Tag Archive | "Brian Feldman"

F&I Participation Programs: A Look at the Options

There are many options for dealerships to participate in the profits (and losses) associated with the F&I business they produce. In our industry, we commonly refer to these programs as participation programs. While participation programs vary greatly by product, administrator and insurer, they generally can be classified into three categories: retrospective (“retro”) programs, dealer- or producer-owned reinsurance companies (CFCs) and non-controlled foreign corporations (NCFCs).

How do you choose the best participation option for your customers? While there are many versions of these three main types of participation programs, their general characteristics hold true across the board. It is important for agents to understand these characteristics and key differences so that they are able to evaluate the options based on their customers’ individual business needs.

Retrospective Programs

Commonly referred to as retro programs, these allow a dealer to participate in a portion of the underwriting profits associated with their business, along with a portion of the investment income. The participant’s share of the underwriting is typically defined by a predetermined schedule that may or may not have volume levels and/or a loss ratio component. There may be additional factors that have an impact on the share amount. Investment income is typically also stated as a fixed amount.

Dealer or Producer-Owned Reinsurance Companies

These participation programs are commonly referred to in our industry as CFCs. Simply put, the dealer or producer forms an offshore reinsurance company that makes both an 831(b) and 953(d) tax election. These companies will pay regular U.S. C-corporation tax on investment income generated. 831(b) companies are subject to a $1.2 million premium production cap.

In situations where the dealer or dealer group writes in excess of 1.2 million in premium, we sometimes see multiple 831(b) companies used to reinsure the business. While in some cases this may be acceptable, there are complex attribution and control group rules that need to be reviewed and followed. It is important to use a well-known and respected captive manager to ensure compliance with these and other items to avoid any potential problems.

Although they are an industry standard, a common objection to CFCs is that they offer little investment return potential, particularly in today’s market. Traditional reinsurance programs use a very conservative investment approach. Many programs utilize money markets and fixed income securities as their investment vehicle. For some dealer participants, this extremely conservative approach is acceptable; for many others, it is not, and there is a need to seek a more lucrative option.

Non-Controlled Foreign Corporations

Commonly referred to as NCFCs, these are companies that reinsure risks and allow dealers and producers to participate in the offering by purchasing stock. The securities are typically private placement offerings that are exempt from securities registration. As such, they are only available to accredited investors as defined by the Securities Act of 1933.

NCFCs allow for tax deferral of underwriting and investment income. In addition, some NCFCs allow for annual or biannual distributions. The tax consequences of these distributions vary from company to company. In addition, a 1% federal excise tax applies to most NCFC transactions, unless exempt under a tax treaty.

Profit Potential and Income Generation

From a net potential perspective, retro programs offer the least amount of profit sharing and investment income, and investment income is usually capped. Retros typically also have fixed schedules that define the payout, and sharing of the underwriting profit is typically less than 100%. In addition, penalties, payment delays and high fees are common. There is no beneficial tax treatment associated with this type of program. From a risk perspective, retro participants do not have any risk, as they have not put their own capital into the program. Should a retro perform poorly, the participant could lose the potential for future profits.

CFCs offer a higher income potential than retro programs. Typically, 100% of the premium is ceded to a CFC and the program earns 100% of the investment income. Insurers typically restrict the allowable investments so that they can take credit for the reinsurance on their statutory financials, and this can greatly reduce the potential for investment income. CFCs allow for tax deferral of underwriting profits but are taxed on investment income. CFC participants must form and capitalize a company, and a poorly performing CFC program could force the liquidation of the CFC and the loss of the initial capital along with accumulated surplus.

NCFCs offer the highest level of income potential among the three basic types. NCFC programs allow for tax deferral of both the underwriting profits and investment income. In addition, NCFCs are not subject to the $1.2 million premium cap as with CFCs. Most NCFCs have the ability to invest funds in a manner that can provide for a higher investment income than traditional reinsurance programs. This is due to the fact that they are not subject to the same investment restrictions as CFCs, allowing them to achieve superior returns. A poorly performing NCFC could cause the loss of the capital along with accumulated surplus. In addition to the loss of initial capital and accumulated surplus, participants in both CFCs and NCFCs could lose future income potential from the reinsured business should there be poor underwriting performance.

