While the financial market crisis and the deepening recessionare being blamed for a drop in captive insurer formations in somedomiciles, the captive business is far from dormant, with at leasttwo domiciles actively licensing more facilities and others hopinga hardening commercial insurance market might spur more alternativerisk-transfer activity.

Nancy Gray, executive director for North America at AonInsurance Managers, predicted that 2009 will be similar to 2008,with "continued new formations, but along the same trends ofexpanding the captive use and also the number of newformations."

In particular, she noted, "we're seeing signs of the markethardening in some lines--that will have an impact on captives."

However, with the economy in such dire shape, corporateinsurance buyers are more focused on the costs of operating acaptive.

"There's more involved in setting up a captive," she said. "Theperiod of time from when a risk manager decides they want a captiveto the point of getting approval is much longer than what we'veseen in the past."

This trend, she said, started after the fall of Enron andimplementation of Sarbanes-Oxley disclosure mandates for publiccompanies. "The days of risk managers being able to make thatdecision [to form a captive] on their own, I think, are gone," shesaid, adding that corporate boards are much more involved with suchstrategic moves.

When selecting a domicile, Ms. Gray said, cost is a factor aswell as the infrastructure of the domicile--how well established itis and the reputation of the regulators. She said there is morefocus on location, because more than ever, companies are lookingfor convenience.

The following is an overview of the latest news and trends inU.S. captive domiciles:

One domicile that has seen phenomenal growth is Kentucky, whichbegan licensing captives in 2000 and has formed most of itsfacilities within the last two years.

Russell Coy II, captive coordinator in thefinancial standardsand examination division for the Kentucky Office of Insurance, saidthe state currently has 76 active captives. According toinformation supplied by Kentucky, the state licensed 37 captives in2008, compared to 21 captives in 2007.

"Our growth last year was up drastically," he said. "Our storyis a little different. We passed our law in 2000 and nobody camefor three years."

Because the state wanted to become a successful domicile, hesaid, "we started asking ourselves why. We started going to theCaptive Insurance Companies Association meetings to find out whatpeople wanted in a domicile--that's when we got serious."

Since 2003, he said, the domicile has grown from nine to 76captives. Kentucky also had a dormant captive association, whichhas taken on new members and now holds an annual one-dayconference.

The Kentucky Captive Association's president, Stewart Ferguson,is with a captive management company, The Underwriters Group, whichhe said manages 13 captives--all in Kentucky.

Mr. Coy said most of the captives are pure captives, covering abroad spectrum of industries and coverages. "We are seeing a lot ofbusiness interruption type coverages--supplemental to theirstandard commercial policy," he said.

Another part of the domicile's growth is due to repatriation andre-domestications from offshore domiciles, he noted. "Part of thatis the economy. It's more convenient, cheaper [to be onshore]. Its'probably harder to justify that trip to Cayman or Bermuda and otherlocations."

Utah, which also experienced slow growth initially, has seen agrowth spurt--even with the financial markets downturn.

Donnie Spann, captive insurance director with the Utah InsuranceDepartment, said that as of year-end 2008, Utah has a total of 122captives--adding 31 companies in 2008, with one dissolution. Of the122 companies, he said, all are pure captives, except for one riskretention group and one special-purpose financial captive.

Utah adopted its captive act in 2003 and licensed one captivethat year, and one in 2004. The turning point was when the domicileabolished the premium tax in 2005--since then, the number ofcaptives increased to 12. Now a company pays a licensing fee and anannual renewal fee totaling $5,252, Mr. Spann noted.

So far in 2009, he said, five applications are pending.Industries he's seeing are "across the board. We continue to seeinterest in all lines of coverage--about 25 percent of the total iseither real estate construction or manufacturing."

Geographically, Mr. Spann added, 86 percent of Utah's captivebusiness is located in Western states, 11 percent are from theMidwest and 3 percent are from the Southeast.

Delaware is another domicile that surged forward, adding 22captives in 2008, compared to 10 in 2007, said William P. White,administrator of the state's captive program.

"We were at 40 captives at the end of 2008," Mr. White noted."Not bad, considering I got here in 2006." He said the 22 licensedlast year were a mix of pure captives, a number of special purposecompanies and groups forming cell structures.

Mr. White surmised Delaware will continue to see growth in groupcaptives, especially those using cell structures. "And I thinkwe'll see growth in smaller pure captives," he said. "Smallerbusinesses are looking for ways to initiate their own risk-transferprogram, or they're trying to protect assets and have morecontrol."

Delaware hasn't had much activity with RRGs--an area that hasbeen "very quiet recently," he noted. "We've always been in favorof RRGs, but if legislation had gone through last year, we'd have aclearer view now of Congress' intent and what RRGs are supposed tolook like, and some of these issues would have been resolved."

He added, however, that "because of the economic crisis, thatgot shoved to the back burner."

Mr. White said that businesses concerned about the capital andcredit markets and those with balance sheets under pressure willlook to the alternative risk-transfer market for coveragesolutions. "This has always been the market that comes up with aresponse," he noted.

Meanwhile, in Vermont--the largest U.S. captive insurancedomicile and second-largest worldwide in terms of gross writtenpremium (with $15.2 billion in 2007), 16 new captives were licensedin 2008, about half the number of 2007.

David Provost, Vermont's deputy commissioner of captiveinsurance, said 2008 was "a slower year for captive growth due toeconomic conditions." However, he added, "we continue to seeinterest in forming quality captives, with activity across alllines of business."

