Among the recent amendments to Vermont’s captive insurance law was the addition of “marketable securities” to the list of assets that may be used to satisfy Vermont’s minimum capital and surplus requirements. See 8 V.S.A. §6004(c).

On June 15, 2015, Vermont’s Department of Financial Regulation (the “DFR”) issued Bulletin No. C-2015-1 in which it updated its guidance for complying with Vermont’s minimum capital and surplus requirements (the “Bulletin”).

As was the case prior to the adoption of the amendments, Vermont captives have the option of satisfying the minimum capital and surplus requirements through the use of cash;[1] a trust approved by the Commissioner of the DFR (the “Commissioner”) and of which the Commissioner is the sole beneficiary; or an irrevocable letter of credit issued by a bank approved by the Commissioner. The amendments add “marketable securities” to this list of approved assets.

Per the Bulletin, “marketable securities” include any investment or portfolio of investments that comply with the investment restrictions applicable to traditional insurance companies. These restrictions are found in Sections 3461 – 3472 of Chapter 101 of Title 8 of the Vermont Statutes Annotated (the “Investment Code”). While the Investment Code is somewhat challenging to parse, the following investments likely qualify as marketable securities:

  • Most obligations of the Federal Government and its instrumentalities;
  • Most obligations of the States and their political subdivisions;
  • Most corporate bonds;
  • Stocks or other equity interests of business entities organized under the laws of the United States or Canada;
  • Certain derivative instruments;
  • Certain debt instruments; and
  • Certain foreign investments.

The intent of the new legislation is to provide additional flexibility, not to increase the regulatory burden on any captive. Accordingly, the Bulletin differentiates between pure captives and industrial insured captives on the one hand, and risk retention groups, association captives, and sponsored captives on the other.

Since the investment portfolios of risk retention groups, association captives, and sponsored captives are already subject to the Investment Code, these entities are relieved from the obligation of holding specific assets in order to satisfy the minimum capital and surplus requirements.      

For pure captives and industrial insured captives, the Bulletin provides that, subject to a few exceptions, the Investment Code is only applicable to marketable securities held on account of the minimum capital and surplus requirements. The exceptions help maximize the flexibility of the new regulation. First, the Bulletin provides that the diversification requirements contained in the Investment Code will be applied across the entire investment portfolio of a pure captive or an industrial insured captive. For example, a pure captive could satisfy the minimum capital and surplus requirement by holding $250,000 in stock in a single company, so long as such stock does not comprise more than 25% of the pure captive’s “admitted”[2] assets, and so long as holding such stock does not result in the captive holding more than 5% of its “admitted” assets in investments from any one issuer. Second, the Bulletin provides that Section 3463a of the Investment Code, which governs valuation, only applies if it is consistent with a company’s approved accounting standards. Accordingly, companies will not be required to alter their accounting practices in connection with the new regulations.