As 2009 came to a close, an apparent net gain in captive formations in many domiciles had some regulators thinking the interest in captives might signal economic recovery.

While the economic downturn and paralysis in the credit markets stalled many prospective parent companies' interest in forming captives late in 2008, 2009's fourth quarter was closer to the norm in several domiciles.

“Now things are essentially back to normal” compared with a year ago, when “we were basically dead in the water,” said David F. Provost, deputy commissioner of captive insurance in the Vermont Department of Banking, Insurance, Securities & Health Care Administration.

In the final weeks of 2009 in the Vermont Captive Division, “Most of what we had we expected from people we were talking to,” said Mr. Provost, who added in a mid-December interview that the division was essentially done taking applications for 2009 licenses.

Vermont expected to end the year with 36 to 38 new licenses issued in 2009 vs. 16 in 2008, and already was set to begin processing applications for 2010 licenses. “We'll actually have a good start to (2010), too,” Mr. Provost said.

“Some of these are construction companies, so I've got to think that's a good reflection of their thoughts for the future,” Mr. Provost said. “Everyone else is saying they're through the bottom (of the downturn) and things are at least predictable.”

In South Carolina, Jeff Kehler, program manager of alternative risk transfer services in the South Carolina Department of Insurance, offered a similar view.

“I am very encouraged,” Mr. Kehler said. He recalled telling attendees at September's South Carolina Captive Insurance Assn. conference, “It's my opinion new captive formations are a leading economic indicator.”

Interviewed in mid-December, Mr. Kehler noted that South Carolina issued 11 licenses in 2008 for 10 captives and one special-purpose vehicle. “And we'll do 14 or 15 (in 2009), so that's positive,” he said.

“Here, with this economic recession, the construction and finance areas are all supposed to be in the tank,” Mr. Kehler said. But among the captives South Carolina licensed in 2009 are three for construction businesses and three for banking companies. Of captives the state anticipated licensing before year's end, five are “either in the service area or manufacturing,” he said. “That's all positive stuff.”

“Some of these that we're licensing are the largest companies in the world,” Mr. Kehler said. “The preponderance of new captives that we're doing are very large companies.” Also in 2009, South Carolina licensed a captive for a large regional construction company, “So it's really kind of covering the spectrum,” he said.

The final 2009 license the state anticipated issuing was for a retail company with the bulk of its operations in South Carolina, Mr. Kehler said.

Steve Kinion, director of the Bureau of Captive and Financial Insurance Products in the Delaware Department of Insurance, said his office also was busy during 2009's final quarter.

“I'm a little more optimistic in terms of the number of applications we've had vs. expectations,” Mr. Kinion said of 2009. “I do think 2011 will be a better year than 2010.”

“We're seeing an agency captive,” Mr. Kinion said. “We're especially proud of this one because it's a locally grown agency in Dover.” An agency captive is a captive typically formed by an insurance agency or broker to reinsure a portion of their clients' risks.

He said the state also is seeing interest from prospective captives looking at forming under the state's serial entity law. Delaware is one of seven states with such a law, an approach often used in the mutual fund industry to allow mutual fund companies to segregate various asset groups.

In the captive setting, Mr. Kinion said, the serial entity structure could be used to segregate different lines of coverage. The advantage of the serial entity approach vs. a segregated cell structure is that only one license is required for the serial entity instead of needing to obtain multiple licenses or approvals for different cells, he said.

Mr. Kinion said Delaware also has seen interest from captives looking to redomesticate from offshore domiciles.

“One of my favorite terms in the past couple of months has been "optics,'” he said. “Captive managers have approached us about moving their offshore captives onshore. They're doing that because their clients are asking them about the perception of being offshore.”

With growing interest in using captives for employee benefit programs, Delaware Insurance Commissioner Karen Weldin Stewart said in December that she planned to seek legislation this month allowing the formation of branch captives in the state to facilitate offering benefits falling under the Employee Retirement Income Security Act for companies with offshore captives.

In Kentucky as the year came to a close, Russell Coy II, captive coordinator in the Kentucky Department of Insurance, said, “It's mixed. Things have picked up. Of course, we've kind of been steady all along.”

“There are people interested in talking about the concept but then saying, "Eh, let's talk about it next year,'” Mr. Coy said in mid-December. “There are some people that think we're at the start of the recovery and other people who still think it's batten-down-the-hatches time.”

Mr. Coy said the Kentucky office saw significant interest in captive formation in the final months of 2009, but also saw some existing captives that “might want to shut down the lights and turn in their license, particularly in construction.”

Captive interest varies by industry sector, he said.

Kentucky will have its 10th anniversary as a captive domicile in 2010, and the state hopes to have 100 captives in time for that anniversary, Mr. Coy said.

“Right now we're at 86 and we do have enough (applications) to take us over” the 100 mark, Mr. Coy said.