Profit participation: Finding the right fit for auto dealerships

Running a successful auto dealership presents plenty of day-to-day challenges — navigating fluctuations in the market, shifts in global supply chains, regulatory developments, staff retention and more. But while a dealer’s focus on all this is essential, it’s the long view that really matters. Will your business get you to the position of financial security and the lifestyle you’ve worked so hard to achieve?

Whether your goal is early retirement, a new summer home, a college fund to leave for your children or grandchildren, or simply an all-purpose “nest egg,” F&I profit participation programs can be a wealth-building opportunity that gets you there. With the right structure, underwriting and properly managed portfolio, profit participation can be a key income generator that helps your business navigate the ups and downs of sales and fixed operations revenue streams, building a long-term buffer against industry volatility.

While most dealers are in some kind of profit participation program, misunderstandings of different program structures may result in some not taking full advantage of the best choice to maximize their potential benefits. A wide range of factors, including vehicle sales volume, tax strategies and risk appetite need to be considered.

Recognizing no two businesses are exactly alike, Zurich offers several profit participation structures and we work with our customers to find the right fit for their unique needs.

“Our expertise in the auto reinsurance space enables us to provide strategic guidance and recommend the most effective structure or combination of structures to support our clients’ short- and long-term financial goals,” said Dan Mowid, Senior Division Reinsurance Executive for Zurich Direct Markets.

The process starts by asking some key questions, including:

• Where do you stand in terms of short-term cash flow versus long-term wealth-building, now and in the foreseeable future?
• Is your business more focused on growth or stability?
• What level of tax risk is appropriate or comfortable for you and your business?

Zurich takes a consultative approach to finding the right structure for customers, providing dealers with the details they need to make the decision that’s best for them and their business.

Producer-Affiliated Reinsurance Company (PARC)

While there is no “one size fits all” answer for profit participation, there may be a “one size fits most” option: a Producer-Affiliated Reinsurance Company (PARC), also called a Controlled Foreign Corporation (CFC).

The vast majority of dealerships qualify for the PARC structure. It provides dealers with a lot of flexibility. It’s easy to set up and has the minimal amount of tax risk associated with it, as it files an annual federal tax return to the IRS. Overall, the flexibility can benefit the dealer in several ways. The dealer can access funds for loans with the surplus or profit that develops from that program. Based on current tax law, dividends declared at the request of the shareholders typically get favorable tax treatment on a capital gains basis. Additionally, all the assets in trust are invested, which provides investment income from the time it is ceded into the company until the time claims or dividend distributions occur.

Zurich customers have a choice of investment portfolio options: 100% Fixed Income, 90% Fixed Income/10% S&P 500 Index fund, or an 80% Fixed Income/20% S&P 500 Index fund option. Historically Zurich customers have done very well in the PARC program, getting good returns from largely low-risk investments. Since contracts in the program may not experience claims due to manufacturer warranty coverage, asset balances can be significantly enhanced with investment returns.

The PARC structure does have an annual IRS premium threshold of $2.9 million (for 2026). Participants exceeding that annual threshold would be subject to higher tax liabilities. However, there are work-arounds if multiple PARCs are formed and meet some regulatory guidelines. This is often done for family businesses, which are so common in the industry.

Non-Controlled Foreign Corporation (NCFC)

If a PARC is not a good fit for the dealership, Zurich offers another reinsurance profit participation program: a Non-Controlled Foreign Corporation (NCFC). The NCFC is an insurance company  domiciled in Bermuda, in which the dealer buys non-voting preferred stock. As the name indicates, however, with the NCFC, the dealer is not a common shareholder and has limited control over the corporation. Unlike the CFC model, the dealer is not an officer nor a director for the company. The NCFC does not have to file an annual tax return in the U.S. and is responsible to pay excise tax.

The advantage to a NCFC is not having an annual premium limit. This can be a big benefit for a dealership constrained in the number of CFCs they can justify setting up.

Non-reinsurance programs

Zurich also offers two non-reinsurance profit participation programs: a Dealer-Owned Warranty Company and a Contingent Commission (Retro) plan.

A Dealer-Owned Warranty Company is exactly what the name indicates. It’s a warranty company — a service contract provider registered in the states where the dealership conducts business. Unlike the reinsurance plans, a Dealer-Owned Warranty Company is a domestic company, and it can be a good option for dealerships focused on growth but wary of acting as a reinsurer. Zurich acts as an administrator for the program, but the dealer owns the business and is contractually obliged for warranties on the F&I products they choose to sell under those agreements. The plan can be appealing to dealers, as they retain all underwriting profits and investment income related to the products.

However, the minimum capital needed to launch a Dealer-Owned Warranty Company can be significantly higher than either a PARC or a NCFC. And although there is a tax-deferral period in initial years of operation, earnings are subject to considerably greater taxation when that period ends. This structure has some additional tax risk as it will eventually be subject to corporate tax rates and there are no guarantees on what the tax rate will be when the entity becomes taxable.

Finally, the Contingent Commission (Retro) plan is the most straightforward, with the dealer participating only in the bottom-line profit. Distributions for Contingent Commission (Retro) are recognized as ordinary income, not at the tax-beneficial capital gains rate enjoyed within the other programs. What’s appealing about this structure is that it requires no upfront money and has little risk beyond sales fluctuations.

Zurich is clear in communicating both the benefits and risks of our profit participation programs to help dealers select the best structure to support their objectives. Shared success is always our aim.

Beyond personal financial security and retirement planning benefits, profit participation income can also be used to help fund acquisitions and growth, facility upgrades, employee bonuses and more. The right program and portfolio management can open the door to a better tomorrow for you and your business.

Request a no-obligation Profit Participation Portfolio Checkup, or contact your Zurich representative to discuss our Profit Participation Programs.