Segregated portfolio companies: where are we now? (2022)

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.

(Video) What is SEGREGATED PORTFOLIO COMPANY? What does SEGREGATED PORTFOLIO COMPANY mean?

"PICs are arguably the mostimportant 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.

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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

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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.

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Challenges

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.

(Video) What is a segregated portfolio?

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:kcarter@solomonharris.com.

FAQs

What is the purpose of a segregated portfolio company? ›

A Segregated Portfolio Company (SPC) is a company limited by shares. The SPC may create up to ten segregated portfolios for the purpose of segregating the assets and liabilities of the company, held within or on behalf of a segregated portfolio from other assets and liabilities of the company.

What is the meaning of a segregated portfolio? ›

Segregated Portfolio: The term 'segregated portfolio' shall mean a portfolio, comprising of debt or money market instrument affected by a credit event, that has been segregated in a mutual fund scheme. 2. Main Portfolio: The term 'main portfolio' shall mean the scheme portfolio excluding the segregated portfolio.

What is an exempted segregated portfolio company Cayman? ›

(i) Under Cayman Companies Act, an SPC is an exempted company which has been registered as a segregated portfolio company. It has full capacity to undertake any object or purpose subject to any restrictions imposed on the SPC in its Memorandum of Association (“Memorandum”).

What is an SPC entity? ›

The Segregated Portfolio Company (SPC) is a single legal entity within which may be established various segregated portfolios. The assets and liabilities of each segregated portfolio are legally separate from those of the other segregated portfolios.

When a segregated portfolio can be created? ›

Segregated portfolio can be created in a mutual fund scheme by an asset management company in case of a credit event, which includes downgrade to below investment grade and subsequent downgrades in credit rating by a Sebi-registered credit rating agency, as per the regulator's circular issued in December 2018.

What is the exit option for investors from segregated portfolio? ›

Parallelly, new units of the segregated fund are credited to the holders of the mutual fund as on a specified record date. In case you have segregated mutual fund units in your portfolio, you can exit them directly through your holdings on Kite: Note : 1.

How does a segregated fund work? ›

Commonly found in Canada, segregated funds are private contracts between insurers and customers that must be held until contract maturity. Because these products offer better guarantees than traditional insurance or annuity products, they do come with higher fees and expenses.

How is segregated portfolio taxed? ›

As such, the cost of acquisition of units in the segregated portfolio is nil. For FT investors, the entire receipts from segregated portfolios are taxable as capital gains. Meanwhile, cost of acquisition for main portfolio remains at original purchase NAV.

Can you sell segregated funds? ›

3. Who can sell segregated funds? Only life insurance representatives (financial security advisors) are authorized by the AMF to sell segregated funds.

What is a Cayman exempted company? ›

A Cayman Islands exempted company limited by shares is a flexible and versatile vehicle that is quick to set up and easy to maintain. As such, exempted companies formed under the Companies Act (as amended, the Companies Act) are the most commonly used company for offshore vehicles in the Cayman Islands.

What is segregated mandate? ›

A segregated mandate is a fund run exclusively for a client, typically an institution (such as SJP or True Potential). But asset managers typically earn far lower fees on segregated mandates than for pooled funds. At NextWealth we call this 'wealth managers as manufacturers'.

Is a portfolio a legal entity? ›

As a Portfolio is not a separate legal entity, distinct from the SPC itself or from any other Portfolio, the general case law stipulating that a company may not purchase shares in itself applies so that a Portfolio it is not able to invest into another Portfolio of the same SPC.

What is SPC legal? ›

It is the role of the Supreme People's Court (SPC) to give guidance to the People's Courts on how to interpret the laws. The SPC does it through promulgating “judicial interpretations” and other documents to address the application of laws.

Is SPC a private company? ›

SPC was incorporated as a public listed company in 1912, and Ardmona opened in 1921. SPC Ardmona was bought by Coca-Cola Amatil in 2005 for A$520 million. It sold it in 2019 for A$40 million to Shepparton Partners Collective.

Is an SPC a fund? ›

<content type="text">In ABC Company v J & Co Ltd, ABC was an open ended investment fund structured as a segregated portfolio company (“SPC”). Under Cayman Islands law, a company registered as an SPC may create segregated portfolios so as to segregate the assets and liabilities of one portfolio from other portfolios.

Can segregated funds be transferred? ›

First, segregated funds and mutual funds are two separate types of investment products, not accounts. Because of this, there is no way to directly transfer funds from one to the other without selling the investment first.

What is the difference between segregated funds and mutual funds? ›

A segregated fund policy is similar – like mutual funds, there's a pooling of investments. But unlike mutual funds, a segregated fund policy includes insurance guarantees that can protect much or even all your original investment.

What is a 75 100 seg fund? ›

75% to 100% of principal is guaranteed upon death or maturity. Investment must be held until the maturity date (or until death if earlier) to get the guarantee. Higher fees to cover the cost of the insurance protection.