In Practice

A common misconception is the notion that NCFCs are only available to large dealerships and dealership groups. While each NCFC program is different, every dealer, regardless of size, should be able to utilize an NCFC. Let’s consider a dealer producing $600,000 in net premium on an annual basis as our example. In most cases, an agent would not even consider a NCFC for this dealership. The dealer would use a CFC and earn a very minimal investment return that is then taxed. If they’re lucky, the investment income offered by the CFC in this example will be enough to offset the company’s annual operating expenses.

Now let’s take this same dealer and substitute an NCFC that allows participants to request dividends that are qualified for tax purposes. In 2014 alone, the dealer would have received approximately $30,000 in investment income after expenses. Keep in mind that the interest income earned compounds, and assuming the same premium levels and investment income return, this could lead to an investment income in excess of $60,000 in Year Two. Compare this to the CFC where investment income generated would most likely have been erased by taxes and operating expenses. If you were participating, which structure would you choose?

NCFCs Are Not a One-Size-Fits-All Solution

There are many NCFC programs available in the F&I marketplace with varying features. When looking at NCFCs, it is important to first understand the structure of the company. Some NCFCs are “closed” or “sponsored,” meaning they only allow participants of a specific F&I administrator’s program access to the NCFC. In other words, you will not be able to offer a closed NCFC to a dealer unless you represent that program. Other NCFCs are “open,” meaning they allow multiple F&I providers access and have relationships with many different F&I providers.

In addition, NCFC features and benefits vary greatly. There are two main types of NCFC programs: dividend paying entities and tax deferral entities. Dividend paying entities typically provide annual dividends, which, out of most NCFCs, are considered ordinary income to the shareholder. On the other hand, tax deferral entities typically do not allow access to the profits until the stock is redeemed. Some NCFCs offer a combination of these two types of entities. This combined structure also allows for qualified dividends, meaning the dividend is taxed at the capital gains rate.

When evaluating an NCFC, it is also crucial to understand the company’s investment plan and philosophy. Most NCFCs have unrestricted access to the premium dollar, and as such are not restricted as to how they invest their money on behalf of shareholders. It is extremely important to understand each NCFC’s investment strategy, as bad investment decisions could cause premium dollars to be lost and significantly reduce the profits associated with the reinsured business.

Picking the Right Participation Program for Your Customer

With so many participation program options available, how do you determine the best option for your customers? Agents should be able to explain to their dealer customers the differences between each type of participation program in terms of cash flow, associated costs, tax consequences, investment strategy and how the distributions are handed. When evaluating the options, it is important for agents to understand their customers’ wants, needs and appetite for risk.

Retro programs are the least lucrative as these programs almost always share less than 100% of the underwriting profits and investment income is capped. While CFCs are an industry standard, they offer little investment return potential, particularly in today’s investment environment. NCFCs now offer options that were not available in the past and offer the highest income potential from both an investment income and tax perspective. If the potential for higher income with tax deferral is what the customer is looked for, then an NCFC is likely their best option.

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Agent Summit V Wrap Up

To all who attended – thank you for making Agent Summit V the best yet. Since its inception, the number of attendees has increased with each passing year – and with close to 900 attendees, this year was no exception. Agent Summit was launched in 2010 and was designed to provide Independent Agents, who serve as an extension of F&I product providers, with a forum to come together to network, share and learn. Today, many now regard Agent Summit as the one must-attend industry event of the year. This year’s show highlighted the latest training techniques and addressed the newest trends and most pressing challenges that Agents face as they serve their dealer clients.

Attendees were welcomed to the show’s upscale new location at the Venetian Palazzo. Complete with cobblestone streets, footbridges over canals, blue skies, and gondolas, attendees couldn’t help but feel as if they had just stepped off the plane in Venice, Italy. Jaws dropped as Agents who had taken advantage of the Agent Summit room block entered their stunning suites. Words like “lavish” and “spectacular” were heard describing the Palazzo as Agents arriving on Sunday evening gathered for welcoming cocktails.

