If David Fitz-Gerald had his way, Carris Reels would have started a captive insurer more than two decades ago.

The notion was born partly out of frustration, said Fitz-Gerald, CFO of the employee-owned manufacturer based in Proctor, Vermont. He wanted the company to write its own policies, not just take what insurers and brokers were willing to give.

The stumbling block was a lack of financial capacity, Fitz-Gerald said. But over the last few years, the math finally started to work in the company’s favor — in part because of its persistence. In 2023, Carris Reels joined dozens of other companies, including Fortune 100 and Dow 30 firms, in establishing a captive domiciled in Vermont.

“The consultants would say we are on the small side of where the captive line would be drawn,” FitzGerald said. “But we’re showing that maybe that line could be drawn a little lower than it’s been drawn in the past.”

State officials have spent 40 years positioning Vermont as an attractive destination for captives, making it the largest in the world today. Still, it is relatively rare for Vermont-based companies like Carris Reels to take advantage of the opportunity.

“There’s only a handful of captive owners that are based in Vermont,” said Amber Walsh, an examiner in the captive insurance division of the Vermont Department of Financial Regulation. “I feel proud to be a Vermonter and was happy and excited to see a Vermont-based company form a captive here.”

In recent years, companies have been turning to Vermont’s captive program to formalize their risk financing, she said.

The companies already may be retaining risk in their companies but want to wall off the money they set aside for claims. The hard market for property coverage has been another recent driver of captive interest, Walsh said: “There are quite a few companies that are coming to us where their insurance premiums through their commercial carriers are becoming so unreasonable that it really doesn’t make sense to continue paying a third party when you could be paying yourself.”

Partial to the Idea of Self-Insuring

Founded in 1951 by Henry Carris, Carris Reels turns wood, metal and plastic into cylindrical reels for use in the wire and cable industry, including for IT and industrial applications.

David Fitz-Gerald, CFO, Carris Reels

Henry Carris retired in 1980 after building the company into a multimillion-dollar player. His son, Bill Carris, took over and began expanding the company’s footprint, adding plants in California, Connecticut, Virginia and Mexico. But a broader geographic reach was not the only change ushered in by the second-generation owner.

In 1995, Bill Carris began converting Carris Reels to an employee-stock ownership plan, or ESOP, under which company ownership was transferred to its roughly 725 workers. The company does not share its revenue.

When Bill Carris retired in 2005, the ESOP became majority owner of Carris Reels. Three years later, the company became 100% employee-owned. In addition to its home state of Vermont, Carris Reels now operates in Arkansas, California, Connecticut, Indiana, North Carolina, Oregon, Texas and Virginia, as well as Canada and Mexico.

Fitz-Gerald started exploring the idea of a captive in the 1990s. The company has long been comfortable with relatively high deductibles of $500,000 for its workers’ comp, general liability and auto programs, so it would not have been a huge leap, Fitz-Gerald said.

“We’ve always been partial to the idea of self-insuring risk at a certain level and buying commercial insurance for risks that could ruin the company’s year or bankrupt the company, but not for the sorts of things that will be happening in some of regular, predictable frequency,” Fitz-Gerald said.

But the timing was not yet right. During the technology boom of the 1990s, Carris Reels was eyeing an aggressive growth strategy. But it had to pare back following the dotcom bust, the September 11 terrorist attacks, and the struggles of telecommunications companies like AT&T, Lucent and WorldCom. Captive plans ended up on the backburner. But they were revived following the 2008 Great Recession when Carris Reels joined a group captive made up of about 400 companies from diverse industries.

“It seemed like it would be more manageable than just being one of one,” Fitz-Gerald said.

The experience helped acclimate managers and directors at Carris Reels to the idea of a captive. Among them was Alberto Aguilar, who became the company’s CEO in 2021. He recalled thinking the idea sounded risky. But, he said, the more he learned, the more he saw the upside. Aguilar ended up helping to sell the idea to the company’s other decision makers.

Fitz-Gerald, meanwhile, worked to educate the company’s employee-owners on the idea. An ESOP itself is a fairly complex financial mechanism, and employees were used to thinking like owners, balancing risks and rewards, rights and responsibilities, said Fitz-Gerald. But, he said, one of his goals is to make the complex simple. So, he compared the move into insurance to the company’s existing role as a property owner in the real estate business.

