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NEVADA CAPTIVE INSURANCE ASSOCIATION

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COMMUTATION. CORPORATE ISSUES. FORMATION OF NEVADA ENTITY. LIQUIDATION OF OLD ENTITY (ULTIMATE) ... ASSUMPTION/COMMUTATION. 19. FOREIGN (U.S.) CAPTIVE ... – PowerPoint PPT presentation

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Title: NEVADA CAPTIVE INSURANCE ASSOCIATION


1
NEVADA CAPTIVE INSURANCE ASSOCIATION
  • REDOMESTICATION OF CAPTIVES
  • INTO NEVADA
  • CLARK COUNTY LIBRARY
  • LAS VEGAS, NEVADA
  • FEBRUARY 24, 2006
  • P. BRUCE WRIGHT, ESQ.
  • PARTNER
  • LeBOEUF, LAMB, GREENE MacRAE LLP

2
REDOMESTICATION OF CAPTIVES
  • BACKGROUND
  • REASONS TO REDOMESTICATE
  • TYPES OF OPERATIONS
  • TAX ISSUES
  • STRUCTURES ALTERNATIVES
  • GENERAL BUSINESS ISSUES
  • REGULATORY ISSUES
  • CORPORATE ISSUES
  • GROUP CAPTIVES

3
REASONS TO REDOMESTICATE
  • GEOGRAPHIC
  • DECISION TO MOVE ONSHORE
  • PATRIOTIC
  • TRIA
  • OTHER (NOTE TRAPPED LOSSES)
  • PROVISIONS IN STATE LAW
  • LLC CAPTIVE (REITS)
  • NOT-FOR-PROFIT PROVISIONS (CHARITY)
  • RENT-A-CAPTIVE

4
REASONS TO REDOMESTICATE
  • REGULATORY CONCERNS
  • DOMICILE MAY CHANGE ITS POSITION ON TYPE OF
    BUSINESS
  • DECISION TO INCREASE/DECREASE UNRELATED BUSINESS

5
TYPES OF OPERATIONS
  • TERMINOLOGY
  • FOREIGN
  • ALIEN
  • FOREIGN CAPTIVE INSURANCE COMPANY
  • FOREIGN SPONSORED CAPTIVE
  • FOREIGN CELL

6
TYPES OF OPERATIONS
  • ALIEN CAPTIVE INSURER
  • ALIEN CAPTIVE INSURER WITH DOMESTIC (IRC 953(d)
    ELECTION
  • ALIEN CAPTIVE INSURER WITH ENGAGED IN TRADE OR
    BUSINESS ELECTION (IRC 953(c)(3)(C))
  • ALIEN CELL

7
STRUCTURE ALTERNATIVES
  • MERGER
  • CORPORATE ENTITY MOVES WITH ALL ATTENDANT ASSETS
    AND LIABILITIES
  • ASSUMPTION REINSURANCE
  • CEDANT AGREES TO LOOK ONLY TO NEW CAPTIVE AND
    RELEASE OLD CAPTIVE
  • OLD CAPTIVE CEDES RESERVES AND RISK PREMIUM TO
    NEW CAPTIVE
  • REINSURER RELEASED BY OLD CAPTIVE AND AGREES TO
    PAY TO NEW CAPTIVE

8
STRUCTURE ALTERNATIVES
  • ASSUMPTION REINSURANCE
  • OLD CAPTIVE IS LEFT WITH CAPITAL AND TRADE
    LIABILITIES
  • OLD CAPTIVE IS LIQUIDATED
  • RUN OFF OF OLD CAPTIVE
  • OLD CAPTIVE IS MAINTAINED AND RUNS OFF EXISTING
    BOOK OF BUSINESS

9
STRUCTURE ALTERNATIVES
  • RUN OFF OF OLD CAPTIVE
  • REINSURANCE (WITH CONTINGENT PROFIT COMMISSION)
  • THIRD PARTY
  • NEW CAPTIVE
  • FORMATION OF NEW CAPTIVE WHICH INSURES/REINSURES
    ALL NEW BUSINESS

10
BUSINESS CONSIDERATIONS
  • MERGER
  • UTILIZATION OF EXISTING CAPITAL
  • COMPARATIVE REDUCTION OF ONGOING EXPENSE
  • LIKELY NOT AVAILABLE IF EXISTING OPERATION IS A
    CELL OR SPONSORED CELL
  • ASSUMPTION REINSURANCE
  • MAY REQUIRE INFUSION OF CAPITAL

11
BUSINESS CONSIDERATIONS
  • ASSUMPTION REINSURANCE
  • MAY NOT BE PRACTICAL IF CONSENTS ARE NOT
    AVAILABLE FROM ALL INSUREDS
  • DIRECTORS OFFICERS
  • UNRELATED BUSINESS
  • OTHER

