Key features of a PICThanks to an amendment passed by the Cayman Islands Legislative Assembly this past March, segregated portfolio companies (SPCs) now have the ability to incorporate and register under one or more of their cells as something called a ‘portfolio insurance company’ or PIC. In turn, the resulting PIC can then proceed to conduct its relevant insurance business as if it were a separate legal entity rather than a traditional cell of an SPC.
According to law, a PIC is an exempted company that is limited by shares. However, since the PIC is technically held by a cell within an existing SPC structure and the license is held by the SPC, the PIC does not need to be separately licensed as an insurance company. One of the other key distinguishing features of a PIC is that in addition to being a distinct legal entity from the SPC, the PIC is permitted, under insurance law, to have a different group of directors and officers than the SPC.
Regulatory framework for PICs
With respect to regulation, as is typically the case with a cell of an SPC, each PIC will be regulated by the Cayman Islands Monetary Authority. As part of this framework, each PIC must comply with a number of requirements, such as:
- Conducting insurance business only in accordance within the context of its business plan,
- Maintaining a margin of solvency and having adequate capital available in accordance with the prescribed requirements of the Insurance Law and Regulations, and
- Maintaining adequate arrangements for the management of risks, to name a few.
These companies will also be required by regulation to include the letters ‘PIC’, ‘P.I.C.’, or the words ‘Portfolio Insurance Company’ in their legal names.
In terms of reporting requirements, PICs must submit an annual return to CIMA within six months of the end of the fiscal year. This return must be accompanied by audited financial statements and, in certain cases (e.g. in instances in which the PIC writes long-term business), an actuarial valuation of its assets and liabilities and a certification of solvency.
In addition, the law also requires each PIC to be controlled by the SPC, on behalf of the cell. It is also worth noting that a cell within any given SPC is permitted to control only one PIC. Furthermore, while voting shares in a PIC are not allowed to be issued, transferred or disposed of in any manner without the prior approval of CIMA, non-voting PIC shares may be held by third parties.
A look at the potential advantages of the PIC structure
The PIC structure provides a long list of compelling advantages that are helping to make it an attractive alternative, particularly in comparison with traditional SPCs. The following is a brief overview of just a few of these advantages:
- Enhanced flexibility – This new structure allows an SPC to transact insurance business between its respective cells through PICs. And cells within a particular SPC structure will also be able to participate in different cellular insurance strategies such as reinsurance, quote sharing or pooling.
- Increased assurance to counterparties – The PIC is a distinct legal entity and does not have recourse to the general company or other cells, which can be the case for SPCs.
- Separation of control – As the PIC is permitted to have a separate board of directors from that of the SPC, this can facilitate increased flexibility and allows for separation of control.
- Automatic novation – The law allows for automatic novation from an existing cell to the PIC within 30 days after registration. As such, it is therefore easy to incorporate a PIC and then subsequently transfer all of the business from the cell to the PIC.
- Simplicity of wind-up – Unlike with an SPC structure, a PIC can be wound up without any impact on the SPC or other PICs.
Accounting and financial reporting
There are also considerations with respect to the accounting and financial reporting aspects of PICs. As a PIC is incorporated by a cell of an SPC and all of the voting shares are held by the cell, the PIC becomes a legal subsidiary of that cell, and the PIC’s financial statements may need to be consolidated into those of the cell.
In the event that an SPC directly incorporates a PIC, the PIC’s financial statements may also need to be consolidated with those of the SPC. The net effect is that the cell or SPC effectively becomes a reporting ’group’ and may be required to prepare annual ‘consolidated’ financial statements. While consolidation will typically be required, the application of consolidation may differ depending on which accounting standards are used for financial reporting:
According to U.S. Generally Accepted Accounting Principles (GAAP), in the event outside financing sources significantly outweigh financing from voting share capital, the PIC may be considered to be a ‘variable interest entity in which case, consolidation may be a requirement of the captive participant rather than the cell.
Under International Financial Reporting Standards (IFRS), certain waivers may apply provided there is consolidation at another higher level within a reporting group.
Though these circumstances are possible, generally speaking, consolidation of PICS will likely be required.
There is no format for the manner in which an SPC must present its financial statements. Some will prepare separate financial statements for the general company or core and for each active cell. Other SPCs will opt to prepare financial statements for the entire structure in a columnar format within one master document.
Each format is acceptable. However, in either format, a cell with an incorporated PIC must consider the consolidation of the balances and transactions of the PIC into their own. Accordingly, the consolidated financial statements will be based on the assumption that they represent the financial position and operating results of a single economic entity (e.g. the ‘group’).
The financial statements of the general company, those of each cell and those of the PIC will need to be filed with the regulator based on the amendment to the law. Regardless of the chosen reporting format, a PIC will require its own standalone financial statements given the fact that it functions as a standalone legal entity.