Ace Hardware Corporation’s William Montanez outlines the benefits of long-term captive investment and why Bermuda remains his company’s domicile of choice.
In 1924, a handful of Chicago hardware shop owners founded Ace Stores, Inc. The business model was simple: buy in bulk at the lowest price possible and in turn, compete with larger retailers while retaining respectable profits.
Eighty-eight years later, Ace Hardware Corporation is a global cooperative with more than 4,600 stores in 70 countries. But while the business has evolved, expanded and become a household name, it continues to take a conservative approach to profit and loss.
Ace Hardware established its captive in Bermuda in 1995 and has since made the Island its captive home. We asked Ace Hardware’s director of risk management and a director and president of the Bermuda Captive Owners Association (BCOA), William Montanez, what Bermuda has to offer captive owners over rival domiciles, and how writing risk through its captive has benefited the company as a whole.
“Back in 1995, what impressed the captive initiators about Bermuda were the reasonable capital requirements, the infrastructure and the proximity of service providers,” said Montanez. “The main reason that they opted for Bermuda, though—the tipping point, if you like—was the low tax structure and the loan-back provisions available to the parent company. We’ve never actually had to use that provision, but at the time it was a hot topic and something no US domicile offered.”
Domestic domiciles have come a long way since then but for Montanez, Bermuda hasn’t lost its charm.
“I still feel very enthusiastic about Bermuda,” he said. “As a domicile, it still has a lot to offer, and one of the key attractions for me is the fact that we can hold all our meetings in one day. Our attorneys, our chartered accountants and our administrative folk are all within walking distance of each other, and that makes locating in Bermuda incredibly efficient.
“The depth of expertise is also a real asset,” he added. “Everyone in Bermuda knows how captives should be run, so we don’t need to waste time explaining anything, and we are able to talk directly with underwriters and decision-makers without going through layers of management.”
Ace Hardware’s business lines include property and casualty for its third party retail operations, while its main products are business owner’s policy (BOP) and workers’ compensation. “We also reinsure most of our corporate casualty retentions through the captive,” added Montanez, “and, over time, we’ve transferred existing corporate casualty liabilities and added environmental coverage, as well as some limited cyber risk options.”
"We're a conservative company and we like to ensure that each decision we make is the right one."
The company’s captive portfolio is reviewed and developed regularly and, as Montanez explained, the long-term focus is on expansion. “We are always looking to utilise as much of our equity position in Bermuda as possible,” he says. “Right now, we are looking at medical stop-loss coverage and some warranty business. In most cases, it makes sense to put these through the captive; it’s a case of getting traction from a corporate perspective, and making sure we have the right people in place. We’re a conservative company, and we like to take our time and ensure that each decision we make is the right one.”
Imparting loss control
By utilising its captive, Montanez estimates that Ace Hardware has saved tens of millions of dollars, but added that it is also about “bringing a more structured approach to loss control”.
“The captive has had a huge impact on our loss and safety activities,” he explained, “The losses come directly out of our company bottom line. We invest heavily in making sure people have the right tools and resources in place in order that they can control losses.” At the same time we don’t carry any insurance-related liabilities on our corporate books, because they’re all in the captive,” he added.
Employing a captive is also about flexibility. “Utilising our captive allows us to stabilise pricing for our retail operations and remain competitive in the marketplace.”
Asked whether soft commercial market conditions had been a cause for concern, Montanez said: “It’s affected us as much as anyone, but we take a long-term view of the market. We didn’t establish a captive just for one or two years, but for many. With our corporate retention programme, it hasn’t had too much of an impact, as we mostly write the retention part.
“On the retail side, we’ve seen a significant erosion in market pricing but in a way, it helps us. Ace Hardware is a cooperative, so we’re not primarily in the business of profiting from our retailers. Instead, our focus is on breaking even in our underwriting and employing our investment income to benefit the company.”
As a director and president of the BCOA, Montanez is confident that the Island will remain a leading captive domicile, and feels that the recently ratified Canada-Bermuda tax information exchange agreement (TIEA) has sent a clear message regarding Bermuda’s position on tax and its plans for the future.
“The TIEA has set the tone for where Bermuda is heading,” said Montanez. “The Island has been seen as a competitive place from a tax perspective for many years and I think that this agreement helps to cement this impression. The TIEA has helped to emphasise Bermuda’s focus on transparency, and its ongoing desire to deliver the best product it can to the market.”
As a long-standing market leader, there may be a premium associated with Bermuda but, for Canadian business owners in particular, Montanez believes that this is offset by a shared Commonwealth bond. “Clearly, emotional ties aren’t enough to overcome any substantial financial considerations, but if Bermuda can continue to bring competitive proposals to the table, then I think Canadian firms will be keen to invest in the Commonwealth. There’s a special relationship there—a feeling in your heart, I suppose.”
And with such a compelling business offering, Bermuda is happy to leverage such emotive ties further.
William Montanez is director and president of the BCOA and director of risk management at Ace Hardware. He can be contacted at: firstname.lastname@example.org
Bermuda, captive owner, BCOA, captive, insurance