The Captive Insurance Journal - 1st Quarter 2011

The

Captive Insurance J O U R N A L

1st Quarter 2011

I N

T H I S

I S S U E

Chairman’s Report

Page 2 President’s Message

On January 1st, I handed the presidential reigns off to Robert Johnson and

Page 3-4 Committee Updates: Membership Committee Marketing Committee Education Committee Government Relations Committee

became the Chairman of the Association for 2011.

In this role I continue to be a part of the Board of Directors and work with

Page 5 12th Annual Cinference

them closely on priority items for this year.

Page 6 Capitol Connection

Page 7 Director’s Message

Page 7-8 Health Care and Education Reconciliation Act of 2010 – Highlights for Captives

During my year as SCCIA President, we made great progress. We started the Captive Insurance Political Action Committee, “CIPAC”. For those of you that gave last year, thank you. We look forward to raising more money this year.

You will see more about this in this issue of The Journal and please note that now more than ever, the CIPAC is vital to the progression of our industry in South Carolina.

Also, in 2010 the SCCIA Board of Directors went through a RFP process and hired a new association management and lobbying firm, Capitol Consultants, Inc. During the latter part of the year, they began working on a new website for the SCCIA, and jumped on board with lobbying for the 2011 session.

The SCCIA 11th Annual Conference held in September 2010 in Charleston was

well attended and from a financial point of view we ended the 2010 year with a small net income.

2011 can prove to be an even more successful year. The Association’s committees and our manager and lobbying firm have been busy with a new website, assisting the Board with priorities and making communications to you more frequent. You will read more about those activities in this edition of The Journal.

The Board is working to make this an even more exciting year for the Association. As always, we appreciate your support, your membership and rely on your feedback to make the Association the best it can be.

I hope to hear from you in 2011!

Ann

The Captive Insurance Journal First Quarter, 2011

President’s

Message ("CIPAC") and our new association manager, Capitol Consultants,Inc. ("CCI").

Please be sure to take a look at the redesigned SCCIA website at www.sccia.org. I also invite you to start planning your attendance to the 2011 Annual Captive Education Conference to be held at the Charleston Place Hotel from September 12-14. The SCCIA Education Committee has prepared a great variety of innovative educational sessions so mark your calendars and be sure to take advantage of early registration discounts.

Managing Editor Laura Stuckey Design/Graphics Florence Design, Inc. Editorial and Advertising Office PO Box 1763 Columbia, SC 29202 855-CAPTIVE

SOUTH CAROLINA CAPTIVE INSURANCE ASSOCIATION 2011 DIRECTORS & OFFICERS Chairman of the Board Ann West HSBC Insurance Management President Robert L. Johnson Marsh Management Services, Inc. Treasurer/Corporate Secretary Thomas A. Brumgardt Nelson Mullins Riley & Scarborough, LLP Directors Robert Schmid Energy Insurance Services, Inc. John P. Seibels, Jr. Seibels Law Firm, PA Andrea Bartlett Bartlett Actuarial Group, Ltd. Randy Collins Koppers Assurance, Inc. Executive Director Laura Stuckey © Copyright 2011 SC Captive Insurance Association

I am incredibly honored to address the membership of the South Carolina Captive Insurance Association, “SCCIA”, as your 2011 President. Throughout this publication you will no doubt see evidence of new ideas, new faces of leadership and new goals for 2011. In fact, you are reading one of the changes.

We are pleased to introduce the updated South Carolina Captive Insurance Journal.

With a new name, appearance and layout, this Journal is the premier publication focused on news and events that directly impact the South Carolina domicile and association members. We hope you enjoy the new digital format which is user friendly for online viewing or hardcopy printing.

One of the new faces of leadership in South Carolina is our Director of Insurance, David Black. On behalf of all members, I extend a warm captive community welcome to Director Black and wish him much success.

