Transcript Slide 1

2012 VSCAC
INDUSTRY SUMMIT
New Developments in
Reinsurance
by
Greg Petrowski
GPW and Associates, Inc.
September 11, 2012
Overview of Presentation
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Product and Structure Updates for Reinsurance
Programs
Current and Pending Tax Changes and Impact on
Dealer Owned Reinsurance Structures and NCFC
Programs
Changes to Shareholder Taxation
Q&A
Product and Structure Updates
for Reinsurance Programs
Most F&I reinsurance programs are centered around reinsurance
of extended service contracts. The recent trend has been to add
ancillary F&I products to “fill up” reinsurance program
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GAP
Tire and Wheel
Etch/Theft Products
Chemical/Paint and Fabric Products
Lifetime Products
Key Replacement
Product and Structure Updates
for Reinsurance Programs
The primary advantages of this strategy is to provide
the ability to participate in underwriting profit of
ancillary products. Administrators/insurers do not
generally offer bonus or retro programs for many of
these products
Product and Structure Updates
for Reinsurance Programs
There are also potential disadvantages when adding
ancillary products to the reinsurance program:
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Exposure to underwriting losses
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While there is segregation of trust accounts, losses from one product
will offset profits from others within the same reinsurance company
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Segregation of underwriting can be achieved through use of a
separate reinsurance company or alternative participation program
Potential of adding premium that could push combined
premium over the $1.2 million annual IRC Section 831(b)
threshold
Product and Structure Updates
for Reinsurance Programs
Recent loss experience tends to favor many F&I
products for reinsurance program, assuming premium
reserve provides enough margin for profit
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VSC
Limited Warranty
GAP (although currently trending upward)
Etch
Paint and Fabric
Product and Structure Updates
for Reinsurance Programs
Key Point:
All ancillary products considered for reinsurance should
be reviewed for potential underwriting risk and
expected annual premium volume
Product and Structure Updates
for Reinsurance Programs
Strong vehicle sales in fourth quarter, 2011 and first
and second quarters of 2012 have translated into
increased F&I product sales
Product and Structure Updates
for Reinsurance Programs
Key Point:
For Dealers in existing reinsurance programs, reinsurance
premium volumes have likely increased and should be
periodically reviewed for potential impact on IRC Section 831(b)
premium thresholds and tax planning
Product and Structure Updates
for Reinsurance Programs
There may be opportunities to change the existing dealer
participation program to include one or more of the following:
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Multiple reinsurance company structures
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Opportunity to segregate business/products
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Opportunity to change shareholders
 Estate planning tool
 Minority shareholders/Key employees
Hybrid participation program structures
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NCFC
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Retro
Product and Structure Updates
for Reinsurance Programs
Key Point:
For Dealers not previously in reinsurance programs,
reinsurance may now be a viable option by bundling
multiple products/administrators to put into a single
reinsurance program
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New reinsurance company participation
Participation in multiple stock class reinsurance
company or NCFC
Reinsurance Update
Tax Law Changes
• Hiring Incentives to Restore Employment
(HIRE) Act
 Section 6038D Information with Respect to
Foreign Financial Assets
 Foreign Account Tax Compliance Act (FATCA)
Sections 1471-1474
• Proposed Regulation 119921-09
Reinsurance Update
Tax Law Changes
Section 6038D
• Created by HIRE Act
• Requires US persons to file a disclosure statement
with their personal tax returns if they hold any
interest in a specified foreign financial asset(s) whose
aggregate value exceeds the threshold for their filing
status (Form 8938)
• Effective for 2011 and all tax years thereafter
• Penalties for underpayments related to undisclosed
foreign financial assets and extension of statue of
limitations
Reinsurance Update
Tax Law Changes
Specified Foreign Financial Assets (SFFA)
• any financial account maintained by a foreign financial
institution
• any of the following assets which are not held in an
account maintained by a financial institution
any stock or security issued by a person other than a United
States person
any financial instrument or contract held for investment that
has an issuer or counterparty which is other than a United
States person
any interest in a foreign entity
Reinsurance Update
Tax Law Changes
Filing Status
Living
Value on 12/31
Maximum Value
Single
In US
$50,000
$75,000
Married Filing Jointly
In US
$100,000
$150,000
Married Filing Separately
In US
$50,000
$75,000
Single
Abroad^
$200,000
$300,000
Married Filing Jointly
Abroad^
$400,000
$600,000
Married Filing Separately
Abroad^
$200,000
$300,000
^ Must be bona fide resident of a foreign country(ies)
Reinsurance Update
Tax Law Changes
What is value?
