1. R E V I E W
DELAWARE
REPORT2011
DISTRIBUTED WITH CAPTIVE REVIEW
REGULATION
Robust legislat ion secures Delaware’s
position as a leading captive domic i l e
FLEXIB ILITY
Th e jurisd ict ion welcomes and supports
in n ovat ive id eas
LOCATION
A prim e geographic position and excel-
len t transp ort links ensures success
FEATURING Bayard | Capstone Associated Services | Parkowski, Guerke & Swayze
Stevens & Lee | Stewart Law Firm | Wilmington Trust Company

2. DELAWARE REPORT
Own your own
insurance
company
Stewart A Feldman of Capstone Associated Services talks to Captive
Review about why business owners should consider setting up a
captive and how to go about it
O
wners of middle market busi- Stewart Feldman talks to Captive CR: In terms of size, which businesses
nesses are attracted to the cost Review about the best course of action would particularly benefit from form-
saving, risk management, and for a business owner to put in place a ing a captive?
profit potential provided by more comprehensive risk management SF: Generally, a business owner or group
owning their own insurance company. programme that protects against a wider of owners would form a captive for a
In a recent interview, Stewart A. range of risks than currently seen cov- substantial operating business (one that
Feldman, chief executive of Capstone As- ered by conventional policies. has meaningful uninsured or under-
sociated Services, a Houston-based firm insured risks), with pre-tax profits (be-
specialising in alternative risk planning Captive Review: How would you fore partners’ salary, bonus and other
for closely held businesses, explained: define a captive, and what are the forms of compensation) of $1m or more.
“Many middle-market businesses need- particular benefits of forming one?
lessly ‘self-insure’ a wide range of risks. Stewart Feldman (SF): A captive is CR: What are the benefits of forming a
By self-insurance, I mean ‘pay directly generally thought of as a closely held captive to the business owner(s)?
out-of-pocket as losses are incurred’. insurance company that principally SF: The captive insurance company’s
This is an inefficient and dangerous ap- insures related businesses. Today, potential risk management and asset
proach to risk planning.” over 90% of Fortune 1000 companies protection benefits, together with the
As an alternative to being self-insured, and many successful mid-market federal tax incentives, often combine to
a business can form its own small insur- companies have captives. Forming a make it a very attractive option for suc-
ance company, or ‘captive’. A captive captive may be one of the best risk cessful business owners. The bottom line
allows the business to underwrite hereto- management and financial planning is that a captive gives owners ultimate
fore inappropriately self-insured risks (for tools available for middle-market control over their insurance needs,
example business interruption coverages) businesses. Due in large part to the and in the event that premium revenue
into property & casualty premiums. Like US tax structure, most captives in the exceeds claims, owners benefit from the
any other property & casualty premiums, world are sponsored by US businesses profits of their own insurance company.
a captive’s premiums are tax-deductible ( see diagram on page 14 ). The resulting underwriting profits are
to the operating businesses. tax free.
Operating businesses are only allowed CR: What factors can make captive
to deduct losses as they occur. In con- insurance an attractive planning Stewart A. Feldman
trast, insurance companies are unique tool for businesses? is CEO of Capstone
Associated Services, a
in that they are able to currently deduct SF: A captive allows its owners to
Houston-based firm spe-
future, unspecified losses. With a captive specifically tailor and implement cialising in alternative
insurance arrangement, those reserves customised policies that are often risk planning for closely-
are available to fund future losses, or in too expensive or practically speaking held businesses. As a
the event that the loss does not occur, unavailable through the conventional 30+ year tax attorney,
the profits can be distributed to the cap- insurance markets. A captive provides Mr. Feldman is one of the foremost experts
tive’s owners at advantageous tax rates. a platinum level of coverage to an op- on captives in the United States. Since 1998,
Meanwhile the captive has a wide range erating business, while allowing the Capstone Associated Services, together with
of investment opportunities, and if prop- business owners to benefit from the their affiliated law firm, The Feldman Law Firm
LLP, have formed 100+ captive insurance
erly structured, enjoy fully or partially profits of the insurance company in a
companies for closely held businesses,
tax exempt status. tax-efficient manner.
WWW.CAPTIVEREVIEW.COM CAPTIVE REVIEW 13

