Despite the ongoing soft commercial insurance market and slow climb out from the recession, domiciles report their captive formations are back up to 2007 levels, while some point out their formations remained steady throughout the downturn.

Vermont, which had dipped dramatically in 2008, is making a strong comeback, as is Montana. Kentucky, Utah and Washington, D.C. report similar numbers for both years.

Vermont–the largest U.S. captive domicile and the third-largest in the world–estimated more than $16 billion in gross written premium for 2009. It hosts captives for 42 of the firms making up the Fortune 100 and 18 of the companies in the Dow 30.

In 2008, Vermont's formations were down to 16–only half the number it licensed in 2007. Now, however, things are “getting back to normal,” said David Provost, deputy commissioner of the Vermont Captive Insurance Division.

He said in 2009 the state licensed 39 captives. “It's a very nice jump,” he said, noting 2009 “was our sixth-biggest year.”

The new entities formed include 28 pure captives, five new risk retention groups, four special purpose financial captives (SPFC), one sponsored captive and one industrial insured captive, bringing the total number of licenses issued in Vermont to 878.

Because the economy was “still tanking” in 2008, he said, there was too much uncertainty for “anybody to plan for a long-term thing like a captive.” In 2009, however, things began to look up and there was more stability and predictability. “It was more practical to go ahead with a captive,” Mr. Provost said, explaining that a number of companies that discussed forming one in 2008 came through in 2009.

Reasons for forming captives in 2009 were a “microcosm of the last 20-to-30 years,” he noted. “We had a little bit of everything, and everybody was out either to solve availability or pricing issues.”

During the soft market, he said, many forming captives were “after the big 'control' word. [The market] might be soft, but they could still see where they had benefits to having a captive.”

There also was more diversity in the size of firms forming captives. “We had some family construction companies coming in and we had some big ones,” Mr. Provost said, with Comcast, Morgan Stanley, Swiss Re, the Empire State Building, Peabody Energy, Planned Parenthood and Turner Construction among the captive parents.

Captives formed by the health care industry continue to be one of Vermont's fastest growing sectors, the state noted, with the class of 2009 including Centra Health, Carilion Clinic, Saint Mary's Hospital & Medical Center, Crystal Run Health Care, ENT & Allergy Associates, and the Children's Mercy Hospital.

Mr. Provost said there also were two re-domestications–from Cayman and Bermuda. “It's not a flood, but people are asking us about the process,” he said. “I think we'll see a continuing trickle.”

Beyond that, he noted, “everyone is looking at their captives. Companies with multiples may question whether they need them, or if they can be combined into one, and whether they are in the right domicile.”

Although very few shut down a captive just for the sake of it, he said, quite a few closed because of mergers and acquisitions. In fact, about a third of the captives lost in 2009 were a result of M&A activity, he said.

Another third were because the captive didn't make sense anymore, and there were a few re-domestications both in and out of Vermont. “Without the M&A activity, we'd be growing a lot faster,” he said, “but I think that's going to keep going on for awhile.”

But so far this year, growth is going well. “We've already licensed three in the first quarter. Our average is five, and I expect we'll license at least six in the first quarter,” Mr. Provost said. “We get calls every week from people wanting to meet.”

Overall in the industry, he added, “everybody I've talked to is going along fine. Nobody is predicting the sky is falling or anything like that.”

KENTUCKY

Kentucky licensed 37 captives in 2008 and the same number in 2009, reported Russell Coy II, captive coordinator in the Financial Standards and Examination Division for the Kentucky Office of Insurance. In 2007 the domicile had licensed 21. Kentucky's captive law passed in 2000, and formations were slow for three years.

“In 2009 we had another very successful year–our current number is 103,” Mr. Coy said, noting that the total was 105 until the state lost two risk retention groups. One never got off the ground, and the other was for medical malpractice.

“They never grew much beyond their core group of doctors,” he said. “The market went soft on them and most of their business went to AMS”–American Medical Surgical, a risk retention group.

Mr. Coy said Kentucky is seeing mostly pure captives, a number of 831-B captives (formed by smaller companies) and a few small group association consortiums.