12
BUSINESS CONSIDERATIONS
  • RUN OFF OF OLD CAPTIVE
  • MOST FLEXIBLE
  • ADDITIONAL CAPITAL NECESSARY FOR LONG TERM
  • ADDITIONAL EXPENSE
  • MANAGEMENT
  • ACTUARY
  • ACCOUNTING

13
FOREIGN (U.S.) CAPTIVE
  • STRUCTURES
  • MERGER, ASSUMPTION REINSURANCE AND RUN OFF
    CAPTIVE ARE ALL GENERALLY AVAILABLE
  • MERGER
  • FEDERAL TAX ISSUES
  • STRUCTURE AS A TAX-FREE REORGANIZATION (USUALLY A
    STATUTORY MERGER)
  • REDOMESTICATION (F REORG)
  • GENERALLY NO U.S. FEDERAL TAX IMPLICATION

14
FOREIGN (U.S.) CAPTIVE
  • STRUCTURES
  • MERGER, CONT
  • REGULATORY ISSUES
  • CONSENT IN JURISDICTION OF OLD CAPTIVE (OC)
  • FILING WITH INSURANCE DEPARTMENT OC
  • FINAL REPORTS, TAX RETURNS IN OC
  • FORMATION OF NEW CAPTIVE (NC) IN NEVADA
    OUTLINING BUSINESS PLAN, PROPOSED MERGER, ETC.

15
FOREIGN (U.S.) CAPTIVE
  • STRUCTURES
  • MERGER, CONT
  • CORPORATE ISSUES
  • PLAN OF MERGER
  • APPROVAL BY BOARDS OF OC AND NC
  • FILING OF CERTIFICATE OF MERGER IN BOTH OC AND NC
    JURISDICTIONS
  • FILING OF APPROVAL OF INSURANCE DEPARTMENTS
    (SOMETIMES)

16
FOREIGN (U.S.) CAPTIVE
  • STRUCTURES
  • ASSUMPTION REINSURANCE
  • TAX ISSUES
  • MAY BE TREATED AS TAX-FREE REORGANIZATION, SEE
    PVT LTR RULS. 9541025, 9335045
  • STRUCTURED AS A REINSURANCE TRANSACTION

17
FOREIGN (U.S.) CAPTIVE
  • STRUCTURES
  • ASSUMPTION REINSURANCE
  • REGULATORY ISSUES
  • CONSENT IN OLD CAPTIVE JURISDICTION
  • APPROVAL IN NEVADA IN CONNECTION WITH FORMATION
    OF NEW CAPTIVE
  • LIQUIDATION OF OLD CAPTIVE
  • CONSENTS BY ALL INSUREDS
  • CONSENTS BY MULTIPLE JURISDICTIONS IF DIRECT
    BUSINESS

18
FOREIGN (U.S.) CAPTIVE
  • STRUCTURE
  • RUN OFF OF OLD CAPTIVE
  • REGULATORY ISSUES
  • RUN OFF OF OLD PROGRAM
  • ASSUMPTION REINSURANCE WITH THIRD PARTY
  • COMMUTATION
  • CORPORATE ISSUES
  • FORMATION OF NEVADA ENTITY
  • LIQUIDATION OF OLD ENTITY (ULTIMATE)
  • ESTABLISHMENT OF ELIMINATION OF LIABILITIES
  • ASSUMPTION/COMMUTATION

19
FOREIGN (U.S.) CAPTIVE
  • STRUCTURE
  • RUN OFF OF OLD CAPTIVE
  • TAX ISSUES
  • PROFIT OR LOSS IN NEW ENTITY CONSOLIDATED
  • REGULATORY ISSUES
  • NOTIFICATION IN OC JURISDICTION OF CESSATION
  • FORMATION OF NEW CAPTIVE
  • CAPITAL
  • NEW POLICIES
  • NEW PROGRAMS
  • REINSURANCE OF OLD PROGRAMS(?)

20
FOREIGN (U.S.) CAPTIVE
  • REDOMESTICATION
  • MOVEMENT OF CORPORATE ENTITY
  • REQUIRES COMAPRABLE LOCAL LAW
  • TREATED AS AN F REORGANIZATION FOR TAX PURPOSES

21
FOREIGN (U.S.) SPONSORED CAPTIVE OR CELL
  • STRUCTURES
  • MERGER (NOT AVAILABLE)
  • ASSUMPTION REINSURANCE
  • RUN OFF

22
ALIEN (NON-U.S.) CAPTIVE
  • STRUCTURAL ISSUES
  • MERGER
  • REDOMESTICATION
  • ASSUMPTION REINSURANCE
  • RUN OFF

23
ALIEN (NON-U.S.) CAPTIVE
  • MERGER
  • ADDITIONAL REQUIREMENTS OF FOREIGN JURISDICTION,
    e.g., BERMUDA PUBLICATION ISSUES
  • STATUTORY MERGER PER TREAS. REG.
    1.368-2(b)(1)(ii) IF STATE LAW ALLOWS
  • STATUTORY MERGER MAY NOT BE AVAILABLE
  • B REORGANIZATION (EXCHANGE OF STOCK FOR STOCK,
    ACQUIRING COMPANY OBTAINS CONTROL)

