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THE PROTECTED CELL COMPANY PCC

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The PCC Cell is used to purchase the mortgage cash flows ... to cover it's risk. Local Insurance company buys reinsurance from. a cell of the PCC ... – PowerPoint PPT presentation

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Title: THE PROTECTED CELL COMPANY PCC


1
  • THE PROTECTED CELL COMPANY (PCC)
  • (Incorporated in Guernsey
  • and
  • SEGREGATED ACCOUNT COMPANY (SAC)
  • (Incorporated in Bermuda

2
Disclaimer
  • The presentation has been written as an
    informational aide to discuss with clients.
  • The examples contained are simplified taking no
    account of tax, expenses and omit required third
    parties such as Swap Dealers to the transaction.
  • Each client will have different needs and
    circumstances. Different legal, accounting and
    regulatory issues will affect their solutions. As
    such a full report will be necessary after due
    consideration of the individual clients
    requirements.
  • The presentation should not be used other than in
    conjunction with a report from ARM
  • In this presentation the word cell is used to
    denote either a cell in a PCC or an account in a
    SAC and the word PCC is used to denote either a
    PCC or SAC.

3
PCC a solution for smaller Companies
  • To establish a Captive usually requires a
    substantial premium and capital to justify the
    regulatory, legal and operational expenses
  • For smaller companies the costs are inherently
    prohibitive compared to the probable benefits.
  • Nevertheless, many smaller companies wish to have
    the advantages of a captive and not be trapped
    into the traditional Insurance market.
  • A solution is to take a cell of an existing PCC
  • Each cells assets and liabilities are segregated
  • The Legislation has been written to ensure that
    no cross contamination of risks occurs
  • Thus if one cell becomes insolvent it cannot
    claim on the assets of another cell.

4
A PCC explained
  • It is a single legal entity
  • It is a company made of individual protected
    cells or segregated accounts ( hereinafter
  • cells).
  • It has a core capital.
  • Each cell will have its own additional
    capital.
  • The assets of one cell are statutorily
    protected from the creditors of another.
  • Creditors of one cell can only attach assets
    of that account and have no recourse to the
    core
  • (Guernsey PCC option to allow recourse).
  • The Directors have a duty to inform any party
    that contracts with a cell that is doing business
  • with that particular cell.
  • Its major advantage over the captive is that
    it is a simplified and more cost effective way of
  • entering the alternative risk market.
  • Each Cell has a separate series of redeemable
    preference shares to enable dividends to be
  • declared on its underwriting performance.

5
The Protected Cell Company (PCC)
Contingent Payment
A customer enacts an Insurance policy with a
Local Insurer or, where possible, directly with a
cell of the PCC The PCC is financed as per a
normal Insurer under the PCCs Jurisdiction
rules Each cell is additionally financed usually
by preference shares to enable dividends to be
paid. Additional finance could be in the form of
subordinated loans or other assets Each Cell
assets and liabilities are insulated from any
other Cell
Customer
Fronting Insurer
Premium
Cell
Cell
Cell
Cell
Cell
PCC
Retrocessionaire(s)
Cell
Cell
Cell
Equity
Dividends
PCC Owner
6
Cell Types
The PCC concept is highly innovative and while
the following illustrates a large cross section
of what is possible, there are many more
possibilities. ARM is able to work with clients
to analyse their needs and construct a solution
appropriate to their circumstances.
  • Life Insurance
  • Non-Life Insurance
  • Reinsurance
  • Pensions
  • Investments
  • Catastrophe Bonds
  • Securitisations
  • Transformer Contracts
  • Collateralised Debt Obligations

Examples are attached of the final four types of
insurance.
7
PCC for Catastrophe Bonds
  • Catastrophe Bonds are High Risk Insurance
    contracts
  • The example shown is the risk of a hurricane
    devastating property
  • The Insured enacts a contract with the cell
    of the PCC at a
  • premium of say 50m
  • The coverage is 500m
  • The PCC turns to the Capital Markets to
    obtain funding
  • The Capital Market are much larger than the
    Reinsurance market.
  • If there is no claim the capital markets
    receive the premium plus the
  • interest plus the returned capital
  • In the event of a claim the Insured receives
    the coverage of 500m
  • and the capital markets lose their capital

Insured
Premium 50m


































Claim
PCC Cell
Capital/ Premium/ Interest
Capital 500m
Capital Markets
8
PCC and Securitisation
  • Securitisation occurs when the cash flows on
    an asset, in
  • this case, mortgage payments, are
    repackaged and sold to
  • third parties
  • Securitisation enables a company to improve
    its capital
  • position, possibly allowing additional
    investment, without
  • totally divesting of the business
  • The PCC Cell is used to purchase the mortgage
    cash flows
  • Investors fund the PCC to obtain an
    alternative investment
  • class with a potential higher yield
  • The diagram is highly simplified as there
    will be additional
  • parties to the transaction such as, a credit
    enhancing agency
  • and an Investment Bank to establish
    securities to distribute
  • to Investors.
  • Other assets suitable for securitisation
    include almost all

Mortgage payers
Mortgage repayments
Loans
Mortgage Lender
Purchase price
Cash flows
PCC CELL
Interest and Principal Payments
Investment
Investors
9
PCC as Transformer
  • A cell of the PCC is able to transact
    business
  • under both Insurance and Bank documentation
  • A cell therefore becomes an ideal candidate
    to
  • transform Bank products into Insurance
    products
  • and vice versa
  • The example transforms an Insurance contract
  • into a derivative.
  • Company is in a jurisdiction that doesnt
    permit
  • derivatives
  • Company buys Insurance from a local company
  • to cover its risk
  • Local Insurance company buys reinsurance from
  • a cell of the PCC

Company
Local Insurer
Premiums
Contingent Payments
Insurance Documentation
PCC CELL
Premiums
Contingent Payments
Bank Documentation
Bank/ Derivative
10
PCC and Collateral Debt Obligations
  • In a similar fashion to securitisations
    structured
  • finance can be used in a PCC to present
    Investors with
  • an alternative asset class
  • Collateral Debt Obligations (CDOs) structures
    bundle
  • credit risk and issue securities to Investors

Obligors
Payments
Credit
Bank
Securities are issued to Investors normally
tranched according to risk AAA has the lowest
risk and lowest risk and lowest interest
rate Equity is unrated and has the highest risk
and hence the highest interest rate
Purchase price
AAA
Cash flows
AA
PCC Cell
A
BBB
BB
Investment
Interest Payments
Equity unrated
Investors
Similar structures exist for Collateralised Loan
Obligations (CLOs) And Collateralised Bond
Obligations (CBOs)
11
Contact Information
Charles Scott Alternative Risk Management
Limited Third Floor, Dixcart House Sir William
Place St Peter Port Guernsey GY1 1GX Tel 44
(0)1481 714704 Fax 44 (0)1481 714319 Email
cscott_at_arm.co.gg www.arm.co.gg
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