2012 VSCAC INDUSTRY SUMMIT

2012 VSCACINDUSTRY SUMMIT

New Developments in Reinsurance

by Greg Petrowski

GPW and Associates, Inc.September 11, 2012

Overview of Presentation

• 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• GAP• Tire and Wheel • Etch/Theft Products• Chemical/Paint and Fabric Products• Lifetime Products• Key Replacement


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


There are also potential disadvantages when adding ancillary products to the reinsurance program:

• Exposure to underwriting losses While there is segregation of trust accounts, losses from one product will

offset profits from others within the same reinsurance company

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


Recent loss experience tends to favor many F&I products for reinsurance program, assuming premium

reserve provides enough margin for profit• VSC• Limited Warranty• GAP (although currently trending upward)• Etch• Paint and Fabric


Key Point:All ancillary products considered for reinsurance should

be reviewed for potential underwriting risk and expected annual premium volume


Strong vehicle sales in fourth quarter, 2011 and first and second quarters of 2012 have translated into

increased F&I product sales


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


There may be opportunities to change the existing dealer participation program to include one or more of the following:

Multiple reinsurance company structures• Opportunity to segregate business/products • Opportunity to change shareholders

Estate planning tool Minority shareholders/Key employees

Hybrid participation program structures • NCFC • Retro


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• New reinsurance company participation• Participation in multiple stock class reinsurance

company or NCFC

Reinsurance UpdateTax 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


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


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 institutionany stock or security issued by a person other than a United States

personany 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


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)


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 valueNegative values are treated as zero from maximum value and

aggregationAssets 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

http://www.fms.treas.gov/intn.html


• 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


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


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 UpdateTax Law ChangesPlanning 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


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


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


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 accountsTo report directly to IRS about financial accounts held by

US taxpayersTo act as withholding agent

Reinsurance UpdateTax Law ChangesProposed 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


• 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


• 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


• Grandfathering provisions for existing seriesEstablished prior to regulation dateConduct business or investment activity, or more than

half the business of the foreign series is insuranceForeign series has correct entity classification and more

than half the business is insuranceNot treated as a separate entity for filing any federal

income tax returns, information returns, or withholding documents for any taxable year


• 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 UpdateTax Law ChangesPlanning 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


Planning Considerations (continued)• Typical NCFC structure may not provide the same tax

benefitsMake sure existing NCFCs meet grandfathering

requirementsFor 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 UpdateShareholder Taxation

Select pending Federal income tax law changes that impact Individuals and Corporations

• 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

• Business Taxes Depreciation, Special Depreciation, and Section 179

• New Taxes for 2013


2012 Rate 10% 15% 25% 28% 33% 35%

2013 Rate 15% 15% 28% 31% 36% 39.6%

• 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


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


• AMT exemption is reduced by 25% of AMTI over the threshold

• AMT “patch” has not been passed for 2012 or future years

AMT:

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


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%


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

2012 VSCAC INDUSTRY SUMMIT

Documents

ncfc reinsurance

reinsurance structures

reinsurance programsthere

reinsurance programscurrent

reinsurance programgaptire

reinsurance premium

separate reinsurance

reinsurance programskey