Beating the Inflation Curve: How Smart Dealers Stay Ahead and Maximize Margins

In today's dealership landscape, the rising costs of parts, labor, and overhead are cutting into profits faster than ever. Inflation isn't just an inconvenience—it’s a silent killer of long-term wealth. The dealers who win in this environment are the ones who take control of their financial future, leveraging smart investment strategies to build sustainable growth.

At Elevation Dealer Services, we help dealers go beyond short-term profits and structure their financial future to maximize margins, lower tax liabilities, and compound wealth over time. A key part of this strategy? Reinsurance Alpha: Mastering the Investment Policy Statement (IPS).

Why Reinsurance Alone Isn’t Enough

Many dealers set up reinsurance programs, but few optimize them for maximum profitability. The reality is, without an Investment Policy Statement (IPS) to guide how reserves are invested, too much money sits in low-yield accounts, losing purchasing power to inflation.

Take two dealers with the same product mix and volume:

• Dealer A uses reinsurance but follows a generic, conservative approach dictated by their administrator. Their reserves sit mostly in money market funds or bonds earning 3-4%, barely keeping up with inflation.
• Dealer B actively manages an IPS, diversifying investments into a tax-efficient portfolio with long-term growth strategies. With an 8-10% return, their reserves compound exponentially, creating significant surplus wealth over time.

Over 10 years, Dealer B builds 2-3x more wealth—without selling a single additional car.

The Hidden Costs of Retro Programs

For dealers participating in Retro programs with the manufacturer, there’s a major missed opportunity: tax efficiency and investment income.

With a manufacturer’s retro, dealers only receive a portion of the underwriting profits, and the investment income generated on those reserves benefits the manufacturer—not the dealer.

In contrast, with a properly structured reinsurance program:

• You keep 100% of the underwriting profit.
• You invest those reserves tax-efficiently.
• You generate investment income that can cover claims, taxes, asset manager and trust account fees, while still producing surplus earnings.

Consider this: For every $1,000 in premium you put into your reinsurance company, you can yield back $553 before claims. With average claims running about $290 per contract, that leaves an additional $262 per contract in investment income—plus your original reserves.

That’s money that could be fueling dealership expansion, acquisitions, or simply providing long-term financial security.

The Power of an Optimized IPS

An IPS isn’t just a document—it’s a strategy that dictates how your reserves work for you. The best IPS structures focus on three pillars:

1. Risk Management – Allocating reserves strategically based on dealership size, loss ratios, and future expansion.
2. Tax Efficiency – Avoiding unnecessary tax burdens with in-kind transfers, deferrals, and tax arbitrage.
3. Long-Term Growth – Ensuring reserves are earning more than inflation, not sitting in low-yield accounts losing value.

A $19 Million Difference in Net Worth

The impact of reinsurance mastery isn’t just theoretical—it’s real. Compare these two dealership financial scenarios:

?? Dealer Without Reinsurance:

• $1M in cash
• $2M in working capital
• $5M in dealership assets
• $15M in blue sky
• $15M in real estate
• $4M in debt
• Total Net Worth: $39M

?? Dealer Who Has Mastered Reinsurance:

• $1M in cash
• $2M in working capital
• $5M in dealership assets
• $15M in blue sky
• $15M in real estate
• $5M in a reinsurance reserve account
• $15M in a surplus reinsurance account
• Replaces traditional loans with a $5M reinsurance-backed loan
• Total Net Worth: $58M ?? (A $19M difference!)

Dealer Owner Warranty Companies: Hidden Costs and Over complications

Many dealers are drawn to Dealer Owner Warranty Company (DOWC) structures, but these can be unnecessarily complex and costly. Here’s why:

1. Regulatory and State Filings – Setting up a DOWC requires extensive compliance filings, which can be costly and time-consuming.
2. Excess Formation Fees – Dealers often face $50,000–$60,000 in unnecessary setup fees that could be avoided.
3. Missed Simplicity of 831(b) Elections – Instead of creating a full-fledged warranty company, dealers can file an 831(b) election with the IRS, allowing them to use cost-basis accounting while leveraging the same IPS investment strategy—without excessive filings or costs.
4. Tax Optimization Through Longer-Term Limited Warranties – If you aren’t actively acquiring stores, you can use longer-term limited warranties to create future net operating losses (NOLs), reducing taxable profits from years 7-10 and avoiding major tax events.

Beyond Reinsurance: Elevation Dealer Services' Full-Spectrum Support

At Elevation Dealer Services, we don’t just help you structure the right reinsurance program—we provide Best-in-Class F&I Income Development Training, Compliance Reviews, and Unmatched Account Support.

• F&I Income Development: Our tailored training ensures your team maximizes product penetration while staying fully compliant and enhancing the customer experience.
• Compliance Reviews: We conduct rigorous deal audits, safeguarding your dealership against costly regulatory missteps and ensuring you meet FTC and state guidelines.
• Account Support: Our team provides continuous guidance and proactive strategy development to help your dealership stay ahead in a rapidly evolving market.

Key Takeaways: Simplify, Optimize, and Maximize Your Margins

If your dealership isn’t actively optimizing an Investment Policy Statement (IPS) and leveraging reinsurance over costly warranty structures, you’re leaving money on the table. At Elevation Dealer Services, we work with dealers to structure custom investment strategies that: ? Reduce tax burdens ? Generate higher returns ? Grow wealth beyond just selling cars

Want to see how your current reinsurance strategy stacks up? Schedule a 1-on-1 strategy review with our team and start maximizing your margins today.

?? Contact Us to take the first step toward building real, lasting financial security.

Elevation Dealer Services | We create objective value for dealers by improving customer process, increasing cash flow and profitability.