On June 14, 2013, Governor Rick Perry signed legislation, which for the first time authorizes domestic captive insurers in Texas. The bill, known as SB 734, allows Texas businesses to realize the advantages, including tax benefits, of forming and operating a “pure” captive insurance company without the burden and cost associated with an out-of-state captive.

For those companies that already have a foreign captive in a state with pre-existing captive enabling legislation, the statute provides for redomestication to Texas for those captives meeting the standards set forth in SB 734. As a significant additional incentive, the bill authorizes the Texas Commissioner of Insurance (the “Commissioner”) to “postpone or waive the imposition of any taxes or fees under this code for a period not to exceed two years for any foreign or alien captive insurance company redomesticating to this state.”

Here are a few of the significant provisions from SB 734, which will be codified at Chapter 964 of the Texas Insurance Code.

• Scope of Authorized Coverage. Texas captives may directly insure any risk of a parent or affiliate company, except life insurance, annuities, accident and health insurance (other than ERISA benefits), title insurance, mortgage insurance, financial guaranty insurance, residential property insurance, personal automobile insurance, and worker’s compensation insurance. Chapter 964 captives may also issue certain reimbursement and reinsurance policies, including for certain employee benefit plans, liability insurance, workers’ compensation and employers’ liability coverage. 
  
• Capital, Surplus and Reserve Requirements. The amount of capital and surplus required of any Texas captive will be determined by the Commissioner based on certain defined criteria, subject to a minimum of $250,000. Necessary reserves will be determined on the basis of estimated losses and anticipated adjustment expenses for claims known at the time of reporting. 
  
• Domestication Requirement. To receive a certificate of authority, (1) the captive’s parent or affiliates must have significant operations in Texas; (2) at least one board member must be a Texas resident; (3) the captive must hold at least one board meeting annually in Texas; and (4) the captive must maintain its principal office and books and records in Texas, subject to exceptions. 
  
• Reporting Obligations. Texas captives must file audited annual financial reports stating the company’s financial condition and in some cases, where the captive is reporting on a fiscal year-end basis, a balance sheet, income statement and statement of cash flows. Information provided by a captive to the Commissioner under Chapter 964 is deemed to be confidential and privileged, including for purposes of responding to a subpoena or as evidence in civil litigation. 
  
• Investment Limitations. Texas captives are not subject to limitations on allowable investments, except for (1) loans to parents/affiliates, which require the prior approval of the Commissioner; and (2) investments that threaten the solvency or liquidity of the captive. 
  
• Texas Insurance Guaranty Associations. Texas captives are prohibited from contributing to or receiving benefits from any guaranty or insolvency fund in the state. 
  
• Premium and Maintenance Taxes. Section 223A of the Texas Insurance Code will be amended to provide for an annual tax equal to half of one percent (0.5%) on the captive’s taxable premiums, subject to a minimum tax of $7,500 and a maximum tax of $200,000. Those insurers required to pay premium taxes under Section 223A in a given year are exempt from franchise taxes for the same period. Captives are also subject to maintenance taxes on gross premiums as applicable to the individual lines of business written by the captive.

If you have any questions about the newly enacted Chapter 964 of the Texas Insurance Code or about captive insurance companies in general, please contact one of the Haynes and Boone Insurance Coverage Litigation Practice Group partners listed below.