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RMC Group win gives hope for future 831(b) battles – ZMF’s Matthew Reddington

Luke Harrison
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RMC Group win gives hope for future 831(b) battles – ZMF’s Matthew Reddington

The jury verdict in favour of captive management company, RMC Group and its president and CEO, Raymond Anker, against the Internal Revenue Service (IRS) highlights there are ways micro captives can be successful in cases that have historically gone against them.

In the RMC case, the jury concluded that the IRS failed to show that the captive manager was liable for Internal Revenue Code Section 6700 penalties.

“They came back as no on every single tax year for each of the entities, which is obviously a  big win for us and a big loss for the Department of Justice (DoJ) and for the IRS,” said Matthew Reddington, partner and head of the Tax Controversy Practice at ZMF Law, speaking on episode 102 of the Global Captive Podcast.

Reddington and ZMF Law represented Anker and RMC Group in his case against the IRS.

In the case, the IRS had argued: “Ankner and his companies designed, sold, and managed a plan to avoid federal income taxes through unlawful deductions for supposed ‘insurance premiums’ in connection with micro-captive insurance programs.”

However, the jury found that Ankner and his entitles should not be held liable for each of the tax years in question.

“They’ve [the IRS] been feeling that they are 10 feet tall and bulletproof,” Reddington said on GCP #102. “They’ve won seven cases in a row in the US Tax court, but there’s other avenues to get better results.

“Moving forward, as we push on these buttons and try to find ways that we can take this out of the Tax Court’s hands and find ways to put this in front of a jury, then those wins are not nearly as automatic.

“This should help for settlement purposes, and should help for reconsideration, or maybe not even taking the case at all on behalf of the IRS.’”

The IRS has a history of going after captives making the 831(b) tax election, winning its most recent case at the end of last month against Dr. Patel, the co-founder of an eye surgery centre and the founder of two research centres in the West Texas area.

“This should help in pushing that back,” Reddington said. “The IRS take a bully approach in a lot of tax matters where they know that they can outspend and take more time and resources than the individual taxpayers.

“With any bully you’ve got to punch them in the nose to get them to lay off.”

Reddington said more court cases should eventually emerge in favour of micro captives if the courts do their job correctly and people keep fighting their case.

“Now that the IRS has shifted some of their focus into other areas and moved more onto conservation easements, there’ll be a huge focus in different areas, which will take their resources away,” he added.

“As long as we continue to fight and push with better facts, we should see some changes in the law.”

GCP #102: Matthew Reddington RMC case, Loren Crannell on Juul Labs captive

Richard Cutcher
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GCP #102: Matthew Reddington RMC case, Loren Crannell on Juul Labs captive
Matthew Reddington, ZMF Law
Loren Crannell, Juul Labs

In episode 102 of the Global Captive Podcast, supported by the ⁠EY Global Captive Network⁠, Richard brings two very different interviews.

01.30 – 12.50: Matthew Reddington, partner and head of the tax controversy practice at ZMF, discusses the recent jury verdict in favour of RMC Group and its CEO Raymond Ankner in a court battle with the Internal Revenue Service.

13.51 – 36.04: Loren Crannell, director and head of global risk and insurance at American e-cigarette company Juul Labs, tells me why forming a captive has been such an important enabler for the business in recent years.

For the latest news, analysis and thought leadership on the global captive insurance market, visit ⁠Captive Intelligence ⁠and sign up to our ⁠twice-weekly newsletter⁠.

Premium increases in agriculture open the door to captives

Luke Harrison
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Premium increases in agriculture open the door to captives
  • Group captives and cooperatives are a common way of diversifying risk in the sector
  • Having funds available to form a captive an issue for some in the industry
  • Crop insurance and employee benefits provide challenges unique to agriculture

The agriculture sector provides a unique opportunity for the captive industry to help organisations mitigate rising costs in the commercial market.

Group captives and cooperatives are commonly utilised in the agriculture space as industry members look to band together to diversify their portfolios amid growing challenges.

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GROWMARK members saving $20m in premium from captive utilisation

Luke Harrison
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GROWMARK members saving $20m in premium from captive utilisation

Members of the GROWMARK captive are saving more than $20m in premium cost since placing their property risk inside the captive.

GROWMARK is an agricultural cooperative with around 250 members, but not all of them participate in the captive.

“We provide the fuel and propane, but we also provide the seed for planting, crop nutrients, crop protection, and all the agronomy products that the farmer needs,” Jaci Mennenga, director of risk management at GROWMARK told Captive Intelligence.

“After harvest, we are the first handler and store the farmers’ grain,” she said. “Our members entrust GROWMARK to produce and deliver the products they need.”

