Segregated Portfolio Companies (SPC) legislation was introduced in the Cayman Islands in 1998. The SPC structure has been popular since its introduction, as it provides the ease of administration of a single company with the legal segregation of assets and liabilities for individual participants. In September 2000, 25 SPCs had been formed in Cayman with 60 cells, making it one of the world's leading jurisdictions for this type of business.

Companies that undertake only the business of a Restricted or Unrestricted Class B insurer may apply to be registered as SPCs. A Class B licence is one which permits the holder to carry on insurance business other than domestic business relating to the Cayman Islands.

An SPC is a single legal entity, but the assets and liabilities held within or on behalf of one segregated portfolio are identified and maintained separately from the assets and liabilities of other segregated portfolios and the general assets of the company.

Shares may be issued in respect of a particular segregated portfolio, the proceeds of which are included in the assets of the segregated portfolio and which carry the right to distributions from the segregated portfolio.

Alternatively, segregated portfolios may be formed by contractual arrangements, with participants having a contractual right to receive distributions from the relevant segregated portfolio.

Segregation

The assets of an SPC are either segregated portfolio assets or general assets, i.e. those not held on behalf of a specific segregated portfolio. It is the duty of the directors to segregate portfolio assets from general assets and from the assets of other segregated portfolios. Segregated portfolio assets are only available to meet the liabilities of creditors of the company in respect of that segregated portfolio and are absolutely protected against the claims of creditors upon the general assets of the company or other segregated portfolios of the company.

To the extent that the assets of a segregated portfolio company are insufficient to meet the claims of creditors, the creditors of a segregated portfolio have recourse to the general assets of the company - but only to the extent that they exceed the minimum capital requirements for regulatory purposes. This ensures that other segregated portfolios are not prejudiced and may continue in business.

Directors' responsibilities

The company acts on behalf of the individual segregated portfolios and must indicate the basis on which it is acting. If the company fails to indicate the basis on which it is acting, the directors of the company incur personal liability for the liabilities of the company and the relevant segregated portfolio in relation to the matter in question.

Unless the directors are fraudulent, reckless or negligent, or they have acted in bad faith, they have a right of indemnity against the assets of the relevant segregated portfolio. In addition, a director may be relieved of liability by the court where he or she was not aware of the circumstances giving rise to the liability or expressly objected and exercised their rights as a director to object to the matter in question.

General provisions

All other provisions applicable to Cayman Islands insurance and ‘exempted' companies apply. The Cayman Islands Monetary Authority (CIMA) has indicated that it is willing to discuss proposals in advance of a formal application to allow a mutually acceptable structure to be agreed.

CIMA treats each segregated portfolio as a different company and, as such, a separate business plan and financial projections must be submitted for each individual cell. Minimum capitalisation is US$120,000 where the company will be carrying on “general business” and US$240,000 where it will be carrying on “life and annuity business”.

Uses of an SPC

Among the uses to which SPCs can be put most efficiently are:

  • rent-a-captive;

  • the firewalling of different risks from a single parent;

  • composites;

  • special purpose vehicles (SPVs), separating insurance-linked securities;

  • agency-owned captives, offering agent participation in their own business;

  • life assurance, legally separating the assets of life, pension and individual policyholder funds; and

  • reinsurance, such as finite reinsurance contracts.

    Freelance journalist Alison Cranbourne wishes to thank the Cayman Islands Monetary Authority for its assistance in the preparation of this article.