Global Captive Management
Impressive growth continues for Cayman PICs
A portfolio insurance company provides a flexible corporate structure solution and has become a popular option for many businesses that have captives in the Cayman Islands. Global Captive Management’s Ian Bridges explains how they differ from traditional models.
“A PIC, being incorporated as an exempt limited company, provides numerous benefits over a traditional SPC.”
Ian Bridges, Global Captive Management
Since the legislative effective date of January 1, 2015, interest in portfolio insurance companies (PICs) in the Cayman Islands has steadily increased. The numbers speak for themselves: in the first year of the legislation there were four PICs registered. Those numbers trended upward, from seven in 2016, 10 in 2017, 19 in 2018, and 27 in 2019 to 32 as at September 30, 2020.
Global Captive Management is in the final stages of forming two more PICs for our clients in 2020, with at least three more for planned for 2021.
There are some key characteristics of PICs which have been the (not so) secret to their success.
The visual of a train is often used to describe the structure of a segregated portfolio insurance company (SPC). An SPC, a Cayman Islands entity many are familiar with, is incorporated and, by itself, is deemed a “general account” or “core”, which can be considered the train engine in the analogy. The SPC’s core has its own board of directors and is the actual licensee approved to conduct insurance business, regardless whether there is any insurance business in the core or not.
In a traditional SPC model insurance business could be conducted in the core, but generally segregated portfolios (SPs) are formed for that purpose. The SP would be considered the train car in the analogy. While the SPs are not legal entities—in-fact the entire train is one legal entity under Cayman Islands law—the assets and liabilities of each SP are separated from other SPs and the core, and vice versa. This traditional structure has flourished in the Cayman Islands for 20 years.
The PIC is the next evolution of the traditional SPC and SP model. Similar to the traditional model, the SPC submits the licence application for approval. Once licensed, the SPC can apply to register a PIC which would be considered the train car by comparison to the tradition SP model. The PIC will not need its own licence, hence it only needs to register, but it must meet all minimum and prescribed capital requirements as if it were a separate licensee. This individual capital requirement differentiates it from a traditional SP.
“The SPC is considered to be the controlling relevant insurer for regulatory purposes under the legislation.”
A PIC typically has ordinary voting shares with no dividend rights and non-voting preferred shares with dividend rights. The SPC still creates an SP but this time for the sole purpose of holding all the ordinary voting shares in the PIC.
The SP, while holding the voting shares in the PIC, would be the coupling to connect the engine to the train car and not the actual train car itself. The SP generally does not even have a bank account or have financial statements prepared. In fact, it is likely that most tax providers would recommend to “check-the-box” to treat it as a disregarded entity for US federal tax purposes, to further substantiate its disregarded position. Since the SPC ultimately controls the voting stock in the PIC, the SPC is considered to be the controlling relevant insurer for regulatory purposes under the legislation.
The non-voting PIC shares are issued to the participant of the PIC, the participant being the beneficial owner of the train car, due to its right to dividends. Only one SP can hold voting shares of one PIC so each additional PIC would require its own SP to directly connect to the core and not through any other SP or PIC. Therefore, you would not get one long train but rather a train with multiple SP and PIC combinations.
A PIC, being incorporated as an exempt limited company, provides numerous benefits over a traditional SPC where insurance business is conducted in the SP. The PIC will have its own board of directors separate from the SPC’s board, although they many have directors in common. Having separate boards is very helpful in many situations. For example, in an agency-owned SPC where the agency’s customers are the PIC participants, having a separate board of directors formed by the participants provides a heightened level of self-governance and becomes a selling feature of the PIC. It ensures customers have more legal oversight of the PIC.
A PIC, unlike a SP in a traditional SPC, can also contract with its core and any other PIC, since PICs are separate legal entities under Cayman law. This aspect can be particularly helpful in many situations such as sharing or pooling risks among PICs. Contracting between SPs is not an option under the traditional SPC and SP model, as the SPs are not separate legal entities under Cayman Islands law, and are therefore prohibited to contract between themselves.
Forming and registering a PIC is still a time-efficient process, although it is not as quick as a business plan change when forming a traditional SP. However, since the registration approval is provided by the Cayman Islands Monetary Authority’s insurance department, and not the management committee, the process takes weeks off the formation clock. That could be the difference between getting a programme off the ground or not when you have a tight renewal.
“The fact that the PIC is now an incorporated entity strengthens the position that they are separate entities, whether they are treated as insurance or not, for US tax purposes.”
There are a few standard ongoing compliance items for SPs which also apply to PICs. Each bespoke PIC business plan must have some commonalities. The captive insurance manager and the auditor must be the same among the entire structure. In addition, the fiscal year end must also be common.
The separate legal entity status of the PIC also provides more clarity of how the PIC will be viewed for US federal tax purposes. Effective September 14, 2020, the Internal Revenue Service’s proposed regulations treat foreign cells conducting insurance business as an entity for US federal tax purposes.
Before the PIC legislation many traditional SPs would rely on these proposed regulations to make individual tax elections and tax filings. However, this was not helpful for many SPs which were not treated as insurance for tax purposes, which is a common occurrence for many of not-for-profit owners. The fact that the PIC is now an incorporated entity strengthens the position that they are separate entities, whether they are treated as insurance or not, for US tax purposes.
There are many additional benefits to PICs. One that has a more practical use is how the PIC can represent itself to other counterparties. In the traditional model the SPC is conducting business on behalf of the SP. This creates a lengthy and sometimes confusing name. For example, a SPC named “Traditional” with an SP named “Startup” would have the naming convention “Traditional Insurance Limited Segregated Portfolio Company On Behalf Of Startup Segregated Portfolio.” This might be abbreviated to “Traditional Insurance Limited SPC OBO Startup SP”. Not only is this name a mouthful, it is confusing to vendors and counterparties.
“Will the rise of the PICs in the Cayman Islands come at the expense of the traditional SPC and SP model? There is plenty of room for both solutions.”
Cayman legal practitioners will insist that all contracts for the cell use the full legal name to ensure the separation of an SP’s assets and liabilities under Cayman Islands law, especially if the account is held in another jurisdiction. The specific name also includes opening bank accounts, custody accounts, etc.
Compliance departments in US financial institutions always have a hard time trying to understand what a cell is, and often have rejected bank opening forms because of the name confusion. The PIC simplifies this process, using the name “Simply”, “Simply Insurance Limited Portfolio Insurance Company” or “Simply Insurance Limited PIC” for short.
While naming convention may seem like a trivial aspect, should any legal proceedings occur for a particular SP or PIC, the account names need to be correct as it is the same as an individual holding assets in their personal name or corporate entity. This is a case were details matter.
Will the rise of the PICs in the Cayman Islands come at the expense of the traditional SPC and SP model? There is plenty of room for both solutions. Many current SPs will want to continue with business as usual. However, for new captives looking for a cell solution, one must weigh the pros and cons of the traditional model versus a PIC.
In my experience, captives looking to minimise capital requirements across the structure will favour the traditional SPC model. Captives looking to enhance self-regulation and strength their individual tax entity status for tax purposes at the cost of more capital prefer PICs. Fortunately, the Cayman Islands has both options ready for your next captive insurance solution.