How do you calculate the cost of segregated portfolio? ›

The cost of acquisition of units in segregated portfolio will be the ratio of value of defaulted units and total value of the main portfolio. Simultaneously, the cost of acquisition of units in the main portfolio will be reduced to the extent of cost of acquisition in the segregated portfolio.

What is the legal status of the units of a segregated fund? ›

Segregated funds do not issue units or shares; therefore, a segregated fund investor is not referred to as a unitholder. Instead, the investor is the holder of a segregated fund contract. Contracts can be registered (held inside an RRSP or TFSA) or non-registered (not held inside an RRSP or TFSA).

Is TDS applicable on capital gains? ›

Capital gains are not subject to TDS for domestic investors.

Are segregated funds good? ›

The pros of segregated funds are that they often have principal investment guarantees up to 100%, have the option to lock your gains, offer creditor protection, and come with a death benefit. On the flipside, the cons are that they often have higher fees, lower return, and aren't very liquid.

What are the benefits of seg funds? ›

Savings and Retirement
  • Additional protection for your investments. A segregated fund policy includes both a maturity guarantee and a death benefit guarantee. ...
  • Growth potential and flexibility. ...
  • Potential for creditor protection. ...
  • Protect your privacy. ...
  • An efficient way to do an estate transfer.

Why are they called segregated funds? ›

Only life insurance companies offer “seg” funds. The name derives from the fact that funds are held separate from the general assets of the company. Seg funds guarantee all or most of your principal investment upon maturity or death.

Are seg funds tax free? ›

A segregated fund is deemed to be a trust for tax purposes. The investment policy of each fund is to allocate its income and capital gains and losses realized in the year to policyholders, so that no income tax will be payable by the fund (after taking into account any applicable losses of the fund).

What is recovery proceeds payout? ›

Recovery Proceeds means the difference between (a) proceeds received after Claim Payment from the foreclosure upon, the liquidation of, or the exercise of any other rights or remedies, with respect to the Collateral and the exercise of any other rights and remedies with respect to any assets of a Borrower or a ...

What is the difference between Sid and Kim? ›

What is the difference between Scheme Information Document (SID) and Key Information Memorandum (KIM)? SID is the primary scheme-related document issued by the Asset Management Company (AMC). KIM is the abridged version of the SID.

What is the maximum guarantee on segregated funds? ›

Unlike mutual funds, segregated funds provide a significant guarantee and protect between 75% and 100% of your investments!

Are segregated funds expensive? ›

According to Globefund.com, many segregated funds charge a fee (MER) above 4 percent of the total value of the investment every year. Part of that goes to the advisor who sold the fund. In most cases the advisor can also get a fee when the fund is bought or sold.

Is there an age limit for segregated funds? ›

a) If you are under the age of 70 as a new investor, most segregated funds guarantee 75% or 100% of your principal investment over 10 years OR when an investor dies, as long as you are under the age 0f 70.

How much money do you need to open a bank account in the Cayman Islands? ›

What Is the Minimum Investment You Need When Setting Up a Bank Account in the Cayman Islands? Like interest rates, the minimum deposit rules for Cayman Islands bank accounts vary. Residents in the territory will typically need only 80 Cayman Island Dollars (KYD) to open a bank account which is about $100 (USD).

Why have a bank account in the Cayman Islands? ›

Cayman Islands has one the largest and most respected financial sectors and is home to more than 600 banks and 100,000 companies. Because of its tax-free status on incomes, the country is famous as a host of offshore bank accounts.

Why do companies register in the Cayman Islands? ›

One of the benefits of registering a company in Cayman Islands is the tax neutrality environment that it poses, warranting many to associate the place as Cayman Islands Tax Haven. For businesses that choose to register company in Cayman Islands, they stand to gain significant tax benefits.

Who regulates segregated funds in Canada? ›

Although Canadian securities regulation of mutual funds is carried out by each of the twelve separate provincial and territorial securities regulators, the CSA ensure that mutual fund regulation is consistent, and consistently applied, across Canada.

What is the difference between pooled and segregated funds? ›

What's the difference? Segregated investments are owned by you, the investor, directly. Pooled investments are owned jointly by many investors whose money has been “pooled” together.

What is a segregated trust? ›

A trust that has segregated amounts must separately account for the income, deductions, and other items attributable to each segregated amount in the books of account and separately account to each of the beneficiaries of the trust.

How do portfolio companies work? ›

A portfolio company is a term used to describe a company in which investors own equity in a company or buy out a company. The goal of the investor is to increase the value of the portfolio company and earn a return on their initial investment.

Is a portfolio company a subsidiary? ›

More Definitions of Portfolio Company

Portfolio Companies do not include Subsidiaries. Portfolio Company means an entity in which an investment fiduciary has made or considered an investment on behalf of the investment fund.

