iA American's Profit Participation Opportunities

Reinsurance is a type of financial transaction in which an insurance company (called a “ceding company”) transfers all or a part of its insurance risks to another insurance company (called a “reinsurer”). To compensate the reinsurer for assuming the ceding company’s risks, the ceding company pays the reinsurer a reinsurance premium. While there are many reasons why an insurance company may enter into a reinsurance agreement, a principal reason is to enable the reinsurer to participate in the underwriting profits on the ceding company’s business. If the premiums paid by the ceding company exceed the losses on the business, the reinsurer will experience an underwriting gain. The reinsurer will also profit from the investment income associated with its investment of the premium assets.

Reinsurance has become the preferred method within the service contract industry to return underwriting gains and investment income to participating dealers. Reinsurance is typically preferred to other compensation plans, such as retrospective commissions or profit sharing, for the simple reason that reinsurance enables the dealer to generate income utilizing the very favorable income tax treatment enjoyed by insurance companies. Insurance companies are one of the few types of businesses that are entitled to defer the recognition of income over the multiple years that a service contract may be in effect. Most other businesses are required to recognize sales income in the year the sales proceeds are received. For example, on a five-year service contract, a reinsurer recognizes the premium income pro rata (or other earnings formula) over the entire five-year period.

With the iA American Flexible Investment Program (FIP), you'll take advantage of your profits much more quickly by gaining 100% ownership of your own reinsurance company. Most insurance companies only allow reinsurance funds to be allocated to conservative investments with limited investment opportunities. Our FIP carrier (DAC) agrees the conservative investments need to be held in trust in an amount equal to the present value of future claims, plus a small buffer. The rest of the funds are FIP releases and can be invested with complete flexibility. In other words, you can get your money faster with FIP.

The primary benefit of a sound reinsurance program is that it provides you with the opportunity to realize the underwriting profit and investment income from Finance & Insurance (F&I) products sold to your customers. This additional income source also provides many other benefits, including:

• Opportunities for additional compensation for key employees
• Estate planning
• Long-term wealth accumulation
• Taxation efficiency

For one, we provide efficient, all-inclusive administrative solutions, including:

• Reinsurance company formation and corporate management
• Financial statement and tax return preparation
• Regulatory reporting
• Policy administration
• Claims adjudication
• Program development

Secondly, with our ceding method, premiums are ceded on a written basis, which allows your reinsurance company to realize immediate investment income from its business.

Thirdly, you have buyout control. Our reinsurance company owners may let their company “run off," accept our bid for the company’s assets, or accept a competitive bid from an external party.

Lastly, there are no termination provisions. Our reinsurance company owners retain control of unearned reserves and investment income on their business, even when they stop writing.

While participating in reinsurance by itself is beneficial given the deferral of income, many reinsurance companies owned by dealers fall into a category that creates additional benefits. Section 831(b) of the Internal Revenue Code allows a reinsurance company with not more than $2.45 million of annual net written premium to elect to be taxed only on its investment income. The underwriting gains experienced by an 831(b) electing company are not subject to tax at the corporate level. This enables the dealer to defer the payment of any taxes on underwriting gains indefinitely until the funds are distributed as a dividend (currently considered “qualifying dividends” taxed at 20%) or as a liquidating distribution (taxed at capital gains rate). Until the reinsurance company assets are distributed to its shareholders, the company may invest its surplus funds in any investment or make loans to shareholders.

After much research, we found that the Turks and Caicos Islands (TCI), British West Indies, provide significantly more flexibility than other locations. It is also less expensive to form and maintain an insurance company in the TCI than in the United States. Corporate capitalization requirements for U.S. insurance companies are at least $150,000, whereas in the TCI, the cost is less than $10,000.

This cost advantage gives an insurance producer the ability to turn incoming funds into lower-taxed insurance dollars for significantly less capital up front. Additional jurisdiction advantages in the TCI include a steady economic environment, modern insurance legislation and regulatory oversight, competitive fee structures, and tax exemption status for qualified companies.

Even though your reinsurance company is formed in the TCI, it is not considered an “offshore” insurance company. It will be treated as a U.S. corporation by the IRS for federal income tax reporting purposes, per a 953(d) election.

No. Premiums are held in a trust account in a U.S. financial institution.

A non-exclusive list of who may own a reinsurance company would include an individual or individuals, a legitimate corporate entity, a trust, or a partnership.

Basically anything that can be insured can be reinsured. In addition to automotive dealers, we manage reinsurance accounts for doctors, lawyers, contractors, and many others. In the case of automotive dealers, typical items that are reinsured include most Finance & Insurance (F&I) products, such as vehicle service contracts, aftermarket, GAP, and more. The list of what can be reinsured is extensive.

The service contract business shares many characteristics of the insurance business. The dealer sells a service contract to its customers offered by an independent service contract provider (the “provider”). Under the terms of the service contract, the provider agrees, in consideration for the customer’s payment of a premium, to repair or replace the covered vehicle components that fail due to an unexpected breakdown. The customer can be regarded as an insured, the service contract can be regarded as an insurance policy, and the provider can be regarded as an insurance company. We use a reinsurance transaction to redirect the underwriting gains and investment income that would otherwise benefit the provider to a dealer-owned reinsurance company instead.

We offer our own unique Flexible Investment Program (FIP), as well as Controlled Foreign Corporations (CFC), Non-Controlled Foreign Corporations (NCFC), and Dealer-Owned Warranty Companies (DOWCs). Regardless of which you choose, all of our programs are fully insured.

Benefits of a Flexible Investment Program (FIP):

• Provides access to reserves right away
• Stronger returns and lower tax rates
• Fewer investment requirements

Benefits of a Controlled Foreign Corporation:

• Provides the ability to reinsure life and casualty products
• Minimal capital requirements
• Reserves are ceded on a “written” basis

Benefits of a Non-Controlled Foreign Corporation:

• Ideal for larger producing organizations
• 100% of production and investment income is allocated to the shareholder position
• Lower fee expense rate

Benefits of a Dealer-Owned Warranty Company:

• Ideal for large dealer groups with more than $2.3 million in premium
• 100% of production and investment income is allocated to the shareholder position
• May shield income from tax for 7-10 years or more

• When a dealer signs up with iA American, we will issue the service contracts through the selling dealer and administer the contracts.

• The service contracts are fully insured under a contractual liability insurance policy (or “CLIP”) issued by our affiliated insurance company, Dealers Assurance Company (DAC), to the selling dealer.

• For each sale, the dealer remits a dealer cost to iA American that includes our administration fee and the premium under the CLIP policy. Included in the CLIP premium is a premium fee to compensate DAC, and a reserve component to pay losses (the “reserve”).
• DAC enters into a reinsurance agreement with a reinsurance company owned or formed by the dealer. Under the reinsurance agreement, DAC pays 100% of the reserve as reinsurance premium to the dealer’s reinsurance company. DAC continues to pay the reinsured losses, but is reimbursed by the reinsurance company for the losses under the reinsurance agreement.
• The reinsurance funds are held in a trust account at a bank or trust company selected by the dealer. The funds are released periodically to the reinsurance company as the reserves become earned through the passage of time and declining service contract coverage periods.

• Through our Reinsurance Formation Department and our Reinsurance Accounting Department, we organize the reinsurance company and provide customary captive management services. As part of its management function, we prepare periodic financial statements and prepare federal income tax returns for the reinsurance company. We also provide monthly reinsurance cession reports to the dealer through our sales department.