The Federation of Iowa Insurers plans to ask the Legislature to consider creating a $100 million tax credit program that would allow insurance companies to receive premium tax credits for investing in certain venture capital companies that would invest solely in Iowa start-up companies.

The group, which represents 28 insurance companies domiciled in Iowa, says such a measure would help the state create further venture capital resources for small businesses, while providing a vehicle for insurance companies to invest more of their assets in venture capital within the state.

“These insurance companies in the state have a lot of available dollars for these kinds of activities,” said Paula Dierenfeld, the federation’s executive director. “Because these capital company programs exist in other states, (the insurance companies are) investing their dollars in the states where the certified capital company, or CAPCO, programs exist. The insurance companies would like to see the same program exist here, so they can make the same kind of investments in Iowa.”

The federation is seeking a 10-year program that would allow the state to issue up to $10 million per year in tax credits. Insurance companies would receive those tax credits as an incentive for investing in one or more CAPCOs, which would be required to invest those funds in Iowa start-up companies over a specified number of years or lose their eligibility to issue further tax credits to the insurance companies.

The concept, which Louisiana first adopted in the mid-1980s, has since been adopted by eight other states and the District of Columbia. Audits in some states, however, have resulted in criticism that the programs are inefficient and expensive for taxpayers, and that they place all the risk on the state and none on the companies making the investments.

The proposal is one of the top legislative priorities of the Greater Des Moines Partnership, which views it as a means of leveraging insurance industry resources to build the state’s venture capital pool.

“We should use our strengths to overcome some of our weaknesses,” said Jay Byers, the Partnership’s senior vice president for government relations and public policy. “Specifically, the program we’re working on would require all the money be invested in Iowa companies. And the CAPCO (program) is not meant to replace any of the other work that’s been done in the past few years. This is another tool to leverage our insurance industry.”

Iowa collected $140.3 million in premium taxes and fees from insurance companies in 2004. The tax, which in 2005 was 1.25 percent of premiums collected, this year was reduced to 1 percent.

That premium reduction was part of an agreement the federation reached in 2002 in return for a commitment from insurers to invest at least $60 million in venture capital in Iowa through 2006. That program has resulted in 14 insurance companies committing more than $84 million in venture capital investments, either directly or through regional angel capital funds.

Another venture capital incentive program already in place is the Iowa Fund of Funds, which in June 2005 received $15 million in loan commitments from West Bank and Wells Fargo Bank Iowa. That fund’s goal is to invest in a portfolio of venture capital funds that will consider but not be limited to Iowa start-up companies.

A CAPCO program would provide a more attractive way for Iowa insurers to provide funds for venture capital investments because it would require them to hold far less in reserves to guarantee the investments, said Scott Sundstrom, a lobbyist representing the Iowa Federation of Insurers. An investment in the Iowa Fund of Funds requires insurers to hold a 30 percent reserve. In comparison, an investment in a CAPCO, whose return is guaranteed to the insurer, would require a risk-based charge of less than 1 percent, Sundstrom said.

Ray Davis, senior vice president and treasurer of EMC Insurance Cos., said the investments are much more attractive to companies like his because the CAPCOs also invest in U.S. Treasury securities or other high-quality investments, which reduces the risk.

“We have invested in them in others states, and we would here in Iowa if they were available,” he said. EMC has invested less than $2 million total in programs in Wisconsin, Texas and Colorado, for tax credits it applies to premium taxes in those states.

“It’s been very successful in other states,” he said. “I don’t see any reason it wouldn’t be successful in Iowa if we adopted a CAPCO program.”

Some states that have adopted such programs, however, have found them to be expensive and inefficient from a public policy standpoint.

Legislators in Missouri, which established a CAPCO program in 1996, stopped funding it in 2004 after a state audit revealed that the program had resulted in a net revenue loss to the state of more than $116 million and fewer than 300 jobs being created. During that time, the CAPCOs had collected or accrued $21.3 million in management fees.

Colorado’s economic development director in 2003 called his state’s program “seriously flawed” after an audit found that the CAPCOs were investing in established companies rather than risky start-ups that needed venture capital. Its program, which authorized $100 million in tax credits in 2002, resulted in just $40 million being made available for investment in small companies, with the remainder invested in guaranteed investments such as U.S. Treasuries.

Dierenfeld said the insurance federation plans to back legislation that would address problems encountered by other states. For instance, the proposed Iowa legislation would require CAPCOs to raise 50 cents of private equity for each dollar received from insurance companies to provide for a higher ownership stake in the investment. It would also require insurance companies to wait two years after their capital is invested in a start-up company before receiving any tax credits.

The Legislature in 1999 approved a bill to create a CAPCO program, but it was vetoed by Gov. Tom Vilsack.

George Lipper, a former Iowa resident, has studied states’ involvement with the programs in his current position as an analyst with the National Association of Seed and Venture Funds. While a contract employee with the Iowa Department of Economic Development in 1999, Lipper advised the governor to veto the legislation.

“My conclusion was that the legislation served mostly to enrich the promoters of it and the insurance companies, and that it didn’t serve the purpose of assisting in early capital formation in Iowa or in any state where it was resident,” Lipper said. Studying other states’ programs has confirmed his beliefs about them, he said.

“What I don’t like about the CAPCO programs is that it’s the state that’s putting up the risk,” said Lipper, who said he was speaking from his own experience and not on behalf of the NASVF. “On day one it’s coming out of state money, and taxpayers end up picking up the bill. And CAPCOs and insurance companies end up making money no matter how badly they do. You don’t have to be a good venture capitalist at all with a CAPCO program; you just get rich.”

Dierenfeld defended the insurance federation’s proposal as sound for both investors and the state.

“We believe this could be a model,” she said. “We see it as a real improvement over what exists in other states. We believe there’s more investment needed. It would be another economic development tool. We view this as a complementary tool, not to replace the Fund of Funds or other economic development tools.”