A PROFIT CENTER INSPIRED BY WARREN BUFFETT

Lou PolurCaptivation Capital

An Affiliate of Sihle Insurance Group

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When I sold signs, some customers whose signs are pictured on the next page, asked for lengthy warranties: Shoppes of Wiregrass was the “Sign of the Year” award winner in 2009. Microsoft and Careplus/Humana required months of negotiation with general contractors, REIT landlords, marketing and design firms. Walmart signed up for servicing after conversations with Bentonville and local store managers.

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727-449-2245

In reviewing sales negotiations and their questions about how long they wanted to warrant the signs, I kept thinking about a 2006 issues paper published by the International Association of Insurance Supervisors: it revealed how manufacturers use private insurance companies as profit centers. And sign companies, who are not doing this, are leaving this money on the table.

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INTERNATIONAL ASSOCIATION OF INSURANCE SUPERVISORS

ISSUES PAPER ON THE REGULATION ANDSUPERVISION OF CAPTIVE INSURANCE

COMPANIES

OCTOBER 2006

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Manufacturer Warren Buffett discovered the value of owning insurance companies in the 1960s.

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Like sign companies, he was also in highly competitive manufacturing environments. But he saw that controlling an insurance company would help him.

An insurance company would help him to: grow his businesses add lines of business that fueled that growth use tax laws to accelerate that growth generate low cost funds to finance that growth

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You can implement this proven, 50 year old business model at your company:

An Extended Warranty Program integrated with a captive insurance company creates a profit center that generates low cost funds to grow your business, while using the tax laws to accelerate that growth.

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Captive Insurance Program

* IRS section defining small property and casualty insurance company

831(b)* Micro Captive

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Currently, you pay warranty-related claims on your signs through your company’s bank account.Buffett teaches us to pay claims through a captive insurance company instead. Ideally you want as many premiums paid to your captive as possible because that is what grows the low cost funds. And these funds pay the claims.It is an easy add-on sale, as well. Your customers want to pay to protect the investment in their signs for the long term. That’s what they were telling me.

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Here is an example of a captive from a different industry:

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To get a GMC truck, the best rates come from GM Financial, GM’s captive finance company. Through it, GM gets low cost funding to make and sell more vehicles. This captive was profitable when manufacturing cars and trucks was not. Even truck dealers have their own captives that pay dealerships to fix trucks for customers who purchase the extended service contracts or extended warranty plans.

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By setting up a captive, you create a pool of low cost funds to grow your company AND you profit a second time when selling your signs.Your sign business collects the extended warranty premiums from your customers. Your business then remits this tax-deductible premium to your captive. Then your customers’ claims are settled by paying your sign company for performing warranty work, drawn from your captive.

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UHaul offers insurance on its trailers through its captive.

Snap On Tools’ captive insures its route men’s inventory .

Stanley/Black & Decker, Ingersoll Rand have captives for their extended warranties programs.

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You control the reserves because you own the captive. You get a tax deduction for putting in the premiums. You get a tax break to build up its reserves. And only investment income is taxed by Uncle Sam if you collect less than $1.2 million annually.This is one-way to use the tax laws to contribute to your growth.Its like a 401K with no contribution limits.

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AICPA’s Journal of Accountancy tax analysis shows a 72% net gain with a captive:

72% gain

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Warranty language for the extended warranty is the starting point for building your reserves. Every type of sign has specific characteristics that can be warrantied for repair or replacement. Channel letters have different properties than a monument signs or LED message centers. Each of these poses its own challenges and creates opportunities for you to specify what you will cover. Do you cover the lights and the vinyl? Do you warrant against peeling paint? What about removing birds nests?

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By deciding the terms, the language, and what to cover, you determine your profit center’s revenue. Each warranted item has a custom calculated premium. The more protection your customer wants, the more revenue your profit center generates.

727-449-2245

727-449-2245

Here’s another example:Verizon’s handset captive insurance company charges $60 per cell phone extended warranty annually. A $600 iPhone cost costs Apple about $200 to manufacture and Verizon spends approximately $300 to purchase it from Apple.Warranty Week found that among its nearly 1000 manufacturers, only about 1.2% of products had warranty claims.

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1.2%

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Applying this to Verizon: each 1000 people pay $60,000 annually for their extended warranties. Statistically, only about 12 people will have claims paid. The captive will spend only about $3600 to replace those phones. And Verizon also collects $50 per phone replacement fee. So for each 1000 customers annually, Verizon collects $60,000 in extended warranty premiums, which end up as $57,000 profit each year. Now that’s a profit center.

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Let’s get back to signs.The founder of “Children’s Discount Furniture and Toys Supermart” approached a sign company- Art Display- with this newspaper ad. Art Display returned with a 43 letter raceway mounted channel sign that was rejected as being too expensive.

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A second design from Art Display was not only accepted but ultimately catapulted the store into national prominence by creating a brand for the store:

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With extended warranties you will be paid to maintain customers’ brand over time, creating a long term relationship. Your extended warranty is part of enhancing their brand strengthening its intellectual propertyIntegrating the physical signs with their marketing

and advertising

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GE Lighting and 3M adhesive offer 5 year limited warranties to you, so your customers can be protected triply.

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All the pieces of an extended warranty insurance company have been assembled for your sign company.

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First, we review of your current sales proposals, contracts and warranties. Then, additional the information you provide is customized into your extended warranty program.

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Next, you price the warranties. You can use a company like Risk Analysis Services LLC

to price your warranties, project by project as your customers’ signs change.

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So, what happens when your captive builds its reserves, you may wonder?

What will you do with all those warranty premiums in your captive?

Here’s what CFO magazine says others do:

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“Companies Grabbing Cash from Captives”

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Intercompany Loans

Fixed IncomeEquity

Cash

Alternatives

78% Manufacturers’ Reserves Are Loaned to Parent Company:

Marsh 2013 Bencmarking Study

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These secured loans can finance your sign company’s growth. They give you additional, tax-deductible ways to expand your business with more trucks, more equipment, and more space. Loans from the captive can also be used to fund operations and make raw material purchases.

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Your commercial insurance programs should be reviewed and aligned with your vision. Creative thinking about commercial insurance is what captives are all about. This presentation is one example of how to incorporate this tool for sign manufacturers. Please review the website: www.RethinkingInsurance.org Then call Lou Polur for a conversation to start that review: 727-449-4425

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