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Coke Uncaps Captive Plan; New Tack For Retiree Care

Copyright 2008 Crain CommunicationsAll Rights Reserved Business Insurance

December 1, 2008

NEWS; Pg. 1

818 words

Coke uncaps captive plan; New tack for retiree care


ATLANTA-Coca-Cola Co., in a potentially groundbreaking move, plans to seek approval to fund retiree health care benefits through its South Carolina-domiciled captive insurance company.

In a complex transaction, Coca-Cola would use funds now held in a trust, known as a voluntary employee beneficiary association, to purchase insurance accident and health policies from Prudential Insurance Co. of America. Coca-Cola established the VEBA two years ago, contributing assets of $216 million.

In turn, Prudential would reinsure the policies through Red Re Inc., the captive Coca-Cola set up in 2006 in South Carolina. The company now uses Red Re to fund a wide range of risks, including benefit coverages of employees outside the United States.

Coca-Cola risk management and employee benefit executives briefly outlined the retiree benefits plan as part of a broader presentation at the recent World Captive Forum on how the company is expanding its use of captives. In addition to Red Re in South Carolina, Coca-Cola, which is the world's largest beverage company with nearly $29 billion in 2007 revenues, also has captives in Dublin, Ireland.

While declining to go into detail prior to filing applications with federal regulators, Coca-Cola executives say the proposed retiree health benefits funding program follows the company's strategy of expanding the use of its captives.

``There are efficiencies that'' can be achieved through captive benefits funding, Stacy Apter, Coca-Cola's senior global benefits consultant in Atlanta, said at the WCF meeting.

Referring to captive benefits funding in general, Ms. Apter said the approach can reduce administrative costs while improving access to claims data.

``You get a lot of detailed information in a very timely manner,'' she said. That allows claims trends to be spotted that, in turn, can spark initiatives-such as designing and implementing wellness programs-to reduce claims costs.

Outside experts say there are other special advantages to linking a VEBA to a captive. Under federal law, assets contributed to a VEBA must be used either to pay benefits or purchase insurance policies that provide benefits. Employers cannot remove VEBA assets for other purposes, even when a benefit program is being wound down.

By contrast, using a captive to fund benefits gives a company greater financial flexibility. For example, investment gains on contributions made to the captive can be paid out as dividends to the parent.

``You have much greater use of capital,'' said Mitch Cole, a principal with Towers Perrin in Stamford, Conn.

``The money is not locked in,'' added George O'Donnell, a senior vp with Aon Consulting in Somerset, N.J.

Whatever the advantages, Coca-Cola's plan still faces hurdles. It will need approval from the Labor Department, which regulates the use of captives to fund employee benefit risks. Additionally, Coca-Cola is expected to seek a private letter ruling from the Internal Revenue Service concerning its plan to use the VEBA. A private letter ruling provides the IRS' position on an issue.

There is little precedent in this area.

Since the Labor Department in 1999 made captive benefits funding a practical approach by easing certain prior restrictions-such as a requirement that at least 50% of a captive's business be unrelated to its parent-only one other employer has sought Labor Department permission to fund retiree health care benefits through a captive.

That employer, major appliance manufacturer Whirlpool Corp. of Benton Harbor, Mich.-using an approach that differed somewhat from Coca-Cola's-withdrew its application in late 2004 after the Labor Department declined to consider the proposal under a special expedited review process. Under that process, federal regulators will make a tentative decision within 45 days of receiving an application, as long as certain conditions are met.

One of those conditions is to prove that the arrangement is ``substantially similar'' to two other so-called prohibited transaction exemption requests approved by the Labor Department. A standard review typically takes several months to a year.

Coca-Cola's retiree health care funding proposal comes at a time of increased employer interest in using captives to fund employee benefit risks. So far this year, a record nine employers, including some corporate giants, have received preliminary or final approval to fund benefits through their captives (see box), including several corporations that added benefit lines.

Observers cite several reasons for the growing corporate interest in captive benefit funding.

``You can save money and improve cash flow. There are pluses all the way around,'' said Karin Landy, a managing partner with Spring Consulting Group L.L.C. in Boston.

``There is a lot more comfort with this approach and the advantages that can result. We expect considerably more activity in this area,'' Aon Consulting's Mr. O'Donnell said.

Art Caption: CAPTIVE REQUESTS: Employers that applied for the first time and received Labor Department approval in 2008 to fund benefits through their captives. Benefits funded include life, accidental death and dismemberment, and long-term disability.Art Credit: Source: Labor Department filingsArt Credit: Coke bottle

December 5, 2008


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