“I’ve joked with folks that they can think of themselves as real estate tycoons, and now we can think of ourselves as an insurance company.”

Employees were mostly concerned with how a captive would work and whether the company would have enough resources to recover from a major loss without the backing of an insurance company, Fitz-Gerald said.

“I don’t think people were that scared of it, to be honest,” he said. “We had already been doing the half-a-million-dollar deductible, so it was just a different financing mechanism.”

But there were drawbacks to the group captive. Carris Reels, which takes pride in its safety record, was still sharing risks with others, giving it less control over losses. The disadvantages ultimately outweighed the benefits. Carris Reels left the captive in 2022 and began to focus on starting its own. Among the cheerleaders was former owner Bill Carris, who had become a state senator from the Rutland area, Fitz-Gerald noted.

“He was itching for us to be a Vermont captive, not a group captive.”

A Source of Pride 

As Carris Reels evaluated captive formation, the feasibility study was not a slam dunk, Fitz-Gerald acknowledged. But the company decided to forge ahead anyway, driven by its longstanding desire for better control of its insurance costs.

While many companies that form captives enjoy tax benefits, such as a deduction for premiums paid to the captive, such benefits were not available to Carris Reels. As an employee-owned company, its profits are not subject to taxation.

“This is a straight-up, pure risk-finance mechanism,” said Jim Girardin, managing director of Amethyst Captive Insurance Solutions in Burlington, Vermont, and an adviser to Carris Reels. “It’s not driven by tax planning.”

Because it operates nationwide, Carris considered several potential jurisdictions as the domicile for its captive. But Vermont was a heavy favorite, said Girardin, who formed Amethyst in 2011 after spending nearly two decades as captive insurance management practice leader for Willis North America.

“We thought it was a bigger negative by not being in Vermont than a positive being somewhere else,” he said.

There was not enough risk in other locations to justify going outside the Green Mountain state, he noted, and there was nothing Carris Reels could achieve in other states that it could not in its home jurisdiction. Still, it is unusual for a Vermont-based company to form a captive there. It is only the second one for Amethyst, Girardin said. The other one was a ski-resort operator that was eventually sold to Colorado based Vail Resorts.

For executives at Carris Reels, establishing the company’s captive in Vermont is a source of pride.

“It’s nice to be able to say it,” said Aguilar, who worked at the company for more than two decades, primarily in manufacturing leadership roles, before becoming CEO.

A Measured Approach

Carris Reels spent a year in the commercial market before officially launching its captive in April 2023. The startup process went smoothly, said Fitz-Gerald, who credited the experts helping the company.

Alberto Aguilar, CEO, Carris Reels

“It really wasn’t that complicated.” In its first year, the captive covered the company’s workers’ compensation, vehicle and general liability exposures, as well as its deductibles, which have not changed, Fitz-Gerald said. It is still too early for Carris Reels to draw any firm lessons from its experience with a solo captive, Fitz-Gerald added, but the company enjoyed a return on its investment and already has plans to expand the scope.

The move freed up cash, for example, which the company is plowing into its operations to modernize equipment and automate processes, according to Aguilar.

“We had strong growth in the last six years, but our focus now is on operational excellence,” he said. The next steps include the addition of property coverage, particularly given the premiums Carris Reels has been facing in the commercial market.

“We’ve had three or four years of massive, double-digit increases,” Fitz-Gerald said, adding that carriers also have been prone to making last-minute changes before renewal.

“That makes it quite attractive to move more and more, as we can, to the captive,” said Aguilar.

For its second year, executives are planning for the captive to cover business interruption, where Carris Reels enjoys some benefits by having its operations dispersed geographically. Its plants already pitch in for each other when they are overloaded with orders, said Aguilar. “This would be sort of the same case.”

Eventually, Carris Reels would like to add risks that may be excluded from standard insurance policies, such as earthquake coverage. The company has plants making wood reels and accessories in Madera and Santa Maria, California.

“We don’t want to pay the premium that we heard quoted for having insurance companies do it,” Fitz-Gerald said. Fiduciary coverage for the ESOP is another potential risk for the captive to cover, at least partially, Fitz-Gerald. He expected it would take even more time for the captive to achieve his long-held goal.

“Because we’re baby-stepping our way into it in a measured fashion, I’ll probably be retired by the time we have control,” said Fitz-Gerald. &