3. DELAWARE REPORT
CR: In the US, what measures are in
place to encourage the formation of SIMPLIFIED OWNERSHIP STRUCTURE
captives? FOR A CAPTIVE INSURANCE COMPANY
SF: Captives are tax advantaged, for-
profit insurers. The US government en-
courages the formation of small insurers
to help protect closely-held businesses
as a way of promoting jobs and growth.
While a captive may be a great financ- Owner(s)
Captive
ing tool, it does not work for every
Invest $100,000- $250,000 as capital into a new Stock
business. Provisions in the Internal
Revenue Code have been in place prior captive insurance company and become 100%
to 1920 providing tax exempt treatment owner.
for small insurance companies. Similar
provisions now apply to insurers with
annual premiums under $1.2m.
CR: Why would a business owner form
a captive rather than using a tradition-
al insurance company? Controlling Capital
Ownership Contribution
SF: Captives typically provide supple-
mental coverage to existing convention-
al policies, which upon examination are Risk Coverage and Payment of Claims
often found to be inadequate. Business
owners find that owning their own
Operating Business Captive Insurance Co.
insurance company helps control the
Pays up to $1,200,000 in Receives $1,200,000 or less
rising cost of risk and provides broader annual insurance premiums in annual premiums. Offers
insurance protection by filling in the for a variety of property and a variety of insurance coverages
holes and exclusions of conventional casualty insurance coverages. to the operating business and
policies that all too often do not match others.
the risks of the operating businesses. Tax Deductible Premiums
CR: Is it necessary for the business
owner to be the sole owner of a cap-
tive? CR: Can a business owner choose what
SF: Ownership of the captive often to insure against? Capstone offers webinars to help
mirrors the ownership of the operating SF: Absolutely. A business owner can business owners and their advisors
business. However, the ownership of a choose to insure his operating busi- learn and understand if a captive
captive might also include key employ- ness against events where his current insurance company is right for
ees, children, grandchildren, family conventional polices fall short. Often the them. The webinar covers how to:
partnerships, limited liability compa- captive’s policies dovetail with the exclu- manage insurance costs, custom-
nies or trusts. sions, exceptions and carve-outs in the ise coverages, improve cash flow,
conventional coverages. retain insurance profits, protect
CR: How would business owners pro- your assets and build tax advan-
tect their assets? CR: How prolific is the use of captives taged reserves for future claims.
SF: Captives are one of the better asset in US industries?
protection tools available. Designed SF: Already thousands of businesses
correctly, assets in a captive are difficult representing industries such as manufac- premiums are paid to the captive like
for the operating companies’ creditors turing, fabrication, distribution, finance any other conventional policy premiums,
to reach. and construction, to name only a few, except instead of being paid to an out-
now participate in some type of alterna- side organisation, monies are paid into
CR: Is a captive easy to establish and tive risk-planning programme to better the captive insurance company.
manage? insure the risks of its parent company.
SF: Captives must operate with dual Even Google and the US government CR: How would a business owner set
regulatory parameters: the Internal operate their own captives. The risks of up a captive?
Revenue Code and the domicile where the contractors excavating the remains of SF: A captive insurance company must
the insurance company is established. The World Trade Center site were born always be established with a bona fide
The formation and ongoing manage- by a government sponsored captive. An insurance purpose, in other words, as a
ment of a captive must be overseen by estimated 50% of all property & casualty facility for transferring risk and protect-
experienced professionals that under- premiums are written through captives. ing assets. The transaction must make
stand the insurance, financial, tax and economic sense. Beyond this general
legal aspects of the captive. Because it is CR: How are premiums paid to the rule, there is a great deal of flexibility in
a regulated insurance company, our cli- captive? how the captive insurance company can
ents often prefer to have a professional SF: A captive is a regulated insurance benefit a client. Business owners inter-
third party administer the captive on a company that must first be licensed by ested in forming a captive can contact
turnkey basis. Most regulators demand an insurance commissioner in a US state us to see if their operating companies
ongoing professional management. or foreign jurisdiction. Once established, might qualify.
14 CAPTIVE REVIEW WWW.CAPTIVEREVIEW.COM

4. CONTROL YOUR DESTINY.
MANAGE YOUR RISKS.
Captive Insurance and Alternative Risk Planning
for the Middle Market
For years, large companies have used alternative risk financing strategies to reduce
insurance costs, improve risk management, customize coverages and increase cash flow.
Today, captives are the premier risk management and risk-financing tool for middle
market companies. Capstone operates captives domiciled in the U.S. and abroad, with
sta ed o ces in Anguilla, Delaware and Houston. To learn more about how captive
insurance can protect your business , Contact us at 713/850-0550 or email us
at INFO@CAPSTONEASSOCIATED.COM
CAPTIVE INSURANCE PLANNING
FOR THE MIDDLE MARKET
CUSTOMIZED COVERAGES MANAGE INSURANCE COST IMPROVE CASH FLOW
WWW.CAPSTONEASSOCIATED.COM