The company has two Vermont-domiciled captives, one for property and casualty insurance, and another for health insurance.

“We started to put a lot more of our property, general liability, and auto into the captive at the most recent renewal we had on 9/1,” Mennenga said.

“Until I got here in December of 2022, we were still purchasing a lot of risk transfer. Other than for workers’ compensation, the captive was not our primary insurance vehicle.”

Mennenga said after a few years of significant premium increases and recognising the surplus position they had built up in the captive, they began to increase the captive’s leverage.

“We ended up saving a significant amount of money by comparing what we were going to get for renewal terms from the market for full risk transfer versus what we put together using our captive to take on a large amount of the exposure and then transfer the rest,” she said.

“The savings were over $20m just on the property from looking at what the incumbent carrier wanted for a $200m programme compared to what we put together.”

Mennenga said property premium decreases is not something they have heard people talk about much in the commercial market over the last year, but the captive’s participation has delivered results.

“Many of our members had a premium decrease, so that’s an incredible result,” Mennenga said.

“The captive is performing well and now our next discussions are how we can figure out how to use the surplus in the captive for risk management incentives or how we’re going to give premium holidays or dividends.

“It’s a good place to be having those types of conversations now because of the good performance.”

Pure captive the right long-term solution for Boys Town

Richard Cutcher
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Pure captive the right long-term solution for Boys Town

Not-for-profit Boys Town continues to look for new ways to expand the use of its Tennessee captive, but will not lose sight of its general risk financing strategy.

Omaha, Nebraska-based Boys Town has supported vulnerable and homeless young people for more than 100 years, and includes its own village campus.

Speaking on episode 101 of the Global Captive Podcast David Williams, Director of Risk Management & Safety at Boys Town, explained why the organisation was forced into considering a captive five years ago.

Long-time partner Philadelphia Insurance Company had previously provided Boys Town an umbrella policy limit of $25m, but in 2019 asked if it could be reduced to $10m.

Boys Town accepted this change and were able to buy excess coverage on top, but two years later were asked to drop again to a $5m limit.

“We went out to the market and quickly found that we couldn’t get any of the excess to drop down into that five excess-of-five layer and we couldn’t get anybody to write it unless they had that primary piece,” Williams explained.

“We didn’t want to leave Philadelphia so at that point it was like: ‘Ok, here we go, let’s start a captive to cover that’.”

Williams said he had some previous experience with captives from his time at Aon, but not in feasibility studies or formations

Once they had done the research and analysis of what lines to include Williams needed to get approval from CFO, CEO, the board of trustees and the finance chair.

“It was relatively easy,” Williams said. “We have a lot of smart people at Boys Town and they get it and they realise this is a perfect opportunity for us to use a long term vehicle to take care of our risk that we can’t get insured.”

Square Mile Insurance Company, LLC was licensed as a pure captive by the State of Tennessee on 1 September 2022, with it starting by writing the property deductible.

Today the captive insures all of the wind and hail deductibles for Boys Town, the five excess-of-five umbrella policy and the workers’ compensation deductible.

In the last year Williams has also added the medical stop loss to the captive.

“We’ve really roundtable’d this with our broker to discuss some creative ideas, but we really want to be careful,” Williams said.

“We don’t want to add so many things so quickly and get so big that we lose sight of what we’re there for. And we want to make sure it’s profitable or we have enough capital in there to support a loss if we needed to.”

Tennessee requires captives to have a resident director from the State and Williams was recommended former regulator Michael Corbett by attorney Ben Whitehouse who had worked on the formation.

“Michael’s just been an awesome resource for us, as well as Ben in Tennessee, and also Josh Clark, from Gallagher, another person that was instrumental when he was with the department and getting us over to Tennessee.”

GCP #101: The Boys Town captive, and MAC on life after regulating

Richard Cutcher
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GCP #101: The Boys Town captive, and MAC on life after regulating
David Williams, Boys Town
Michael Corbett, Pinnacle Financial Partners

In episode 101 of the Global Captive Podcast, supported by the ⁠EY Global Captive Network⁠, Richard is joined by David Williams, Director of Risk Management & Safety at Boys Town, to discuss the Tennessee-captive formed by the not-for-profit in 2022.

Richard also catches up with Michael Corbett, senior vice president at Pinnacle Financial Partners, and a non-executive director on the Boys Town captive.

Corbett, Tennessee’s former captive regulator, is also now president of the bank’s Apex Captive Insurance Company.

For the latest global captive news, analysis and thought leadership, visit ⁠Captive Intelligence⁠ and sign up to our ⁠twice-weekly newsletter⁠.