Industries represented, he said, are diverse. “We're getting some medical, but we've seen a lot of urologists for some reason,” he noted, joking that “they must play golf together.” Geographically, companies forming captives tend to be more regionally based, but two captive managers are bringing in business from the West coast, according to Mr. Coy.

While Kentucky had 11 re-domestications in 2008, there was a “trickle” of three in 2009. So far this year, one captive has been approved and another will be licensed shortly. “We didn't have as many in January as last year,” Mr. Coy said. “I have 28 that I think are in the pipeline, but some of those were ones I thought would come in last year and didn't.”

Even though the economy is recovering, he said, “a lot of guys are finding it hard to let go of their capital right now.” He noted that among a few captive owners in two hard-hit sectors–construction and real estate–there has been talk of either shutting down and not writing, or totally dissolving the captive. “But that's talk at this point,” Mr. Coy emphasized.

Even though the last two years were strong, he observed that 2009 is more up in the air. “Last year I think the down economy actually helped us some,” he said. “This year, I think it's just a down economy.”

UTAH

Utah's captive insurance regulator, Ross C. Elliott, said he has been kept busy. “The captive growth has been much stronger than I expected,” he said. “We had 30 in 2008 and 33 in 2009.”

Mr. Elliott announced in August he would succeed Donnie Spann as captive regulator. He previously was vice president of operations at Alta Holdings, a captive management firm, where he formed some of Utah's first captives.

Working on the regulator side, he observed, is like “playing on a baseball team and rotating your assignment. I've come to appreciate the different positions on the team–the actuaries, attorneys and accountants. We're all playing on the same team and 'regulators' are just another position on that team.”

In 2009, he said, there were no particular trends, adding that Utah is “almost a haven for small pure captives–the 831-B types of captive.” He said those include real estate, property managers, manufacturing, health care–mostly midsize or smaller.

What's ahead for 2010, he said, is difficult to tell. “We're hoping it slows down a little because we're a little concerned about managing that level of growth,” he noted. “As much as we'd like to take it, we have to be careful.”

Utah has a total of 149 captives. Mr. Elliott said the state–which enacted its captive law in 2003–has a geographic advantage. “It's a Delta [Airlines] hub, so access is good from all over the country. It's a great state for people to do business,” he said. “Plus, we don't have a premium tax–it's a flat fee.”

WASHINGTON, D.C.

Dana Sheppard, associate commissioner of the Risk Finance Bureau for the D.C. Department of Insurance, Securities and Banking, said the District also had a good year, with 19 captives licensed in 2009 compared to 20 in 2008. The numbers jumped up from only seven in 2007. As of Dec. 31, 120 captives were licensed in D.C.

“We've been doing pretty well the past couple of years,” he said. “This year we've had five applications so far–never this many in the first quarter.”

So far in 2010, he said, “we're seeing a little bit of everything. There's still a lot of interest in our protected cell law.”

The “latest and greatest,” he noted, seems to be captives for medical stop-loss for self-insured employers' health benefits.

“It was popular for awhile, when Congress was talking about Health Savings Accounts and health plans, and it died off,” Mr. Sheppard said. “But the past year there has been a lot of interest. With health care costs going through the roof, a lot of employers are trying to figure out ways to self-insure health insurance.”

He said he also is seeing a mix of large and medium-size companies and not many RRGs. “The last one we licensed was December 2008,” he said. “We were trying to get a mix of good companies and not just one type. RRGs are labor-intensive, so they can be a drag on the staff. There needs to be a mix of types of captives.”

He added that “I wish we could hire another person, but we have budget constraints.” Mr. Sheppard noted, however, that “the main thing for us is to have diverse industries and diverse managers. We're trying to build something for the long term so we'll be around.”

MONTANA

Steve Matthews, captive coordinator and chief financial examiner in Montana, said his state also is seeing positive growth. The state licensed eight captives in 2008 and doubled that amount in 2009. He added, however, that Montana lost four captives to dissolutions, leaving a total of 47.

Mr. Matthews said that most of the captives formed in 2009 were 831-B captives for smaller companies, as well as a couple of RRGs. In 2007, 10 captives were licensed, eight in 2006, and three in 2005.

Special Reports /

Domiciles Seeing Upward Trend In Captive Formations

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