24
ALIEN (NON-U.S.) CAPTIVE
  • MERGER
  • STATUTORY (CONT)
  • C REORGANIZATION (EXCHANGE OF STOCK FOR
    SUBSTANTIALLY ALL OF THE PROPERTIES)
  • D REORGANIZATION (TRANSFER OF ASSETS TO ANOTHER
    CORPORATION, AFTER WHICH TRANSFEROR OR TRANSFEROR
    SHAREHOLDER IS IN CONTROL, IF ASSETS OF ACQUIROR
    ARE TRANSFERRED PURSUANT TO A PLAN)

25
ALIEN (NON-U.S.) CAPTIVE
  • MERGER
  • REDOMESTICATION (F REORGANIZATION CHANGE IN
    IDENTITY, FORM, OR PLACE OF ORGANIZATION)
  • TAX ISSUES
  • IMMEDIATE TAXATION OF ANY UNTAXED EARNINGS AND
    PROFITS, IRC 367(b)
  • IF WRITING ONLY POST-1986 OF NON-DOMICILE RISKS
    (WHETHER RELATED OR NON-RELATED) LIKELY NO TAX
    ISSUE
  • NOTE GROUP CAPTIVE PRE-1986
  • NOTE SINGLE PARENT CAPTIVE PRE-1984

26
ALIEN (NON-U.S.) CAPTIVE WITH DOMESTIC ELECTION
  • CORPORATE AND REGULATORY FOLLOW ALIEN (NON-U.S.)
    WITHOUT A DOMESTIC ELECTION
  • TAX FOLLOWS FOREIGN (U.S.) CAPTIVE

27
ALIEN (NON U.S.) CAPTIVE WITH ELECTION UNDER IRC
953(c)(3)(C)
  • CORPORATE AND REGULATORY FOLLOW ALIEN (NON-U.S.)
    WITHOUT A DOMESTIC ELECTION
  • TAX FOLLOWS ALIEN (NON-U.S.) EXCEPT FOR REPORTED
    INCOME (i.e., RPII)

28
ALIEN (NON-U.S.)CELL OPERATION
  • CORPORATE AND REGULATORY FOLLOW FOREIGN CELL
  • TAX
  • REPORTED INCOME
  • NON-REPORTED INCOME
  • RUN OFF OPTION

29
GROUP CAPTIVES
  • GROUP CAPTIVE CONCERNS
  • SOURCE OF MEMBERSHIP/NON-LIABILITY RISKS
  • MAINTAIN NO TAX ON NON-U.S. PARTICIPANTS WITH NO
    953(c)(3)(C) ELECTION

30
GROUP CAPTIVES
  • GROUP CAPTIVE CONCERNS
  • SOURCE OF MEMBERSHIP/NON-LIABILITY RISKS
  • FACILITATE ACCESS THROUGH FORMATION OF A RISK
    RETENTION GROUP
  • SUBSIDIARY

FOREIGNGP CAP
MEMBERS INSUREDS EXISTING GP CAP CAPITAL
TO FORM RRG GENERALLY NO LOC
NONLIABILITY (INCLUDING W/C)
R/I
100
RRG
MEMBERS
LIABILITY
31
GROUP CAPTIVES
  • GROUP CAPTIVE CONCERNS
  • SOURCE OF MEMBERSHIP/NON-LIABILITY RISKS
  • FACILITATE ACCESS THROUGH FORMATION OF A RISK
    RETENTION GROUP
  • BROTHER/SISTER

SEPARATION OF MEMBER/ INSUREDS WITH FOREIGN GP
CAP. NEW CAPITAL NEEDED FOR RRG/OR DIVIDEND
FOLLOWED BY CAPITAL INFUSION SECURITIES LAW
ISSUES LIABILITY BUSINESS CEDED IN PART TO
FOREIGN GP CAP
MEMBERS
NON-LIABILITY BUSINESS CEDED TO FOREIGN GP CAP
32
GROUP CAPTIVES
  • GROUP CAPTIVE CONCERNS
  • MAINTAIN NO TAX ON NON-U.S. PARTICIPANTS WITH NO
    IRC 953(c)(3)(C) ELECTION
  • OFFSHORE CAPTIVE
  • RPII APPLICATION TO U.S. SHAREHOLDERS
  • IRC 953(c)(3)(C) COMPANY LEVEL TAX ON RPII
  • ADDITION OF RRG
  • ACCESS TO MEMBERSHIP IN U.S.
  • FOREIGN RISK REMAINS IN FOREIGN CAPTIVE
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