• Value is determined on a per asset/investment basis
• Instructions to the Form 8938 provide guidance for
the determination of value
Typically fair market value
Negative values are treated as zero from maximum value
and aggregation
Assets denominated in a foreign currency must have their
value converted to US dollars using the end of year exchange
rate from www.fms.treas.gov/intn.html
• May need to provide proof if the value is less than the
threshold
Reinsurance Update
Tax Law Changes
• Sources of fair market value
 Periodic account statements for financial accounts
 Reported stock price for publically traded foreign securities
with daily price information available
 Based on distributions received from foreign trusts
• Third party appraisal is not necessary
• In most cases, you may use the value as of the last day
of the tax year unless you have reason to know that the
value does not reflect a reasonable estimate of the
maximum value during the tax year
Reinsurance Update
Tax Law Changes
Disclosure requirements
• Form 8938
• For accounts, the name and address of the
financial institution where the account is
maintained and the account number
• For any stock or security, the name and address of
the issuer and information necessary to identify
the class or issue of the stock or security
Reinsurance Update
Tax Law Changes
Disclosure requirements (continued)
• For any other instrument, contract, or interest
information necessary to identify such instrument,
contract, or interest, and
the names and addresses of all issuers and
counterparties with respect to such instrument,
contract, or interest
• The maximum value for each of the asset owned
during the taxable year
Reinsurance Update
Tax Law Changes
Reinsurance Update
Tax Law Changes
Planning considerations
• Does not apply to offshore companies with valid IRC
Section 953(d) election
• Applies to typical NCFC structures
• For NCFC ownership, aggregate all SFFA interests and
discuss disclosure to avoid penalties
• May require additional time and costs to calculate fair
market values for each shareholder
Reinsurance Update
Tax Law Changes
Key Point:
Instructions for Form 8938 Statement of Specified
Foreign Assets (Disclosure Form) require filing for
individuals only. If assets are owned by corporation,
partnership or other entity, the disclosure form does
not appear to be required, although actual regulations
appear to apply to these entities
Reinsurance Update
Tax Law Changes
FATCA
• Created by HIRE Act
• Creates Chapter 4 of the Internal Revenue Code,
Sections 1471-1474
• New law takes effect in 2013
• IRS states the purpose is to combat tax evasion by
US persons holding investments in offshore
accounts
• Generally does not effect reinsurance companies
Reinsurance Update
Tax Law Changes
FATCA
• Requires US taxpayers holding financial assets
outside the United States to report those assets
• Requests that Foreign Financial Institutions enter
into an agreement with the IRS
 To test for US accounts
 To report directly to IRS about financial accounts held by
US taxpayers
 To act as withholding agent
Reinsurance Update
Tax Law Changes
Proposed Reg 119921-09
• Issued September 13, 2010
• Proposes treating each series of a series organization
as a separate entity for federal tax purposes
• Applies to all domestic series and all foreign series
that engage in an insurance or reinsurance business
• May remove the tax benefits of multiple stock class
domestic and NCFC insurance and reinsurance
structures
Reinsurance Update
Tax Law Changes
• Each series is treated as created or organized under
the laws of the same jurisdiction in which the series
is established
• Ownership of a series is determined by who has the
beneficial rights of ownership
• Entity type for federal tax purposes would be
determined by existing regulations
 An insurance company series would always be a stand
alone C-corporation
Reinsurance Update
Tax Law Changes
• Series need not possess all attributes of separate
legal entities (ex. ability to sue, be sued, enter into
contracts, hold property in its own name) since
liability shields (stop loss, risk fees, etc.) of series
often have the same effect
• Series, treated as separate entities for federal tax
purposes, may make any federal tax elections
