Principals:

Iain Brackstone                                           

770 490-4130                                                 

ibrackstone@alternative-risk.com                        

James Selvaggi

202 340-8734

jselvaggi@alternative-risk.com         

Efficient Investment Platforms to Create and Preserve Wealth for the Sophisticated High Net Worth Individual

Overview

The High Net Worth Investor typically seeks long-term investment strategies that are cost efficient and offer flexibility.   Efficiency includes both relative program charges and overall tax exposure.  Flexibility includes the range of allowable investment choices and ability to exit the program as desired.

Alternative Risk Strategies, L.L.C. (“ARS”) had identified two successful strategies that offer these valuable attributes.   The first strategy is purchase of private placement life insurance (“PPVUL”) and deferred variable annuities (“DVA”).  The second strategy, closely related, is investment in specialty offshore insurance operations. 

Private Placement Variable Life Insurance and Deferred Variable Annuities

These programs are designed to provide policy owners with the tax advantages typically associated with life insurance and annuities.  In the case of life insurance, income tax free death benefit proceeds and tax advantaged borrowing accompany the advantage tax-free inside buildup of annuities.   The same estate planning opportunities that are typically available through traditional insurance programs are also available in private placement programs.

Programs for high net worth clients are available at lower cost than retail insurance programs.  For many “recently rich clients”, this revelation proves surprising and generates interest in seriously evaluating the PPVUL and DVA value proposition.  Moreover, the investment programs available may be customized as long as the investor control rules are met.   Planned premiums typically exceed $1,000,000 per policy and may be sold without a policy load or surrender charge.   However, these premiums form the basis of the cash surrender value and, contrary to common misconceptions about insurance, are not an immediate “expense”. 

Policyowners may make allocations to investment accounts that would otherwise be highly tax inefficient such as hedge funds which typically generate ordinary income.   Absolute return oriented investments are typically well suited to long-term insurance programs.

Custom PPVUL and DVA programs are available from both domestic and offshore insurance carriers.   There advantages and disadvantages to both.  Policies funded over a 5 year time frame, commonly known as Non-Modified Endowment Contracts or Non-MECs,  typically have the lowest program charges and represent the best value proposition for policyowners. 

Assuming an 8% return, the long-term efficiency of these programs can be reasonably expected to enhance total returns by 100% over a 30 year period compared to the same investment returns in a typical hedge fund over the same time period.

Strategy 2: Investment in Offshore Insurance Operations

Investors can significantly enhance after-tax returns by investing in companies with tax efficient operational structures.   Offshore insurance companies represent such an opportunity.  Many offshore domiciles, such as Bermuda, have favorable income tax legislation that allow insurance companies to operate at a competitive advantage relative to domestic companies.  Properly structured, U.S. investors are not subject to income tax until dividends are paid or the investment is sold.  So setting up insurance operations in offshore domiciles is a fundamentally attractive proposition.   The company must be carefully structured to avoid tax traps posed by the Passive Foreign Investment Company (“PFIC”) and Controlled Foreign Corporation (“CFC”) tax rules which are designed to prevent U.S. taxpayers from deferring tax and changing the nature of income from ordinary income to capital gains by merely shifting investments to closely held offshore companies.  

The nexus between alternative investments, insurance and reinsurance, and offshore situs is not new.   Alternative investments are typically taxed as ordinary income while insurance products, such as life insurance and annuities, have been afforded favorable tax treatment.  Offshore situs allows companies to take advantage of generally more flexible operational rules and favorable tax treatment of investment earnings. 

Insurance companies typically earn profits from investing activities and from underwriting activities.   Historically, many such endeavors sought match hedge fund investment programs with property and casualty insurance and reinsurance. 

ARS believes that a better match is the more predictable life insurance and annuity risks and is presently seeking investment capital to form such a company.  The company will seek to utilize its investment capital as seed capital for insurance dedicated investments that will enhance the value proposition for its core PPVUL/DVA program.  The company will also seek to minimize total risk for its investors and offer a wide range of investment choices through a series of share classes to prospective investors.  The Company also seeks to capitalize on its administrative capabilities to develop and market specialty insurance programs that meets risk management requirements.

ARS believes the value proposition for the high net worth investor is compelling for both cases.   We believe the case is so compelling that the substantive issue becomes how much to allocate to one or both programs.  Moreover, these strategies have previously been the domain of only the ultra high net worth investor.  As the offshore insurance industry continues to mature, the opportunities of the past are now available to the expanding ranks of high net worth investors.

If you would like to know more, please contact Jim Selvaggi or Iain Brackstone, principals, ARS.  Both individuals have extensive experience with the strategies in executive capacity for offshore insurance carriers over the last decade.