Segregated portfolio companies: where are we now?


Segregated portfolio companies: where are we now?

Kay Carter, a senior associate with lawyers Solomon Harris, charts the history of Cayman’s segregated portfolio companies and explains why they have become a robust choice of vehicle in any circumstances where segregation of the programmes run by the cells is important.

Cell captives are now very much part of the global captive insurance industry. In the Cayman Islands, where cell captives are referred to as segregated portfolio companies (SPCs), a statutory basis for cell captives has existed since 1998.

Cayman’s cell company legislation provides that the business(es) carried on by a segregated portfolio, or cell, of an SPC are insulated or firewalled from the businesses carried on by other cells of the same SPC. As a result, for an SPC that is a captive insurer, a financial failure of the insurance programme operated by any one cell will not impact the programmes operated by other cells of the same SPC. In addition, the Cayman legislation permits the insulation of the assets of the SPC itself (the core) from any claims in respect of claims against one or more cells.

Starting in the 1980s, accounting or contractual segregation of assets and liabilities was used, primarily in the rent-a-captive industry, to create ‘cells’ which were essentially divisions within one company. The agreements to create cells provided that the assets and liabilities of each programme would not be commingled with the assets and liabilities of other programmes within a particular company. The accounting records reflected the segregation, but the problem remained that the company was a single legal entity and each cell within the company was not legally separated and protected from other cells within the company. As a result, if one programme failed, the other programmes could be attacked and brought down.

In the early 1990s, Bermuda tried to address the problem that assets and liabilities of contractual cells were not insulated from each other by allowing for a cell company to be set up by a private Act of Parliament. Bermuda’s approach was not a practical solution, however, as a separate piece of legislation needed to be passed to set up each cell company.

"PICs are arguably the most important legal development for the Cayman captive insurance industry since SPCs were introduced in 1998."

The first practical cell company legislation was enacted in Guernsey in 1997. The Cayman Islands quickly followed by enacting its own legislation in 1998. Legal segregation of cells within one company became possible for rent-a-captives (and other captives) established under the statutory regimes in Guernsey and the Cayman Islands. For the first time, there was a high level of comfort that multiple insurance programmes could be run within a single captive insurer without the risk of cross-contamination between cells. The rent-a-captive industry remains the largest single user of SPCs in the Cayman Islands, but SPCs have become a robust choice of a vehicle in any circumstances where segregation of the programmes run by the cells is important.

Success story

Statistics show that Cayman SPCs have been well received and extensively utilised over the years. As at September 30, 2015, there were 141 SPCs in the Cayman Islands writing total premiums of just under $800 million, with total assets of approximately $5.5 billion. The number of SPCs represents approximately 20 percent of the total captives in the Cayman Islands. In our view, the success of Cayman SPCs is due in no small part to the stakeholders who ensured in 1998 that the enabling cell company legislation was well constructed and the fact that international commentators at the time reacted positively to the Cayman legislation.

The statistics also bear out the fact that SPCs are a cost-effective way to establish multiple insurance programmes. An SPC is one company with one insurance licence, so the fees payable in respect of the registration of the company and the insurance licence are not multiplied as they would be if multiple companies were used. In addition, there is a timing advantage of using an SPC for multiple programmes as once an SPC is formed and licensed, individual cells of that SPC can be established in a fraction of the time and with a fraction of the cost of setting up a separate captive.

Industries other than healthcare systems have started to use SPCs to provide for the insurance needs of members of industry groups. In some instances, cells are used in order to easily track the performance of different risks, different lines of business, or even differences in the business carried on in geographical areas.

We have seen an increase in the last few years of captives used by US carriers as a means of incentivising and building loyalty with their insurance agents by allowing the agents to become owners of the captive and thereby participate in underwriting profits attributable to the business they introduce. In many cases, owners are converting their captives to SPCs in order to write new business in cells on a segregated basis. We are also seeing some advance planning where SPCs are being set up even though there is no immediate need for cells, but there is a business plan to add lines of business to the captive at a later date.