Much like the Palazzo’s five star reputation, show sessions featured “five star” industry experts with every detail of the show sessions ultimately spelling “Profit!”

The third annual Reinsurance Symposium once again preceded Agent Summit; this year featuring two expert speakers. Greg Petrowski, senior vice president, GPW and Associates Inc., and a veteran speaker at Agent Summit, returned to the stage, and was followed by Brian Feldman, executive vice president, Spencer Re – a seasoned executive who has been a part of just about every facet of the reinsurance space.

With more than 20 years of industry experience each, Petrowski and Feldman shed light on the often confusing benefits of controlled foreign corporations (CFCs) and non-controlled foreign corporations (NCFCs).

At the conclusion of the half-day Reinsurance Symposium, Randy Crisorio, president and CEO, United Development Systems Inc. (UDS), and returning advisory board chair, got the show underway with the official opening address.

This year’s show focused on four major areas, 1) Selling to dealers; 2) Training; 3) Coaching and development; and 4) Technology. Each topic was explored first in an individual feature presentation, and was then followed by a panel session.

Morning presentations featured strategies for closing more business and practical steps for getting in front of dealers. Jimmy Atkinson, COO, AUL Corp, stated, “You have to look at a dealer’s DNA – ‘Dealership Needs Analysis’ so you can provide them with products and solutions to meet those needs. This requires pre-call planning and a targeted presentation.” His mantra for agents was “Be prepared. Be flexible. Be confident.” AE readers can look forward to Atkinson’s further expansion of this topic in an upcoming issue.

Days one and two closed with a cocktail reception in the Expo Hall. Throughout the show, crowds filled the expansive Expo area as agents took advantage of the buffet of networking opportunities. With more than 75 tabletop exhibitors and just shy of a hundred sponsors, the exhibit hall was full to overflowing. Exquisite breakfasts and lunch were served alongside the Expo Hall, thanks to show sponsors.

Known as the “World Greatest Closer,” keynote George Dans jump-started day two out with a bang. Dans was a whirlwind of energy, as he crossed the stage, leaving a flurry of excitement and emotion in his wake. He shared personal stories of both success and failure. In his fast paced, energetic address, Dans got the audience pumped up with a revitalized enthusiasm for closing every single deal. He encouraged attendees to be at the top of their game, “We become what we think about all day. You need to say to yourself, ‘I’m good. I’m gifted. I’m talented. Fear, doubt and worry are behind me.’” Dans urged attendees to step out of their comfort zone and to change their way of thinking so they could come out not just ahead, but at the front of the pack. After his presentation, Dans signed hundreds of copies of his book, Just Close It… Ask and You Shall Receive, which were available to all attendees.

Day two also featured two sessions on training, which emphasized the foundational importance of establishing good relationships in order to get buy in from all parties. The sessions covered themes, frequency, and the needs of retail personnel in service, sales, desking and F&I management.

“As an agency,” stated Ron Reahard, president, Reahard & Associates Inc., “you have to help your F&I managers address the challenges they face on a daily basis, and give them the skills, the knowledge, and the confidence to be successful… Performance doesn’t improve because you or a dealer demands it, it gets better because you put a plan in place to ensure it happens.”

A panelist urged, “Make sure the dealer and GM see you as a partner, and know that you are there to make them better.”

Joe St. John, director of training, Innovative Aftermarket Systems (IAS), and seasoned academic, delivered the feature presentation on coaching and development titled, “Xs and Os – Brain Science for Better Coaching.” This dynamic presentation was definitely an audience favorite. St. John’s unconventional yet proven approach focused on the “why” that drives a customer’s decision to make a purchase. He used a lively combination of humor, experience, and science to demonstrate how to reframe common scenarios for success and forge a unique roadmap for the road to the sale.

