typically, loss ratios for property casualty insurance range from 40-60%. 9% of our loss funds are currently tied up in paid or reserved claims, still making investment income in reserve!

As we begin to look forward, we want to hit some highlights to date and share in some successes

  1. Rearview Mirror. With the Trump Tax Reform, captives have had in-depth conversations with tax/audit firms. They laid out the landscape for the members to look at options in relation to captives and the tax status of CFC’s (controlled foreign corporations). As always, the pieces are moving and with the recent switch over of power at the federal level in the House of Representatives, it will be a moving target and one for us to keep our eyes on into 2019.
    Regarding how the government views alternative risk, a Republican president signed captive legislation into effect with the Tax Reform Act of 1986 having a Democratically-controlled congress. Insurance laws cross party lines continually in a bi-partisan relationship, believe it or not! Since then a Democratic President, President Obama, enhanced captive law with a Republican congress. Insurance laws are favorable to owning insurance companies and currently over 35 states have some form of captive legislation with Vermont leading the U.S. domiciles with just under 600 captives licensed.
  2. Looking Forward. With the hardening of the commercial marketplace due to a number of factors, traditional insurance rates are set to go up in 2019.
    Conversely, our group was down in all lines and we triggered the circuit breaker built in of ‘Only’ allowing a decrease of -25%. Auto was down across the board to an average of  -4.43%!
  3. Members are selecting investment advisors. Investment income accrued, or float money, is an added benefit of ownership and control.
  4. Claims handling and loss control. As of January 1st, we have overhauled all claims from inception. We look forward to having claims management reactively and risk management proactively working in tandem.
  5. On the first day of 2019 we launched Tribute, a health captive designed to meet head on the challenges that health care, specifically stop loss, present.

This will be a domestic corporation for federal tax purposes, and the members of Tribute can now retain risk and premium at a group level while still maintaining a robust benefit to their employees. The why:

  • Control over the uncontrollable – create a larger platform to negotiate with stop loss carriers from a position of strength in numbers.
  • Retain risk in line with their current company objectives.
  • Potentially create cash flow back vs. profit to a non-affiliated party.
  • Access to actionable data to support strategic benefit objectives and initiatives.
  • Potential tax advantages with the distributions and accrue investment income on certain lines.
  • Control over rates, terms, and conditions.
  • Reduction of insurer profit.
  • Greater stability and a central control providing creative thoughts and rewards.
  • Flexibility of plan design and vendors.
  • One governance across multiple geographies.

We look forward to having Tribute on as a sister company to Legacy and having them engaged at the board meetings beginning this February! Have a great start to 2019!

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shawn-kraft@leavitt.com 406-324-7485 Shawn Kraft, has been in the insurance industry since 2007, coming into the business from a successful career coaching and working with the highest level of collegiate and professional athletes. Shawn was with Western States Insurance and in 2012 he was elevated to Branch Manager. However, he jumped at the opportunity to join the Leavitt Group as an owner instead of taking a ownership position with the newly formed Paynewest Group. The Leavitt Group is nationally a leader, and expanding rapidly it's footprint throughout the country as a Top 10 ranked agency. His role within Leavitt Great West is to provide cutting edge solutions that were previously unavailable to Montana businesses' on the ground. "I have had the best scenario possible. I learned from a small regional firm how to work with less, rely on yourself and your intrinsic work ethic, but with limited exposure to anything outside of the old way of handling business. It provided a solid base, however, to bring true value above the line, you have to have national relationships, you have to be exposed to, and help create new ideas, and now I am able to be a part of these ideas from the leaders in the country. We now create new profit centers for companies out of a what has been an expense budget line item." Relying on the old, character and work ethic, yet bringing in the new, new knowledge, new relationships, and new experiences, combined with a proven track record of success that spans thru companies, Shawn is driven to find better solutions that most owners do not know exist. "That is the rewarding part, like coaching the best athletes in the NFL, they still need coaches, a support structure to achieve at the highest level, and we are that structure now for best in class companies. We don't work with anyone, we don't have the market share of other agencies because the people we work with are hand picked or referred, and they realize what we know- they shouldn't settle! That's our niche- only the best."