831(b) captives “high priority area” for IRS as it completes 2024 Dirty Dozen

Luke Harrison
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The Internal revenue Service (IRS) has wrapped up its Dirty Dozen list for 2024 with micro captives taking the 831(b) tax election remaining a key focus area for the Service.

The IRS’ annual Dirty Dozen campaign lists 12 schemes that it believes put taxpayers, businesses and the tax professional community at risk of losing money, personal information and data.

Captive Intelligence reported in April 2023 that the IRS had proposed new regulations for ‘micro captives’, which divided opinion across America’s captive landscape.

The proposed IRS regulations would see certain 831(b) captives deemed “listed transactions,” and others labelled “transactions of interest”.

The IRS wrapped up the scheme for the year with a warning to taxpayers regarding promoters selling “bogus tax strategies” and “fraudulent offshore schemes” designed to reduce or avoid taxes altogether.

The Service said micro captive transactions continue to be a high-priority enforcement area.

“Taxpayers should be wary of anything that seeks to completely eliminate a legitimate tax responsibility,” said IRS Commissioner Danny Werfel. “Promoters continue to peddle elaborate schemes to reduce taxes and make a handsome profit.

“Taxpayers contemplating these arrangements should always seek advice from a trusted tax professional, not an aggressive promoter focused on pushing questionable transactions to make a buck.”

The IRS noted that it had prevailed in all micro captive Tax Court and appellate court cases decided on their merits since 2017.

However, last week, Captive Intelligence reported that captive management company RMC Group and its president and CEO, Raymond Ankner, had won an important case against the IRS in the United States, with the assistance of law firm, ZMF Law.

Captive Intelligence recently published a Long Read highlighting that the IRS remains at a stand-off with captives making the 831(b) tax election, and there is no indication of an imminent conclusion, with some observers believing the IRS is purposely drawing out the process.

Guernsey-on-Thames, the existing solution for London

John Rowson
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Guernsey-on-Thames, the existing solution for London
John Rowson, Independent (Re)insurance Consultant

I have read with interest numerous articles discussing the possible Brexit Bonuses available to the UK. Principle among these bonuses is refining Solvency II regulation to better reflect the UK’s leading global (re)insurance industry.

I understand why these commentators see Solvency II as being an unnecessarily burdensome regime with regards to reinsurance, where most contracts are bespoke and each cedent and intermediary have credit committees that make a detailed assessment of the risks presented by each deal/counterparty.

Much has been said about Solvency II as a European project, which in order to work needs to take account of the regulatory environments of all 27 member states. Like many documents written by committee, this can leave the final piece of work overbearing and hence the current UK review of (re)insurance regulation.  

Bermuda is often used as a possible model for the UK to follow. Bermuda is deemed “equivalent” and follows much of Solvency II albeit with a bifurcated approach. Large commercial insurers and reinsurers must undertake much of the Solvency II compliant regulatory regime.

Whilst there is no doubt that London’s (re)insurance market would benefit from deregulation, there will always be a need for proportional regulation that is risk-based while facilitating the international flow of capital.  

It is therefore worth mentioning that much closer to London, only a 45-minute flight and in the same time zone there exists a burgeoning and innovative reinsurance market that can support London’s aspirations. Guernsey has a long history of insurance excellence, indeed the first captive was formed in Guernsey over 100 years ago in 1922 and in 2023, Guernsey surpassed Luxembourg to become the domicile with the greatest number of captives in Europe.

Guernsey has innovated far beyond the realms of captive insurance and is perhaps best known for introducing Protected Cell Company (“PCC”) legislation in 1997. This legislation has been very useful in reducing the costs of setting up ring-fenced (re)insurance arrangements for individual transactions or smaller companies.

The recent Vesttoo investigations have increased interest in the Incorporated Cell Company (“ICC”) which was introduced to the Guernsey statute books in 2006.

ICCs have always been popular with European sponsors of reinsurance companies in Guernsey, as they permit the legal segregation of the assets and liabilities in each cell, but in a more traditional form of corporate entity. The ICC structure, much like the PCC legislation that preceded it, also creates economies of scale and reduced costs.

Guernsey has always been a proponent of proportional regulation and indeed never adopted Solvency II.

Instead, it has always taken account of and respected International Association of Insurance Supervisor guidance. These guidelines have been proposed as a possible model for the UK to follow.

Accordingly, in choosing Guernsey, reinsurers might well find all of the advantages of the proposed UK regulatory changes awaiting them.  Indeed, Guernsey already regulates the capital requirements of insurance and reinsurance companies differently.  It sets the capital requirements of reinsurers at a level adjusted to take account of the sophisticated nature of reinsureds, which in effect means they hold less capital than insurers.