The coaching and development panel session explored topics ranging from dealing with underperforming veteran F&I managers, strategies for facilitating collaboration between the sales department and F&I, and how agents can ensure their efforts are recognized by dealers. ”Communication,” urged panelists, “is key.”

After a lunch that rivaled any Vegas hot spot, names were drawn for two $500 gift cards, courtesy of Old Republic Insured Automotive Services, and two weeklong deep-sea fishing trips, thanks to Performance Automotive Management. The lucky recipients of the gift cards were Glen Tuscan, president, Dealer Commitment Services, and Greg Liverett, vice president of marketing, SGI Services. William Kelly, partner, Automotive Development Group, and Anna McMillan, president, The Milby Group, were thrilled to win the fishing trip prizes.

Jim Maxim Jr., president, MaximTrak, showed agents how to use cutting edge technology to set themselves apart from the competition, increase profits and operate more easily and efficiently. In addition to examining today’s technology landscape in industries across the board, he presented innovative technology solutions for agents and explained how they could be integrated into everyday business.

The technology panel session dissected topics ranging from the impact of compliance on menu usage, to data analytics, and the increasingly popular move towards customer driven presentations in F&I. Panel members were in agreement that in any type of business, you can’t manage what you can’t measure.

The day concluded with a drawing for a Surface Pro 3 sponsored by Endurance Dealer Services. Tom Clark, the owner of Prosperity Dealer Services, was named the prizewinner.

Day three of Agent Summit ushered in the second annual agent principal only session, featuring round table discussions during a sponsored breakfast. The new format was informative and engaging with top agents brainstorming solutions for common issues agents face in their day-to-day business operation. Agents entered the room on high alert as they scanned topics by table to decide which one was most relevant to them. After thoughtful collaboration, each table captain shared their group’s recommendations for making the most of the given challenges. Discussion topics included selling in the service drive, provider relations, dealer expectations, effectively managing a remote sales force, staffing, competition and more. As one table captain took the podium, he pointed out the vast amount of wisdom and experience in the room, stating that his table alone represented more than 81 years of collective industry experience.

Show sponsor, ECP, ended the third day by sending several attendees home with new timepieces. Tension filled the room when names were drawn for the recipients of a Tissot Sailing Touch watch, a Luminox Deep Dive watch, and a Rolex Explorer II. Derek Doberstein, account executive, Back End Builders, took home the Tissot; Brian LoBaugh, partner, Auto Group Services pocketed the Luminox; and Mark Swannie, president, Karbiz took home the grand prize Rolex.

At the end of the show, Crisorio shared his thoughts on Agent Summit V with AE, “The feedback I’ve received is scary. We’ve set the bar so high that future Summit planning will be challenging. Nonetheless, I was told over and over again that Agent Summit V was the best industry event EVER! That says it all and is a credit to the industry professionals that left their knowledge and talent on stage.”

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An Interview with Brian Feldman

Meet Brian Feldman, the new executive vice president at Spencer Re, a subsidiary of Spencer Capital Holdings, ltd. With more than 20 years experience in the F&I space, Feldman has a broad knowledge of the industry. Hear in his own words about the career path he has traveled and what he is looking forward to in his new role at Spencer Re. 

1.Tell me a little bit about your company and its place in the industry?

Spencer Re is a Non-controlled foreign corporation (NCFC) domiciled in Puerto Rico. We were founded in 2005 and Spencer Capital Holdings acquired the company in 2011. Our offices and operations are based in Zurich, Switzerland and San Juan, Puerto Rico. We are unique in the F&I marketplace as we offer tax deferral and the ability to declare dividends that are qualified for tax purposes.

We are a Swiss tax resident which allows us to operate under the US-Swiss double taxation treaty. Under the treaty, the transaction is exempt from US Federal Excise Tax, which allows more premiums to be ceded. Spencer Re is the only NCFC that offers the ability to earn qualified dividends along with tax deferral. Dividends from other NCFC structures in the F&I marketplace are taxed as ordinary income to the shareholder.