Inside this publication you will find articles on our new Political Action Committee 2

I would like to thank our 2010 President, Ann West, for her leadership, hard work and stellar results. Luckily Ann is still part of the board as our sitting Chairperson for 2011. Her guidance and experience will continue to be of value in her new role. Finally, I would be remiss if I did not recognize the (40) volunteer committee members that are the heart and soul of the SCCIA. Without their loyalty and dedication, the captive community simply could not exist.

I look forward to a productive 2011 and invite any comments or suggestions you may have that will enhance the experience of all captive stakeholders in South Carolina. We have some of the greatest captive resources available in the industry and our mission is to put them to work for you, our membership.

Best regards,

Robert L. Johnson Robert L. Johnson President South Carolina Captive Insurance Association Ph. 843-577-1030

The Captive Insurance Journal First Quarter, 2011

Committee Updates Membership Members: Chuck Scherer (Chair) Virginia Adrihan Piper H. Crockett Rebecca Di Pietro Dawn Dinardo Elizabeth Forney Miles J. Hopkins Laura Roemer Sarah Z. Stubbs Jay Seibels, Board Liaison The past few months have been busy times for the Membership Committee. We have been reaching out to SCCIA Annual Conference non-member attendees and other potential SCCIA members to offer the many benefits of becoming SCCIA members. Your 2011 SCCIA Membership Committee is comprised of nine (9) volunteers from the captive manager and CPA communities. The reasoning behind this mix is to be in contact with as many current and potential members as possible and to be your voice when it comes to communication with the Association’s board of directors.

Our 2011 goals are to increase membership and to recognize those members who have contributed to the success of our domicile.

We will also be working on ways to improve efficiencies with regards to the administrative functions needed to maintain a robust, well-rounded membership. Ideas include a common renewal period for all members and an improved communication forum for those whose membership may be lapsing.

Because your ideas and input mean a lot to the Association, the Committee will be conducting a survey later in the year.

We will then analyze the results and prepare a report to the board of directors for their next strategic management meeting. If you would like to offer any feedback or suggestions, please feel free

to contact me at 843-577-1036 or at charles.scherer@marsh.com.

Marketing Members: Thomas Anderson (Chair) Geoff Chester Linda Danna Adam Forstot Miles J. Hopkins Brian Johnson Jeff Kehler Ron Krebs Jeff Pratt Will Russell Arthur M. Salvadori Chris Stormer Jay Seibels, Board Liaison In our last Marketing Committee meeting we discussed and agreed that our focus for 2011 is that of promoting our domicile both within SC and outside of the state. At the top of our list is to make sure we are well connected and represented within the state of SC. To ensure our visibility, we are planning meetings with The Department of Commerce, Department of Insurance and State Legislature. 2011 will be a very important year for Captives and our committee is focused on making sure prospective clients and service providers know that the South Carolina is a leader in the captive industry with a focus on growing.

Education Members: Mike Coulter (Chair) Gavin Foggon Legare Gresham Ron Krebs Dan Kusaila Jeff Tkacz Charlie Wanner Robert Johnson, Board Liaison The SCCIA Education Committee has been 3

hard at work on the 2011 SCCIA Annual Conference to be held September 12-14 at Charleston Place Hotel. Captive Academy, with some updated content, will be back as a pre-conference session. Captive Academy is an excellent primer or refresher for captive professionals. Sessions this year will cover a variety of captive related topics, including: Collateral Issues, Federal Contracts in Captive, RRGs and the GAO Study, FASB and IFRS, Tax and the State of the Economy. A legislative update, roundtables and a regulatory panel will all be offered to add further value for the attendees.

Back by popular demand, the SCCIA’s economic impact of captives in South Carolina statistics will be updated for 2010 and debuted at the Conference. Capitol Consultants, the SCCIA’s new association management and governmental affairs firm, will be on hand to describe how they assist the Association’s mission and what it means going forward.