independently
Reinsurance Update
Tax Law Changes
• Grandfathering provisions for existing series
Established prior to regulation date
Conduct business or investment activity, or more than
half the business of the foreign series is insurance
Foreign series has correct entity classification and
more than half the business is insurance
Not treated as a separate entity for filing any federal
income tax returns, information returns, or
withholding documents for any taxable year
Reinsurance Update
Tax Law Changes
• Grandfathering provisions for existing series
(continued)
Has a reasonable basis for their claimed
classification; and
Series classification was not under examination
when the regulation is made law, if so the
classification is determine by the examination
• Must maintain same series ownership as prior to
effective date of regulation
Reinsurance Update
Tax Law Changes
Planning Considerations
• Still pending finalization by the Treasury
• Actual regulation may not be issued in same form as
proposed
• The regulation is with the Treasury for
consideration/finalization, but has been hung up at
this point for over a year
• Grandfathering may be impacted by examinations of
NCFC structures as a result of Form 8938 disclosures
Reinsurance Update
Tax Law Changes
Planning Considerations (continued)
• Typical NCFC structure may not provide the same
tax benefits
Make sure existing NCFCs meet grandfathering
requirements
For new and non-grandfathered NCFCs, consider
making IRC Section 953(d) elections for each series and
filing as a stand alone insurance company, or
Make sure each series within the NCFC would qualify as
an NCFC on its own
Reinsurance Update
Shareholder Taxation
Select pending Federal income tax law changes
that impact Individuals and Corporations
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Over 40 tax provisions are set to expire December 31,
2012
Personal Income Taxes
 Tax Rates and Brackets
 Capital Gains and Qualified Dividends
 Alternative Minimum Tax
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Business Taxes
 Depreciation, Special Depreciation, and Section 179
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New Taxes for 2013
Reinsurance Update
Shareholder Taxation
2012 Rate
10%
15%
25%
28%
33%
35%
2013 Rate
15%
15%
28%
31%
36%
39.6%
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Marginal tax rates increase
10% bracket is eliminated
“Marriage penalty” returns for 15% bracket; married filing jointly (MFJ)
bracket limit will no longer be required to be twice of single bracket limit
The MFJ standard deduction will no longer be twice the single standard
deduction
Employees 2% FICA tax break is eliminated (Back to 6.2% social security
tax and 1.45% Medicare tax) on first $110,100 of taxable income
Reinsurance Update
Shareholder Taxation
Capital Gains and Qualified Dividends
• After December 31, 2012
Capital gains tax rates go up to 20% for most
taxpayers; 10% for taxpayers in the 15% marginal
tax bracket
Qualified dividends will be taxed at ordinary
income rates instead of at capital gains rates unless
the current provisions are extended again
Reinsurance Update
Shareholder Taxation
Married Filing
Jointly/Qualifying
Window(er)
Married Filing
Separately
2011 AMT Exemption
$74,450
$37,225
2012 AMT Exemption
$45,000
$22,500
Income Threshold
$150,000
$75,000
AMT:
• AMT exemption is reduced by 25% of AMTI over
the threshold
• AMT “patch” has not been passed for 2012 or
future years
Reinsurance Update
Shareholder Taxation
New Taxes and Removed Benefits Effective for 2013
• 3.8% additional tax on capital gains for individuals in
the 36% and 39.6% marginal tax brackets enacted in
Affordable Health Care for America Act (aka Obama
Care)
• Floor on Medical Expense raised to 10% from 7.5% of
AGI
• FSA limit becomes $2,500 per year
• Maximum Estate Tax Rate increases from 35% to 55%
Reinsurance Update
Shareholder Taxation
Key Point:
With the scheduled expiration of the qualified dividend
treatment for shareholder distributions AND the
scheduled increase in the long term capital gains tax
rate, expect a run on available reinsurance trust and
funds held account balances and plan accordingly.
Reinsurance Update
Questions and General
Discussion