Our investment manager, Spencer Capital Management (SCM), is an affiliated company; hence, we are a complete vertically integrated NCFC solution. SCM is a value-oriented investment firm and the investment strategy specific to Spencer Re incorporates earning patterns of the underlined F&I products. Our performance has been very good, which gives our shareholders a lot comfort.

2. Are there any recent or future developments within your company that you would like to tell us about?

Our parent company, Spencer Capital Holdings, ltd., continues to look for companies that are complementary with our existing portfolio of companies across the insurance and financial sectors. Recently, we acquired USA Risk Group, the largest independent captive manager in the world. With over $9B in assets under management, USA Risk Group is very well known and respected. This allows us to offer many different types of captive solutions to automotive dealerships customers which they may not have been exposed to in the past.

We also just announced the acquisition of SouthWest Dealer Services (SWDS). It is exciting to be able to now offer dealers that participate in SWDS offerings the ability to utilize Spencer Re as a reinsurance solution.

3. How did you (personally) get started? What caused you to choose this career path?

I was working at an auto dealer and happened to open up the newspaper and saw an ad for a claims adjustor. It intrigued me because of the way the ad claimed the position was with a Fortune 25 company. It turned out to be a claims adjuster position for the extended warranty division of General Motors/GMAC Insurance. I got the job and worked with the company for close to 15 years. I was lucky to have the opportunity to hold many different roles in the organization, which allowed me to work in virtually all areas of an F&I administrator and insurer, such as claims, operations, product development, regulatory, loss mitigation, reinsurance, and sales. Prior to leaving the company, I held the roles of vice president and chief compliance officer for GMAC Securities, which was a broker dealer used to facilitate offshore reinsurance offerings and reinsurance specialist, GMAC Insurance.

In 2009, I left GMAC and joined Allstate. Tony Wanderon was Allstate’s president and they were our GAP provider. At the time, Allstate was a single product provider. They were looking to diversify their portfolio and grow their business, so it looked like a great opportunity for me to start with another company from the ground up and build a program from scratch.

I ended up spending five years with Allstate. I started as a reinsurance marketing manager then took a short-term assignment leading a team that developed their ancillary products. Once the products were launched, I became national sales leader, with responsibility for all of Allstate’s large B2B relationships such as OEM’s and large dealer group relationships.

Spencer Re approached me since they were looking for someone to assist in growing their reinsurance business. I made the decision to join Spencer Re in September of 2014 and it has been great. So many of my past customers and companies have been very supportive. Many weren’t aware of Spencer Re and once they understand the value proposition and how we can benefit them and their customers, they have been sold. We are fortunate in that we have been able to be selective with who we do business, as there has been so much interest.

4. What are your outside interests? What do you like to do on your days off?

When I am not working, my children keep me busy. Just trying to keep up with all their activities is enough. I have two daughters, who are ages six and seven, and a 13 year old son. Spending time with my kids is very important to me. My family has been extremely supportive throughout my career. It has not been uncommon for me to put 70,000 miles on a car in a year – that is a lot of windshield time. I am especially appreciative of my wife who keeps everything straight at home when I am away. Aside from family time or in combination with family time, I also enjoy being outdoors.

5. What are the biggest issues you see facing the industry today and in the future?

From an industry perspective, just the cost of regulatory compliance, and pending regulatory items are the biggest issues I see. There has been a lot of chatter around 831(b) companies, which has been good for the NCFC. The past few years have been really good for the industry and I think most firms have done a good job of containing costs. It seems like every day there is something new in the way of potential regulatory requirements or implications.

6.What advice would you give to someone new to this industry?

I have been very lucky to have been surrounded by really good people throughout my career. I have had many opportunities to do different things within the business –working in virtually every department that there is. From an advice perspective, I would say to seek out new learning experiences. Ask questions and constantly try to learn new things. Don’t be afraid to make a mistake. When I mentor individuals, I try to provide guidance and let them try to figure things out on their own. I find that they learn more doing things on their own, even if they make a mistake. By getting their hands dirty actually doing it, they not only learn more, but ultimately become more successful.

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