The soft market, uncertainty created by proposed, financiallyburdensome IRS regulations (since withdrawn--see page 26)), andcurrent economic conditions were the drivers that slowed formationsin 2008, Vermont officials said.

New captive formations included 11 pure captives, twospecial-purpose financial captives, one risk retention group, onesponsored captive and one branch captive--bringing the total numberof licenses issued in Vermont to 839, according to figures from theVermont Department of Banking, Insurance, Securities and HealthCare Administration.

Some of the companies licensing facilities in 2008 include:Darden Restaurants, Microsoft, Swiss Re, Thermo Fisher Scientific,Wells Fargo and Winthrop University Hospital.

The state said it is continuing its promotion of and innovationin the captive industry, proposing several new initiatives:

o A Premium Tax Holiday--amounting to a $7,500 reduction inpremium taxes for captives licensed in 2009 and 2010.

o Increasing the special funds budget to support captives.

o Several technical amendments that affect sponsored captives,letters of credit and accounting standards.

Dana Sheppard, associate commissioner of the Risk Finance Bureaufor the Department of Insurance Securities and Banking, reported 13new companies in 2008 and six incorporated cell captives--which, henoted, are "unique to D.C." and a product of its incorporated celllaw, amended in 2006. "We were happy with our year," he said. "Wereached our 100th mark last year."

The District rebounded last year after licensing just sevencaptives in 2007. "We were in a transition period, we slowed downwith RRGs, and our numbers dropped," explained Mr. Sheppard. "Othermanagers checked us out and came back this year."

So far this year, he said the domicile has "several applicationspending and a few on the way, so it looks like the first quarterwill be better than last year. We're seeing a variety--a lot ofsingle-parent coverages."

Included in the count were three health care RRGs. Captivesformed this year were for terrorism coverage, property risks andemployee benefits--"a variety," he said.

While D.C. is not seeing a real impact in its captive sectorfrom the financial market meltdown, Mr. Sheppard said it isexperiencing other related challenges.

"A lot of companies tend to have their investments in one bank,"he explained, noting that "one moved money out of IndyMac beforeits failure" in July 2008.

Because of concern over bank solvency, he said, "we've notifiedour companies to look at concentration issues and decide whether tomove their money into multiple institutions."

D.C. also has observed that some RRGs have "letters of credit,and some banks are electing not to extend them for another 12months when they come up for expiration. Some banks also havepulled out of their LOCs," he said.

Mr. Sheppard added that D.C. has "made some inroads in acontroversial area--we allow self-management." Although notwell-publicized, he said, some captives need to be managed, "and werequire them to retain captive managers, and others are qualified[for self-management]. We handle this on a case-by-case basis attheir request."

Not all domiciles saw captive growth. South Carolina dropped to11 new formations in 2008, compared with 27 in 2007, noted JeffKehler, the state's program manager for alternative risk-transferservices. "Let's face it, the economy and the financial marketshave had a serious impact on the industry," he said.

Of those 11 companies, he said he was surprised that four werein the construction industry--a sector hard-hit by the troubledreal estate market.

He added that he was pleasantly surprised by a few developments."If you talk to [risk managers] about why they're doing this, it'svery clear they have their fingers on the pulse of their ownbusiness. They knew this [economic downturn] was coming, and theyplanned for it and they funded for it."

These companies also had plans for how to use their captives"down the road. You can tell they had already thought it through,"Mr. Kehler observed. "These are very interesting times because ofthe nature of the parent companies."

Steve Matthews, captive coordinator and chief financial examinerin Montana, said the domicile licensed eight in 2008 and losttwo--compared with 10 licensed in 2007. Eight were formed in 2006,and three in 2005. Of their 36, 11 are RRGs.

Mr. Matthews said he is not sure what effect the financialmarket crisis has had on his domicile. "So far, managers we'vetalked to seem optimistic--they're going to form some new captivesthis year--so we're going to wait and see what happens."

In 2009, he said, "two have been licensed, one is about ready togo and a couple of applications are coming, so we're off to anormal start for us."

A few changes are in the works, which have passed the stateHouse and will go to the Senate:

o Surety and marine lines added.

o An ability to waive the risk-based capital reports onRRGs.

o A prorated minimum premium tax by quarter.

o A change in investment laws, which lets RRGs hold up to 10percent in a money market fund if they have less than $5 million intotal assets.

Hawaii Insurance Commissioner J.P. Schmidt said that in 2008,Hawaii licensed eight captives and deleted six, compared with 10licensed in 2007. Hawaii has 165 active captives, he noted, andsince the passage of its captive laws in 1986 has licensed 220captives.

"We're continuing to have positive growth, though slower than afew years back," he said. "We're continuing to see strong interestin captives from companies in Japan, and we have a mix of captivesfrom the Western U.S. as well as other parts of the U.S."

Mr. Schmidt noted the loss of its former captive administrator,Craig Watanabe, who joined personal and commercial lines insurerDTRIC as its chief financial officer. "He did a fantastic job inbuilding the captive industry, but we're happy for his newprospects," he said.

One of Mr. Watanabe's accomplishments, he said, was in building"a solid team here. We think we'll continue without missing abeat." Judy Nako, who has been with the department for a number ofyears, is serving as interim captive administrator.

Mr. Schmidt said the captive division has seen the effects ofthe financial crisis, which has hit some of the large-tract homeconstruction companies in particular. He added there is still astrong interest in health care captives, as well as in the use ofcaptives for estate planning--especially for high-incomeindividuals and owners of family businesses.