1. Captive
Insurance
strategy 2009
marketing the captive
benefits to the middle
market
Presented By: Fahad Karamat
fahad@FinHRC.com
1

2. Introduction
 What is Strategic Tax Minimization?
 What is a “black letter law” tax
exemption?
 What is a “tax shelter”?
 What is a “listed transaction”?
 What is a “safe harbor” ruling?
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3. Total Commercial Risk
Protection Market (2009)
$ Billions Alternative market
mechanisms cover
about 30 percent
($98 billion) of the
total commercial
Commercial
risk protection
Insurance, $229B,
market ($326.9
70%
billion)
Alternatives, $98B,
30%
Source: Conning; MarketStance analysis; Insurance Information Institute. 3

4. Number of captives increased over
100% from 1989 to 2009.
Today, over 6,500 captives,
representing over $50 billion in
premium dollars.
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5. Insured Risk
Captive Strategy: Transfer Uninsured Risk to ●
Hidden Risks Workers Comp ● Property
Auto ● General Liability
Captive
Uninsured Risk
• Deductibles
• Exclusions
• Operating Risks
• A/R Concentration
• Construction Defect
• Credit Default
• Disability
• Administrative Actions
• D&O/E&O
• Litigation Defense
• Mold and Pollution
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• Product Warranty

6. Captive Basic Structure
Key Estate Plan
Shareholders Shareholders Family Employees Trust
Operating
Entities Deductible Premiums
Insurance Policies Captive
Sub Sub Sub
Sub Sub
 Up to $1.2 million in Annual
Insurance Premiums (IRC
831(b))
 Premiums deductible to the
Business
 Premiums not taxable to 6
the Captive

7. Captive Benefits
 Wealth Accumulation
 Favorable Tax Treatment
 Control Risk
 Minimize Insurance Costs
 Wealth Preservation
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8. IRC § 831(b) – Middle Market
Solution
 Small property and casualty
insurance company provision
• If the company writes less than $1.2 Million in
premium income, it will only pay taxes on its
investment income.
Shareholders
$1.2 MM Premium – Tax Exempt
Parent Captive
Insurance Policies
Company § 831(b)
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9. Captive Pro-forma
Year 1 Year 2 Year 3 Year 4 Year 5 Year 10
Premium 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000
Expenses (65,000) (42,000) (42,000) (42,000) (42,000) (42,000)
Claims (120,000) (120,000) (120,000) (120,000) (120,000) (1,400,000)
$ Available* 1,096,200 2,304,936 3,610,371 5,020,241 6,524,900 14,807,961
Net Benefit 522,200 1,147,736 1,869,971 2,696,641 3,636,100 10,265,161
*Available for claims, surplus, and distributions to shareholders; Assumes 40% personal / corporate tax rate,
8% investment return. For discussion purposes only. Actual results may vary significantly.
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10. Who Qualifies?
 Business Owners:
1. With Requisite Insurance Risk
2. Makes Economic Sense
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11. Sample Clients
 Developers
 General Contractors
 Subcontractors
 Manufacturers
 Professional Services Firms
 Franchisees
 Restaurant / Hotel Chains
 Hospitals / Physician Groups
 Transportation
Other Middle Market Companies
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

12. How Do We Price the
Premiums?
 ISO Rates (www.iso.com)
 Underwriters
 Actuaries
 Market quotes from independent
carriers
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13. The IRS and Captive Insurance
 What Constitutes Insurance?
1. Presence of Insurance Risk
2. Risk Shifting and Risk Distribution
3. Commonly Accepted Notions of
Insurance
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14. IRS “Safe Harbors” for Captives
Three IRS Safe Harbor Rulings:
 Single Parent Captive
 Multiple Subsidiaries
 Group Captive
As part of a captive feasibility study, the
Captive Manager will analyze which IRS
Safe Harbor is best for your business.
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15. Estate Planning With a Captive
Mom / Dad Child Trust
Mom / Dad
1% 99%
LLC
Business Captive
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16. Estate Planning With a
Captive (Including Life Insurance)
Mom / Dad Child Trust
Mom / Dad
1% 99%
LLC
Business Captive
Life Insurance
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17. Protecting Assets
Cr
ed
ti on ito
r
ti ga s
Li
Captive
At
to
ts s
eb s
rn
D ine
e
us
ys
B
 Wealthy businesses and owners are litigation targets
 Creditors have no legal claim on Captive’s assets
 Only Captive owner can make an insurance claim
 Captive structure creates independent wealth and investment diversification
 Foreign Captives may have extra layer of protection 17

