Was 2016 a positive year for Texas as a captive domicile?
The 2016 calendar year was a very positive one for Texas as a captive domicile. By the end of the year, the state reached the 30 captive mark. Over the last 12 months, Texas-based captives have written over $2 billion in premium. That’s huge. Of course, it’s indicative of the business risks and revenue streams generated by many of the Fortune 1000 companies based in Texas—100 of the Fortune 1000 list and 50 of the Fortune 500 companies in 2016.
It’s important for readers and captive market participants to bear in mind the evolution of Texas as a domicile. The captive statute allows only pure captives, and the initial law passed in 2013 was fairly narrowly constructed—only risk pooling internal to the parent corporation’s economic family was allowed. This, inaccurately, gave rise to a perception that the Texas law was intended to serve only large corporate captives. As a matter of fact, the very first captive that redomesticated to Texas was a small captive. Since then, the 30 that domicile in Texas today run the gamut from global household corporate names to 831(b) captives.
All in all, the success comes from consistent application of a plan. Our Texas Captive Insurance Association (TxCIA) board is a great group of people, all of whom strive to make Texas as strong a domicile as possible. It’s fun volunteering alongside them.
With TxCIA to hold its 4th annual conference in February, how has the domicile expanded?
Awareness and acceptance of Texas as a domicile help growth, of course. It is fair to say that, on average, the larger Texas companies have the ability to meet the more stringent thresholds that the original 2013 law established, such as the risk distribution among 12 subsidiary entities or risk from 50 percent of ‘controlled unaffiliated’ business. However, there are many master limited partnerships (MLPs) from Houston to the Permian, and real estate investment trusts (REITs) from Austin to Dallas that are smaller but had the sufficient number of subsidiaries back in 2013 to set up shop in, or relocate to, Texas if they wanted to do so. The real challenge is reaching those entities with concise and digestible information on what can be done in a Texas captive. So, initially, it probably was the Fortune 1000 companies that analysed redomesticating to Texas. Those big companies have sophisticated risk management teams and well-informed consultants and attorneys and will make their decisions based on perceived political risk and/or the financial implications of moving back home versus staying put.
The 2015 changes in SB667 that TxCIA helped to pass in the 2015 legislature aided both the functionality of the Texas statute and, I think, the perception of the domicile as one that understands the importance of sensible updates. TxCIA worked closely with the Texas Department of Insurance on that 2015 legislative package, and as much as anything, I think a knowledgeable and supportive regulatory team is key to growth. The fact that SB667 allowed risk pooling and credit for risk reinsured to an affiliate enabled a broad swatch of pure captives to accomplish what they needed to in a Texas captive. A second bill, HB2557, adds some additional dimensions around what county hospital districts can do in terms of establishing captives in Texas. While TxCIA did not draft or originate this second piece of legislation, we did support it. That said, it applies to a smaller subset of Texas non-profit hospitals supported by county tax revenues, and to my knowledge, has not yet been utilised as yet.
What can attendees expect from the TxCIA conference? And what will be the main focus?
Texas has such a substantive cross-section of industry leaders and innovators that it somewhat defies broad labels, except perhaps as a state where entrepreneurs and hard-chargers with the vision to see the path and a bit of luck can turn a business idea into a million- or often billion-dollar revenue business. It’s the wildcatter ethos, maybe.
With that spirit in mind, we are excited to offer a full but diverse slate of sessions from experts on a range of topics, from the benefits and challenges of obtaining a credit rating to some of the structures, technology and tools offered by the confluence market. If one wants to characterise the focus of this year’s TxCIA conference, the most apt description is probably helping a captive find appropriate tools as it becomes a more sophisticated operation.
What sessions are you most looking forward to?
The dais at this 4th Annual TxCIA Conference will host as interesting a group of speakers as we’ve had. The subject matter is intentionally more diversified. Given our pure captive statute and the narrower subset of the captive universe to which we will naturally appeal, our goal is to provide captive owners and corporate risk management teams the chance to hear from experts who can add a new dimensions to their captive knowledge. We want captive owners to say to themselves at least once during the conference: ‘I hadn’t really thought of that.’
Having known many of the speakers for some time, I’m looking forward to simply hearing their counsel to our attendees and seeing many of them here in Austin again. Lisa Havens of Baylor Scott & White will be our keynote speaker. As a veteran of the captive world and a respected leader within her complex and well-regarded institution, I do think that her perspective is deeply informative for those who want to understand the true dexterity a captive can have as it supports the parent entity’s objectives. As importantly, how that risk is measured, managed and costed needs to be shared with executive management and oversight boards, and Lisa Havens will discuss how she does that, as well.
We will have several sessions that are distinct from prior conference topics, including one on the strategic value and economic benefit that captive credit ratings can yield. JLT Strategic Advisory and Kroll Ratings will bring our audience insight on how this is becoming more of an issue for captives of all sorts, but perhaps particularly for those that support multinational operations, especially when issues of regulatory harmonisation and equivalence press in on captive users.
Another important session will see Nephila Advisors outlining the options that confluence markets are bringing to bear on the insurance market. It’s not just reinsurance pricing that insurance-linked securities tools affect. The geography of Texas is so diverse, the weather at times so extreme, and the coastal exposure so significant, that needs for bespoke excess of loss cover or aggregated attritional loss portfolios might very well find a better mousetrap. The intrinsic nature of custom-crafted risk vehicles that confluence markets offer is, to me, the DNA of why captives exist and help their parent companies thrive.
While I certainly have a strong bias, any Texas company with a captive or contemplating one would be well advised to sign up. The Texas Department of Insurance will once again have several members of its captive team available to act as resources or meet with captives or prospective captive owners and their advisors. Attendees can accomplish quite a lot in a very short timeframe.
Can we expect to see anything new from Texas in 2017? Will there be any legislation updates?
There are always improvements to be made en route to being a relevant and well-positioned domicile. Texas has many great insurance success stories, but in this particular subset of the insurance industry, we haven’t really accumulated enough laurels to rest on yet.
The biennial legislature meets here in Austin in odd-numbered years for a six-month session—it is a fast-paced experience for legislators, constituents and any with bills in the queue. TxCIA will have a bill that contemplates non-affiliated reinsurance, reciprocal (in the same economic family) captive structures, as well as some minor housekeeping and clean-up items. The first two items will affect energy companies and many companies whose insurance risks tend to be unique to their industry or geography, as well as those whose non-profit or diversified limited liability company/limited partnership ownership structure does not fit the letter of the statute’s pure captive intent, although it certainly fits the full spirit in which it was conceived.
Like any new association, TxCIA lives and breathes based on the intellectual capital and support of our members. We want more specific perspectives, and need that support to articulate the benefit of certain legislative changes.