In addition to the educational sessions, we are working on having a number of speakers, including the keynote speaker, to add to the conference experience. Confirmed speakers include: Director David Black of the SC Department of Insurance; the Honorable Joseph Riley, Mayor of Charleston; and The Honorable Tim Scott, US House of Representatives, First District of South Carolina. We have also invited the Honorable Nikki Haley, Governor of South Carolina and Secretary Bobby Hitt of the SC Department of Commerce to speak. As speakers confirm, we will be sure to send updates.

Looking forward to non-conference related initiatives; the Committee is working with The Friendly Society Restored (TFSR) to offer educational and informational content in conjunction with the TFSR breakfasts. SCCIA and TSFR working together allow for two continued on page 4

The Captive Insurance Journal First Quarter, 2011

Committee Updates continued from page 3

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world class groups to better serve the needs of our memebers. We are also looking into hosting webinars to educate our members and to help keep up to date on changes in the industry.

We look forward to another informative and successful conference!

Government Relations As part of the SCCIA’s legislative efforts moving forward, CIPAC (Captive Insurance Political Action Committee) was formed in order to be collectively represented as an industry as it relates to legislative matters.

For more information and Pledge Form go to our website www.sccia.org or contact the Association Office at 1-855-CAPTIVE

Members: Michael Molony (Chair) Bill Bartlett Garry W. Coulter Ronnie Dennis Steve Dyar Christopher Gorski Jeddie Suddeth Jan Waring-Woods Tom Brumgardt, Board Liaison This is the first article I have written as chair of the Government Relations Committee. I want to thank Tom Brumgardt for his service as the Chair of the committee over the past couple of years. I wish he would have agreed to serve one more year but he was one step ahead of me. I say that since this is going to be an extremely busy year for our committee.

As for the legislative front, our Association’s bill, H3414 is in good shape with the General Assembly. I am pleased to report the bill passed the full House by a vote of 105-0 and has been sent to the Senate where it resides in the Senate Banking and Insurance Committee. Representatives of the SCCIA have met with the Chairman of the Senate Banking and Insurance Committee, Senator Thomas, and believe that the legislation will be put on the agenda for consideration soon. If any of you would like to help in this effort, please contact Senator Thomas and 4

indicate your support of H3414. Also contact Representatives Sandifer and Brady and thank them for their assistance in moving the bill through the House.

You will notice the CIPAC is mentioned in several places throughout this journal, and we can’t express its importance enough.

The benefits of the CIPAC are that it enables the Association to focus on supporting issues and leaders who can and have been instrumental to our success, state and federal officials who support our programs, and to provide educational materials and programs.

Finally, we hope to see a further collaboration with the Department of Commerce regarding our captive program. As the program has matured over the years, more and more Department of Insurance resources have been devoted to annual reporting and monitoring as well as the required five year examinations of the over two hundred licensed captives in the state. The Governor and Department of Commerce have expressed strong interest in using our successful captive program as an additional tool to recruit industries and to further economic development and job creation.

The new Commerce Secretary, Robert M. Hitt III, hails from Charleston, is very well connected with the media throughout the state and is a former senior officer at the BMW facility in Greenville. We hope Secretary Hitt will move forward in a collaborative effort with our captive program to present a comprehensive alternative risk management program to industries interested in re-locating to our state.

As always, if any one has any questions or desires any assistance or any further information set forth in this article or otherwise, please feel free to contact me.

The Captive Insurance Journal First Quarter, 2011

12th Annual Executive Educational Conference September 12-14, 2011 Charleston Place Hotel South Carolina: The

Next Generation

This year’s conference continues the long tradition of enriching the knowledge of captive and alternative risk transfer professionals by presenting a cutting edge educational program. The Conference also offers the opportunity to network with like-minded industry professionals. Networking breaks, a hosted lunch, the golf tournament and other social events during the conference give you ample time to interact with your fellow professionals.