18. Investment Structuring
Parent Captive
Loans
LLC LLC LLC
#1 #2 #3
Asset Asset Asset
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19. Exit Strategies
 Salaries/Management Fees
 Dividends
 Liquidation
 C-Corp Upstream Merger
 Estate Planning
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20. Turn-Key Captive Programs
 Structuring
 Formation
 Management
 Compliance
 Underwriting
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21. Where is the Captive Formed?
A WORD OF CAUTION
 With the introduction of the “Stop Tax Haven Abuse Act” of 2009, several
formerly “friendly” jurisdictions for captive insurance are now identified as
“off-shore secrecy jurisdictions”, to be scrutinized by the IRS as probable
locations for US Tax evasion. The list includes such historically popular
jurisdictions as:
• Anguilla
• St. Kitts and Nevis
• Antigua and Barbuda
• Costa Rica
• St. Lucia
• Aruba
• Bahamas
• Dominica
• Turks and Caicos
• Bermuda
• British Virgin Islands
• Cayman Islands
 As a result, we will ONLY consider US Domestic jurisdictions or US
Territories for domiciles

22. Who is an Ideal Client?
Good candidates Almost any business
generally meet at type, including:
least one of the
• Contractors,
following criteria: Developers,
• Pre-tax profits of $1 Franchising
million to $50 million • Healthcare,
• Substantial self- Transportation,
insured / uninsured Professional Services
business risk • Manufacturing,
• 50+ employees Distribution, Retail
• Substantial traditional
third-party insurance 22
expense

23. Captive Formation
 Captive Manager Will Handle All Aspects
of Forming the Captive:
• Initial Analysis and Feasibility Study
• Domicile Selection and Applications, including business
plan and pro forma financial preparation
• Design and implementation of Captive ownership structure
• Coordinate initial capitalization, including brokerage
accounts
• Maintenance of proper corporate records
• Underwrite and draft insurance policies
• Prepare and obtain approval for regulatory filings
• Payment of regulatory fees
• Corporate formation; payment of formation fees
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24. Compliant Captive

Management
Captive Manager Will Provide Turn-Key Management of the Captive
• Captive Manager assigned as contact point for all issues
• Annually underwrite and draft insurance policies
• Prepare regulatory filings for your review and approval
• Ongoing work with domicile’s Supervisor of Insurance, the IRS,
and other regulatory authorities
• Accounting: Prepare quarterly financial statements, bank
reconciliation, document and monitor account activity
• Solvency margin analysis and loss reserve analysis
• Prepare tax return for Captive
• Arrange for unrelated insurance
• Arrange reinsurance as necessary
• Monitor ongoing regulatory changes
• Consult with Captive owners regarding proper investment
structuring
• Maintenance of corporate records
• Arrange and coordinate an independent audit if required by the
domicile
• Pay all regulatory and audit fees
• Loss handling/claims processing 24
• Captive liquidation and winding up activities

25. What’s Next?
1. Client or Advisor to Complete
Questionnaire
2. Captive Manager will Provide
Feasibility Analysis
3. Client and Advisors to Discuss with
Captive Managers.
4. Sign Engagement Letter to Form
Captive
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26.  Domestic and U.S. Territory Captives
 “Turn Key” Captive Management
For More Information Contact:
Fahad Karamat
fahad@FinHRC.com
Legal Disclaimer: The information herein is for educational use and is not a substitute for competent legal, tax and business advice
as it relates to the formation and ongoing operations of captive insurance companies. IRS Circular 230 Required Notice--IRS
regulations require that we inform you as follows: Any U.S. federal tax advice contained in this communication is not intended to
be used and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting,
marketing or recommending to another party any transaction or tax-related matters. 26