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VERMONT TOUTS RECIPROCALS

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BURLINGTON, Vt. -- By providing participants tax advantages coupled with an opportunity to keep insurance programs onshore, a 1997 Vermont law allowing reciprocal group captives is beginning to generate interest.

The potential savings a Vermont-domiciled reciprocal offers were cited earlier this month by key players from the state's first two reciprocals. They discussed their reasons for forming reciprocal group captives during a panel discussion at the Vermont Captive Insurance Assn.'s annual conference in Burlington.

Meanwhile, other panelists suggested that though a soft traditional insurance market has kept down the number of group captive formations in recent years, those formations will increase if the market should turn, with the reciprocal form becoming a preferred option.

Jim Clemons, a partner with the Primmer & Piper law firm in Montpelier, Vt., explained that Vermont law defines a reciprocal as the combination of the subscribers and an attorney-in-fact.

While a reciprocal is similar to a corporation in many ways, including the ability to sue and be sued, there are no corporate filings, he said; ultimately, a reciprocal is more like a partnership than a corporation, Mr. Clemons suggested.

Arthur G. Koritzinsky, senior vp at J&H Marsh & McLennan Inc. in New York, noted that Vermont's reciprocal law levels the playing field with offshore captive domiciles that allow the reciprocal structure.

The reciprocal form offers significant potential tax advantages for group captives, he said. For for-profit entities, it eliminates double taxation, while for not-for-profits it eliminates taxation altogether.

Those advantages come by virtue of the manner in which any revenue generated by the reciprocal captive is distributed to its member entities, Mr. Koritzinsky explained. "What the reciprocal does is allow that revenue (from the captive) to pass directly to the shareholders without having to pay tax."

In addition to the potential tax advantages, another advantage reciprocals offer is flexibility of governance, because they do not have a defined corporate structure to follow as do traditional captives.

While reciprocals allow pooling of capital, pooling of risk and limited exposure for participants, they don't involve the filing of corporate charters like traditional captives.

"This is one of the more exciting opportunities for group formations that's come along in quite a while," said Mr. Clemons.

Forming a Vermont-domiciled reciprocal involves the same steps and requirements involved in forming any other captive in the state, plus identifying the attorney-in-fact and the reciprocal's original subscribers.

The ability to avoid double-taxation "was probably one of the strongest reasons for the formation of our reciprocal form," said Daniel Dubreuil, executive vp for Manchester, N.H.-based Mathes Associates Inc., attorney-in-fact for the New England Mortgage Insurance Exchange, one of Vermont's first two reciprocals.

NEMIE was organized to reinsure private mortgage reinsurance coverage originated through the lenders making up NEMIE's membership. Many of the country's largest mortgage lenders have been forming single-parent captives in Vermont in recent years to reinsure private mortgage insurance on their loans.

Because NEMIE's members are financial institutions in the Northeast, geographic considerations were one reason the group chose Vermont as a domicile.

But the state's genuine interest in NEMIE locating there and its base of captive professional expertise were other key considerations, Mr. Dubreuil said.

Keith Blum, accounting manager for San Diego-based Premier Inc., a strategic alliance of 216 non-profit U.S. health care facilities, said that for members of the Premier alliance, the advantages of a Vermont-domiciled reciprocal include the ability to manage insurance programs domestically.

Other key considerations were the elimination of federal excise tax that would be owed if premium were being ceded offshore, a reduction in federal income taxes and a reduction in administrative expenses, Mr. Blum said.

He said total annual savings will be more than $1 million on the excess liability program placed in the Premier group's American Excess Insurance Exchange Risk Retention Group reciprocal, and the hospital professional liability and directors and officers program to be placed in a second reciprocal the group is forming, Premier Insurance Exchange Risk Retention Group.

Mr. Koritzinsky suggested that a turn in the traditional insurance market should prompt considerably more interest in reciprocal formations.

"When the market changes and pricing becomes more firm. . .I think we'll see more reciprocals," Mr. Koritzinsky said. "Reciprocals will be the form of choice for organizing group captives in the future.'