Taking care of the workers
Cayman captives are increasingly converting to segregated portfolio companies, particularly in the healthcare sector and as a result of US healthcare reform. Paul Scrivener and Stefanie Suckoo at Solomon Harris review the conversion process and the options available to captives.
As at September 30, 2013, out of a total population of 755 Cayman captives there were 137 segregated portfolio companies (SPCs) with total premiums of $558 million and total assets of more than $3.5 billion. The SPC therefore remains a very popular insurance vehicle. Cayman is still the leading jurisdiction for healthcare captives, with medical malpractice liability and workers’ compensation the two most popular lines of business.
Approximately 90 percent of Cayman’s international insurance industry is composed of companies insuring risks in the US, with more than a third of all Cayman captives involved in healthcare, so it is inevitable that the impact of US healthcare reform will have a bearing on Cayman captives. The way Americans will purchase health insurance and how they will be covered under those policies will affect both individual hospitals and hospital systems faced with an increased demand to hire new physicians and bring self-employed physicians on to the payroll. For this reason, we may see an increase in the use of captives as newly employed physicians become insured by the hospital system’s own captive.
With this potential increase in the use of captives, it becomes prudent for captive insurers to determine what strategies they will use in relation to the employed physicians they insure. One such strategy we have seen used with increasing frequency is the SPC. Cayman’s protected cell company legislation provides a useful alternative for those who wish to adopt the SPC structure without the need to abandon their existing captive. Under the Companies Law (Revised) a Cayman captive may, subject to certain requirements to be complied with, convert to an SPC, with or without establishing segregated portfolios, or cells, at the point of conversion.
One of the primary advantages of converting a captive to an SPC is the ability to ring-fence pools of assets and liabilities. A creditor dealing with one particular cell would only have recourse to the assets of that cell. Further, the core of an SPC—comprising assets which do not relate to any particular cell—may also be closed off to cell creditors.
We have historically seen rent-a-captives making effective use of Cayman’s SPC conversion provisions but many healthcare systems have also converted to SPCs not only in respect of their existing in-house programmes but also to accommodate non-in house or third party programmes. The ability to place new programmes in separate cells could be an appetising option for captives faced with new challenges of complying with the new healthcare reform provisions or for single parent captives looking to venture into some level of third party business such as for self-employed physicians programmes or potential joint venture arrangements with other hospitals.
The conversion process is relatively straightforward and typically takes four to six weeks. Written consent for the conversion must be obtained from the Cayman Islands Monetary Authority (CIMA), which requires the captive to produce a business plan outlining the proposed structure for the SPC and any cells to be established. The captive’s voting shareholders would then pass a special resolution authorising the transfer of the captive’s assets and liabilities into cells.
Where a captive converting to an SPC proposes to transfer its assets and liabilities into one or more cells, the legislation requires consents from each of the captive’s creditors to be obtained in writing. However, as an alternative to obtaining consents from all creditors, adequate notice may be given to all creditors with consent obtained from 95 percent of those creditors by value. This would mean giving notice to each creditor having a claim against the captive in excess of $1,220.
If the captive opts to retain its existing programme in the core of the SPC rather than transferring it to a cell, the requirement under the legislation to obtain creditor consents would not apply as those creditors would not be prevented from having recourse to the assets of the captive if it is converted to an SPC.
An application to convert a captive to an SPC, filed with the Cayman Islands Companies Registry, is accompanied by a declaration signed by at least two directors of the captive. The declaration exhibits a current statement of the captive’s assets and liabilities (not more than three months old), with details of any material changes in those assets and liabilities from the date of the balance sheet to the date the conversion application is filed, and also outlines the transfer of the assets and liabilities. The declaration further confirms the captive’s solvency and compliance with the requirement to obtain creditor consents, if applicable.
The CIMA approval and special resolution accompany the declaration and, as a part of the conversion process, the captive adopts a new memorandum and articles of association suitable for an SPC.
Where the driver for conversion to an SPC stems from the much-debated US healthcare reform, relevant captives are undoubtedly faced with having to consider how best to meet the challenges of providing quality healthcare balanced against the need to reduce costs. The Cayman SPC is of vital importance to our insurance industry as it provides an attractive option for both existing captives wishing to convert to an SPC and those wishing to form a brand new SPC.
Becoming a PIC
What we predict will add further to the attractiveness of SPCs is the introduction of the portfolio insurance company (PIC) legislation passed as an amendment to the Insurance Law, in March 2013, but not yet in force pending amendments to the Insurance Regulations. When it is in force, an SPC will be able to incorporate one or more of its cells by establishing a PIC, which will be an exempted company sitting beneath the cell and which, generally speaking, replaces the cell.
PICs will be advantageous because they are separate legal entities and they may contract and pool risk between cells of the same SPC. The transition from a cell to a PIC is expected to be straightforward and it will be possible to automatically novate an existing programme from a cell to a PIC. It is anticipated that a PIC will be able to obtain its own federal tax identification number and make tax elections such as under Section 953(d). Such an option is not consistently available to an unincorporated cell of an SPC.
With the already established and trusted SPC structure and the imminent PIC provisions, healthcare captives will find they may have several attractive options for continuing business and for further growth in the face of what is expected to be a challenging task of adapting to the changes brought about by US healthcare reform.
Paul Scrivener is the head of the insurance group at Solomon Harris. He can be contacted at: firstname.lastname@example.org
Stefanie Suckoo is an associate within the insurance group at Solomon Harris. She can be contacted at: email@example.com
Paul Scrivener, Stefanie Suckoo, Soloman Harris, segregated portfolio companies, healthcare, Affordable Care Act
Taking care of the workers