I would therefore suggest that Guernsey provides a knockout option for global reinsurers.  This hugely benefits the flow of international reinsurance capital in and around the London market.

Kraft Group among 15 new Vermont captives licensed in first quarter of 2024

Luke Harrison
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Kraft Group among 15 new Vermont captives licensed in first quarter of 2024

Vermont has added 15 new captives to it roster during the first quarter of 2024, taking the total number of captives in the domicile to 669.

These figures present a strong start to the year for the world’s most popular domicile which licenced 38 captives in the whole of 2023.

Captive Intelligence understands the parent company of Kraft Green Mountain LLC, one of the new captives in Q1, is the Kraft Group, owners of the New England Patriots and several other sports teams and business interests.

Kraft Green Mountain is manged by AIG.

In September last year, Captive Intelligence understands the NFL formed 1920 Risk Assurance captive in Vermont, managed by Marsh.

Five of the 15 new captives in Vermont are managed by Aon, four are managed by Marsh, two are managed by NFP, two are managed by Artex, one is manged by AIG, one is managed by Advantage Insurance Management, and one is managed by Global Insurance Management & Consulting.

Captive Intelligence published a Long Read in August highlighting that Vermont is not resting on its laurels having recently taken top spot for number of active captives, with a focus on “quality over quantity” and a continued recruitment drive both within the regulator and across the local industry.

Family offices provide exciting possibilities for captive utilisation

Richard Cutcher
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Family offices provide exciting possibilities for captive utilisation

More family offices are and should be exploring captive insurance solutions, with a wide variety of risk financing options available depending on the profile and structure of the organisation.

Speaking on the latest episode of the Global Captive Podcast Mikhail Raybshteyn, partner and co-leader of EY Captive Insurance Services (Americas), and Prabal Lakhanpal, senior vice president at Spring Consulting Group, discussed how captives can be valuable tools for family offices and why we may not have seen major utilisation by this group in the past.

A family office is usually structured as a privately held company that manages the wealth and investments of a wealthy family.

“At least in my opinion, family offices have been a little lagging in terms of joining the crowd when it comes to setting up captives,” Raybshteyn said.

“Some, for various reasons, may have felt a captive was not for them. Others may have thought it is too cumbersome or too complicated to set one up because they had heard horror stories or even tried to apply the law as is to their situation, to their ownership facts, and found it challenging to put together.

“And in some cases just the number of decision makers in the family office may not have allowed them to be very proactive.

“We see that’s changing in recent times, but I think there’s still a lag.”

Lakhanpal said we could be starting to see a different approach and an embrace of captives as risk managers move from the corporate space, where they might have had previous experience with captives, into a family office role.

“One of the things I am starting to see a trend on is corporate risk managers who are transitioning to family office organisations are bringing that level of sophisticated risk management to those entities,” Lakhanpal said.

“And the fact that a lot of family offices have a very long-time horizon on capital utilization allows them to be extremely innovative in the way they leverage a captive solution.”

Family offices, naturally, can vary greatly in terms of the types of assets and portfolio they manage. As such, the associated risks and insurance needs also differ from one to the next.

Similarly, ownership structures can vary where multiple generations could be covered by one family office or every couple of generations could split off to form a new entity.

“For family offices that have corporate entities or companies that manufacture something, sell something, export something, move something, the risks may be similar to a company that sells something, but is a commercial company,” Raybshteyn said.

“However, the way they’re owned and the way the family thinks about risks, the number of companies the family owns, becomes more of a private equity structure.

“While risks may be the same, especially when you look at a cross section between qualifying as regulatory insurance company and qualifying as a tax insurance company, some family offices provide very challenging equations that need to be solved.”

Lakhanpal explained that because a family office may have a very high cost of capital and very defined medium and long term objectives, it can be very exciting to produce solutions that include a captive structure.

“We’ve seen organisations where their cost of capital is well in excess of 17%, 18%,” he said.

“So when they’re thinking of setting up a captive, their objectives are very different than what a normal corporate’s objectives would be. And then we’ve seen family offices view it from the standpoint of, ‘I’m not setting this up for today, I’m setting this up because five years from now here are some of the goals I want to achieve, and I recognise I need to plant a seed today so that I have a tree five years from now to be able to  achieve all the objectives we’re trying to get to.’

“As an advisor, it’s very exciting to be able to work with someone who’s viewing programmes from such a strategic and long term perspective. I think it gives you a lot of flexibility in what you’re going to help them structure and achieve through that process.”

Listen to the full 20 minute discussion on the Global Captive Podcast here, or on any podcast app.

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