More Powerful Than Retained Earnings
Why CFOs Love Captive Insurance Companies and Why Small Businesses Should Too
Many CFOs and small business owners alike yearn for the day when their company can build a “war chest.” This war chest gives the business flexibility to invest during times of opportunity or to protect the strategic position or resources during uncertainty or a downturn. War chests are built by stockpiling retained earnings, usually over many years. Retained earnings are a source of joy to CFOs and business owners, and there is a financial tool that should be considered as a component of any war chest. This tool is the formation and ownership of a captive insurance company. A captive insurance company and the reserves it holds have many strategic financial advantages when compared to retained earnings alone. This article will briefly discuss six reasons.
First, a captive insurance company can provide casualty insurance coverage to the parent company.
Second, a captive insurance company can formally insure business risks not currently covered by third party insurance.
Third, by owning its own insurance company (in this case an 831(b) captive insurance company), a business is able to retain earnings as a pre-tax expense. And, retaining earnings pre-tax (as insurance reserves in the captive) results in a bigger base of assets that can grow through investments.
Fourth, reserves in the captive can lower future insurance costs. A company’s captive can insure its deductibles for third party insurance coverage. And, as reserves accumulate, a CFO may consider reducing third party insurance costs by increasing the deductible. The increased deductible can be insured by the reserves in the captive. Over time, the company’s captive insurance company will build up reserves that give the CFO greater flexibility to make strategic financial choices.
Fifth, the reserves of a captive insurance company can be taken as dividends to the owners of the captive insurance company at a future date. Often in business, timing is everything. A captive that builds strong reserves gives CFOs and business owners flexibility to take dividends at opportune times.
Sixth, when properly structured, the assets of the insurance company are secured from creditors.
A captive insurance company should be viewed and managed as part of a company’s overall financial strategy. With so many benefits to the CFO and business owner, it is easy to see why over 75% of Fortune 500 companies own captive insurance companies. Small business CFOs and owners need a war chest as much as Fortune 500 CFOs. CIC Services, LLC has been helping small businesses grow “retained earnings” for seven years. It is very gratifying to help small businesses strengthen their financial position.