An SPC has always been an attractive vehicle to enable segregation of high risk accounts or larger accounts from others. With respect to life insurance, each policy or annuity can be set up in its own cell. The use of SPCs for insurance-linked securities has been increasing.

In summary, the use of SPCs is limited only by the creativity of the owner and the owner’s advisors, particularly the insurance manager.

Eliminating limitations

One of the limitations of using SPCs (and cell companies generally) was that it was not possible for two or more cells of the same SPC to contract with each other, for example, if they wished to enter into a quota share agreement. The reason cells could not contract with each other is that each cell of an SPC is a constituent part of a single legal entity—the SPC—and is not itself a separate legal entity. A contract is possible only where there are two parties as a minimum.

In addition, in certain circumstances it was problematic that all the cells of an SPC were governed by the SPC board of directors. There isn’t any ability in the cell company legislation for cells to have their own separate boards of directors. In some cases, committees were used to try and address this situation, but rarely do committees provide a complete answer. Both of these drawbacks have been completely eliminated in the Cayman Islands through the introduction of the portfolio insurance company (PIC) in an amendment to the insurance legislation in January of this year.

The PIC legislation allows most SPC insurers to form incorporated cells that are owned (and therefore controlled) by the SPC on behalf of a particular cell. The cell itself is not incorporated: instead the cell becomes the owner of the ordinary shares of a PIC, which is a new exempted company. Once a PIC is registered with the Cayman Islands Monetary Authority, the PIC is able to write insurance business that would otherwise have been written by the cell that owns the PIC.

The insurance licence issued to the SPC covers the business written by the PIC. Since a PIC is a company, it is a legal entity separate and apart from the SPC. As a result, the limitations noted above with respect to contracting between cells of a single SPC and having a single SPC board of directors are eliminated. A further advantage of creating a PIC is that it enables certainty that elections can be filed with the US Internal Revenue Service in respect of the business carried on by the PIC.

Our firm was particularly involved in the development of the PIC legislation as Paul Scrivener, the partner in charge of the firm’s captive insurance practice area, chaired the private sector sub-committee that worked with the government of the Cayman Islands to draft the PIC legislation. As a firm, we have seen considerable interest in PICs and were delighted to have assisted with the formation of the first two PICs formed and registered in the Cayman Islands. We think that PICs are arguably the most important legal development for the Cayman captive insurance industry since SPCs were introduced in 1998 and we look forward to their increasing use.


One of the questions we are often asked with respect to SPCs is whether there have been any court decisions regarding the segregation of assets and liabilities under the SPC legislation and whether the legislated segregation has been successfully challenged. Although there have been cases in the Cayman Islands and other jurisdictions that have involved an SPC, to our knowledge there hasn’t been any judicial authority on the nature of a cell company anywhere in the world until this year.

In June, a US District Court in Montana considered the nature of a cell company constituted in Montana in the case of Pac Re 5-AT. The question the court considered was whether a cell of the cell company or the cell company itself was the correct party to arbitration proceedings with a reinsurer of the cell. Under the Montana legislation, a cell was clearly not a separate legal entity. For that reason, the court held that the Montana cell company acting on behalf of the cell was the correct party to the arbitration.

The importance of the decision by the Montana court to us is that the Montana legislation has segregation features that are similar to those of the legislation in the Cayman Islands. In this case, the court gave the provisions in the Montana legislation their ordinary common sense meaning and did not question the legal validity of a cell company structure in any way.

Although this case constitutes acceptance of the integrity of the cell company structure, it is important to keep in mind that the court did not have to consider whether the segregation actually worked. The issue of the effectiveness of the segregation under the Montana legislation will be a factor in the arbitration itself.

The real test of the cell company legislation of any jurisdiction will be one where the structure comes under scrutiny in a jurisdiction that does not have cell company legislation and the facts might favour collapsing the firewalls between cells. It can only be a matter of time before such a case comes before the courts.

Kay Carter is a senior associate in the insurance group of Cayman Islands law firm, Solomon Harris. She can be contacted at: 

Kay Carter, Solomon Harris, Cayman, Europe

Captive International