Often a merger between Fortune 500 companies results in a removal from the Bermuda Register of Insurers, as usually each merging company has its own Bermuda captive, one of which becomes redundant. Lisa Marshall discusses some general regulatory aspects involved in eliminating the surplus Bermuda captive.
While various options are available, there are two sets of Bermuda regulations that need to be borne in mind when deliberating a course of action: (1) as a company, the captive is subject to the Bermuda Companies Act 1981 and (2) as an insurer (the term includes reinsurer), it is subject to the Bermuda Insurance Act 1978 and the related regulations. The Companies Act places duties on the captive's directors, which should not be forgotten when considering the option selected by the parent company. Also, the option selected may impact on the captive's compliance with the Insurance Act, for example, the minimum solvency margin. Changes in certain details of the captive, such as principal office, are reportable events under the Insurance Act. Finally, there are restrictions under both sets of regulations on removal of capital and surplus.
Even where permissions are sought technically from the minister of finance, in practice, the principal regulator under both sets of regulations is the registrar of companies. For the options discussed below, the common and encouraged practice for captives and other insurers is not only to inform the registrar, but also to seek his approval or comment, even if there is no technical or legal requirement to do so. Current financial status, projected financials, changes in the business plan and the nature of insurance licence are some issues for the registrar when considering the application. Further, the registrar may require the proposal to be reviewed by the insurers admissions committee, a subcommittee of the insurance advisory committee, a government board set up under the Insurance Act.It should be noted that, while regulatory approval may not be required, it is common practice to seek “approval” from the Bermuda Monetary Authority and the registrar for any proposed merger or other transaction changing the indirect ownership of the captive.These are some options; often a combination of them is employed:
Commencement of run-off is a reportable event under the Insurance Act. Usually the registrar will endorse the captive's insurance licence with the following: “The captive shall not, without obtaining the prior written approval of the minister of finance, effect any contracts of insurance or reinsurance.”. Compliance with the Insurance Act is still essential and continued compliance with the mandatory minimum solvency margin may require a capital injection.
2 Sale or transfer of shares
A change in direct ownership must have the prior approval of the Bermuda Monetary Authority and the registrar. Key information submitted must include the proposed transferee (purchaser), any planned change in business and the steps to be taken to deal with the existing business of the captive. If the sale is part of a run-off scheme, then, in addition to requiring the reserves to be actuarially reviewed, the registrar may require a change in the class of insurance licence.
3 Sale or transfer of the portfolio leading to liquidation
The registrar will want information on the purchaser or transferee. As a matter of contract law, all contract parties (insureds and reinsurers) need to agree to their contracts being transferred by the captive to its purchaser or transferee.
Comments under 3 above generally are applicable here. The liabilities effectively go back to the parent company. Since neither the Companies Act nor the Insurance Act prescribes contractual provisions, the parties are free to conclude the terms of the commutation.
The Companies Act now permits (subject to complying with conditions) amalgamations not only among one or more Bermuda companies but also among Bermuda and foreign companies. The resulting amalgamated company can be either a Bermuda company or a company located in the jurisdiction of the other amalgamating company. Amalgamating two or more affiliated Bermuda captives is generally a straightforward matter.
The Companies Act permits (subject to complying with conditions) a foreign company to become a Bermuda company and the reverse. In the case of a Bermuda captive relocating to a foreign jurisdiction, the captive's obligations must be recognised under the law of that foreign jurisdiction.
For a solvent captive, the Companies Act allows a “members' voluntary liquidation” under which the shareholders (members) of the captive appoint the liquidator. However, the captive must be solvent and able to pay fully all debts within the first 12 months of its liquidation proceedings. Usually the insurance obligations are dealt with prior to starting the liquidation (for example, by commutation), and the member's voluntary liquidation can be completed within eight weeks.As a final note, there should be no reluctance to discuss tentative plans with the registrar, even if it means a possible removal from the Bermuda register. The registrar's policy is to work with the captive owner in arriving at a solution.
Lisa J. Marshall is a partner in Conyers Dill & Pearman. Tel: +1 441 295 1422; Fax: +1 441 292 4720; e-mail: email@example.com; web: http://www.cdp.bm