Featured Speakers: Phil Lader, Esq. – Nelson Mullins Riley & Scarborough Brad Van Liew – Team Lazarus, www.oceanracing.org

Workshops Include: Captive Academy (pre-conference session) • • • • • • • • • • • •

Captives and the Federal Government: The TOTAL Cost of Risk Collateral Issues for Captives The Evolution of Captive Taxation: Where are we Now? FASB Financial Instruments Package, IFRS and Solvency II Healthcare Reform – How the Market is Changing SCCIA Legislative Update The New Look of Post-Recession Captives Outlook on the Current State of the Economy and Captive Investment Strategies in Today’s Market Risk Appetite – Defining the Quantifiable Parameters of ERM RRG’s: Fed, NAIC and GAO update South Carolina Regulatory Panel Roundtable Discussions for RRGs, Pure Captives, Service Providers and SPFCs

Visit www.sccia.org to view the conference information and register online.

(Super early bird registration discounts end April 20, 2011.)

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The Captive Insurance Journal First Quarter, 2011

Capitol Connection

SC CAPTIVES LICENSED IN 2010 Associated Physicians Captive, Inc SPC Strategic Risk Solutions Columbia Risk, LLC Pure USA Risk CS-Risk Insurance, Inc. Pure MIJS Captive Management Diversified Global Resources, LLC SPC PrimeFortress Double Mountain Risk, Inc. Pure MIJS Captive Management HRI Insurance, Inc. Pure MIJS Captive Management National Casualty & Assurance, Inc Pure Marsh RTS Insurance, Inc. Pure MIJS Captive Management US Consolidated Group, Inc. SPC Willis Captive Management

Even though we have been managing the SCCIA since last October, this is our first opportunity to say Hello in the Journal for those of you who may not have had contact with us yet. Capitol Consultants is a twentyeight (28) year old professional governmental affairs and association management firm based in Columbia.

We are committed to providing the SCCIA members with superior service, offering every possible resource to achieve the association’s goals. We also manage the administration of CIPAC. Your association staff has been very busy working on a variety of issues including meeting with top state officials who impact the captive insurance industry.

Laura Stuckey is your Executive Director and works very closely with the SCCIA President, Robert Johnson, Board of Directors and Committee Chairs. Laura has many years of experience in managing associations and is experienced in all phases of association management. She has quickly learned the complexities of the captive industry.

Some of the exciting things going on at your association office is the new website development at www.sccia.org. The Members Only Section is still under construction but will be available soon. Mass email communications have been sent to members, and we will continue to keep you updated. In addition to the Executive Director, we have a considerable staff that supports Laura’s work for you.

On the Governmental Affairs side, in addition to me, I am fortunate to have Heather Smith and Annie Wessinger, Esq. on the SCCIA lobbying team. We work closely with Michael Moloney, Tom Brumgardt and your Governmental Affairs Committee to make sure you are well represented at the Statehouse and with appropriate state agencies. Weekly, our team publishes a “Week In Review” of happenings at the Statehouse, which will be available under the Members Only section of your website.

We are here to serve you and we want to make sure that we are responsive and attentive to your needs and concerns. Call us anytime Toll free at 855.CAPTIVE (227-8483) or local (803) 779-6677. You can also email Laura at lstuckey@capconsc.com or me at rdavis@capconsc.com.

Richard Richard Davis President Capitol Consultants, Inc.

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The Captive Insurance Journal First Quarter, 2011

A Message from

Director David Black As we move forward, captive insurance companies will continue to play an important role in the economic development of our state. Over the past six years, more than $81 million of economic development has been contributed by the captive industry, to include the creation of more than 175 captive industry related jobs. The economic impact reaches much further by impacting both the tourism industry and our financial institutions. In fact, nearly $700 million has flowed through South Carolina’s financial institutions. These are significant contributions and we look forward to seeing the captive industry continue to grow and flourish in South Carolina.