What is included in a company portfolio? ›

What Is a Company Portfolio?
  • Your company's history and current details about your company, including what your business does, how many employees you have and your locations.
  • Your company's achievements, including any awards it won or local sponsorships.
8 Jun 2018

What is special purpose company SPC? ›

A special purpose company (SPC, 특수목적회사) is a company-type legal entity created to fulfill specific or temporary objectives. SPC is otherwise called special purpose entity (SPE) or, especially in Europe, special purpose vehicle (SPV). SPCs are typically used by companies to isolate the firm from financial risk.

Which country owns SPC? ›

Our Business

SPC is a proud manufacturer of fruit and vegetables, based in the Goulburn Valley Region of Victoria, Australia.

Is SPC owned by China? ›

In 2009, SPC was acquired by China's PetroChina from Keppel Corporation.

Who is the CEO of SPC? ›

ROBERT GILES - CEO of SPC GLOBAL.

What is the purpose of a segregated portfolio company? ›

A Segregated Portfolio Company (SPC) is a company limited by shares. The SPC may create up to ten segregated portfolios for the purpose of segregating the assets and liabilities of the company, held within or on behalf of a segregated portfolio from other assets and liabilities of the company.

How do segregated portfolio Companies Work? ›

A segregated portfolio company (or SPC), sometimes referred to as a protected cell company, is a company which segregates the assets and liabilities of different classes (or sometimes series) of shares from each other and from the general assets of the SPC.

What is segregated portfolio? ›

The downgrade of debt or money market instrument to 'below investment grade' or subsequent downgrades from 'below investment grades'.

What is segregated mutual fund? ›

A segregated fund policy is similar – like mutual funds, there's a pooling of investments. But unlike mutual funds, a segregated fund policy includes insurance guarantees that can protect much or even all your original investment.

What is segregated mandate? ›

A segregated mandate is a fund run exclusively for a client, typically an institution (such as SJP or True Potential). But asset managers typically earn far lower fees on segregated mandates than for pooled funds. At NextWealth we call this 'wealth managers as manufacturers'.

Is SPC a private company? ›

SPC was incorporated as a public listed company in 1912, and Ardmona opened in 1921. SPC Ardmona was bought by Coca-Cola Amatil in 2005 for A$520 million. It sold it in 2019 for A$40 million to Shepparton Partners Collective.

What is a Cayman exempted company? ›

A Cayman Islands exempted company limited by shares is a flexible and versatile vehicle that is quick to set up and easy to maintain. As such, exempted companies formed under the Companies Act (as amended, the Companies Act) are the most commonly used company for offshore vehicles in the Cayman Islands.

What are the benefits of segregated funds? ›

Savings and Retirement
  • Additional protection for your investments. A segregated fund policy includes both a maturity guarantee and a death benefit guarantee. ...
  • Growth potential and flexibility. ...
  • Potential for creditor protection. ...
  • Protect your privacy. ...
  • An efficient way to do an estate transfer.

Are segregated funds good? ›

The pros of segregated funds are that they often have principal investment guarantees up to 100%, have the option to lock your gains, offer creditor protection, and come with a death benefit. On the flipside, the cons are that they often have higher fees, lower return, and aren't very liquid.

Who sells segregated? ›

3. Who can sell segregated funds? Only life insurance representatives (financial security advisors) are authorized by the AMF to sell segregated funds.

What is a disadvantage of segregated funds? ›

3 disadvantages of segregated funds

Higher fees – Segregated funds usually have higher management expense ratios (MERs) than mutual funds. This is to cover the cost of the insurance features. Penalties for early withdrawals – You may have to pay a penalty if you cash out your investment before the maturity date.

How does a segregated fund work? ›

Commonly found in Canada, segregated funds are private contracts between insurers and customers that must be held until contract maturity. Because these products offer better guarantees than traditional insurance or annuity products, they do come with higher fees and expenses.

Can segregated funds be transferred? ›

First, segregated funds and mutual funds are two separate types of investment products, not accounts. Because of this, there is no way to directly transfer funds from one to the other without selling the investment first.

Which country owns SPC? ›

Our Business

SPC is a proud manufacturer of fruit and vegetables, based in the Goulburn Valley Region of Victoria, Australia.

Is SPC owned by China? ›

In 2009, SPC was acquired by China's PetroChina from Keppel Corporation.

Who is the CEO of SPC? ›

ROBERT GILES - CEO of SPC GLOBAL.

How much money do you need to open a bank account in the Cayman Islands? ›

What Is the Minimum Investment You Need When Setting Up a Bank Account in the Cayman Islands? Like interest rates, the minimum deposit rules for Cayman Islands bank accounts vary. Residents in the territory will typically need only 80 Cayman Island Dollars (KYD) to open a bank account which is about $100 (USD).

What does it mean to be an exempted company? ›

An exempted company is a body corporate which has separate legal personality capable of exercising all the functions of a natural person of full capacity irrespective of any question of corporate benefit, and having perpetual succession.

Why have a bank account in the Cayman Islands? ›

Cayman Islands has one the largest and most respected financial sectors and is home to more than 600 banks and 100,000 companies. Because of its tax-free status on incomes, the country is famous as a host of offshore bank accounts.

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