We will continue to market South Carolina as both a pro-business state and a wonderful place to domicile a captive. Working together, we will reach out to companies in South Carolina and elsewhere to promote our captive industry. The ARTS Department will pursue its continuous improvement plan to be supportive and responsive to the needs of the managers, service providers, and captive clients.

We look forward to our continued success and welcome your comments and suggestions.

Health Care and Education Reconciliation Act of 2010 – HIGHLIGHTS FOR CAPTIVES Article By: Lynn Kline, CPA, Manager & John Huskins, CPA, Senior Associate

INCREASED IRS INFORMATION REPORTING Over the past year there has been a national discussion regarding the expansion of the 1099 reporting requirement mandated by the recently passed Patient Protection and Affordable Care Act of 2010. This new law will make it more difficult for businesses to understate revenue by broadening both the types of business and transactions subject to 1099 reporting. The Congressional Budget Office estimates that these two significant changes will raise $17 billion in tax revenue over the next 10 years.

Current IRS regulations require businesses to issue Form 1099-Misc to most types of unincorporated contractors who were paid more than $600 for services rendered

during the current year. Copies of these annual information returns are also submitted to the Internal Revenue Service, where they are used to track self-employment income in much the same way that W-2s are used to track wages.

However, when Section 9006 of the Patient Protection and Affordable Care Act goes in to effect on January 1, 2012, the current reporting requirements will expand to include almost all taxpayers, including previously exempted corporations.

Additionally, Form 1099 will have to be issued for the purchase of goods as well as services. Simply, in addition to sending Form 1099 to the historic culprits such as the accountants and attorneys, businesses will also be required to issue 7

Form 1099 to such day-to-day vendors as the office supply store, phone company and payroll processor for annual purchases greater than $600.

It is important that everyone is ready for this required change by ensuring that their accounting software is properly formatted to track all purchases by vendor. Note that 1099s will have to be issued separately to each major corporation franchisee, so every independently operated McDonalds or Hilton, for example, will need to be tracked separately. It will also be important to collect Form W-9 from all vendors and service providers during 2012 to ensure that all relevant information will be on hand

by January 2013, the first 1099 filing period that will be affected. continued on page 8

The Captive Insurance Journal First Quarter, 2011

Health Care and Education Reconciliation Act of 2010 – HIGHLIGHTS FOR CAPTIVES continued from page 7

ECONOMIC SUBSTANCE CODIFICATION Previously, case law established the economic substance doctrine to determine whether transactions that complied with the literal terms of the code were actually tax shelters or strategies solely used to reduce tax liability. Under the new health

care reform package, Internal Revenue Code section 7701 states that a transaction will meet the economic substance test only if the taxpayer’s economic position changed in a meaningful way and the taxpayer had a valid purpose for entering into the transaction (other than to reduce their federal tax). If a transaction is deemed to lack economic substance a 20 percent underpayment penalty will be applied. If

the transaction lacks economic substance and the taxpayer failed to disclose relevant facts then a 40 percent penalty will apply.

This is a strict liability penalty meaning the IRS will not allow the taxpayer to avoid the penalty as a result of reasonable cause or reliance upon an opinion. The penalties apply to transactions entered into after March 30, 2010.

About Johnson Lambert & CO. LLP: Lynn Kline, CPA is a Manager and John Huskins is a Senior Associate at Johnson Lambert & Co. LLP. Johnson Lambert & Co. LLP is North America’s largest insurance-focused audit and tax firm, and has served the insurance industry for nearly a quarter century.

Since our inception in 1986, we have focused on distinct industry niches where we have distinguished ourselves as technical experts with a unique depth of experience specifically relevant to our clients’ needs. We serve over 350 insurance and insurance services entities from our offices in Florida, Georgia, Illinois, New Jersey, North Carolina, South Carolina, Vermont and Virginia. We also service associations and other non-profit organizations as well as employee benefit plans. For more information about Johnson Lambert & Co. LLP, visit www.jlco.com.