Segregated Accounts Companies

1
Segregated Accounts Companies

• The Real Benefits and the Considerations Required
  in Structuring an SAC Program

2
Introduction - Speakers

• Scott Gemmell, VP Marsh Captive Solutions
• D. Bradfield Adderley, Partner Appleby
• James S. Gamble, VP Asurion
• Catherine M. Sheridan- Moore, Partner KPMG

3
Introduction - Topic

• Segregated Account Companies - The Real Benefits
  and the Considerations Required in Structuring an
  SAC Program
• "Develop insight into the various uses of
  Segregated Account Companies with real world
  examples of the benefits they can deliver. This
  session will also outline the potential
  difficulties in establishing a segregated account
  company and discusses a number of areas that
  require careful consideration.
• This session will cover not only business
  considerations but also identify legal pitfalls,
  accounting and tax related issues."

4
Discussion Outline

• SAC Legislation, A Legal Overview
• Various Uses and Case Examples
• Benefits
• Considerations/Pitfalls
• Business Considerations
• Legal Pitfalls and Discussion
• Accounting and Tax issues
• Questions and Answers

5
Legal Overview

• Who Qualifies
• Effect of statutory division
• History
• Private Act
• Fees

6
Summary of the Act

• Establishes system of public voluntary
  registration
• Creates statutory regime governing record keeping
• Incorporates principles of U.S. business trust
  legislation
• Enables combinations of client relationships

7
Requirements

• No restrictions on application by insurance
  companies
• Segregated accounts are not legal persons
• Must appoint segregated account representative in
  Bermuda
• Private Act companies may register

8
Requirements of the Governing Instrument

• Written format
• Identifies account owners
• Specifies rights

9
Crucial Aspects

• Attributes portions of an asset / liability
• Any type of securities
• Sets conditions for dividends or distributions
• Permits inter account transactions

10
Crucial Aspects Cont/d.

• Record keeping
• Operative law
• The trust nature of a segregated account
• Management of accounts
• Empowers the Minister

11
Uses of a Segregated Account Captive

• Separation of distinct programs or risks
• By product or program
• Healthcare, separate VAP or individual units
• Separate program years
• Special purpose vehicles (SPVs)
• Sponsorship of rent-a-captive capabilities
• Other

12
Example of Structure
Sponsor
Preferred share or participation agreement
100 Common shares
Segregated Account Captive
Cell A
Cell C
Cell B
Cell income (loss)
User B
User A
User C
13
Examples of Uses
Segregated Account Captive

• Other factors
• Same owner can use one or more cells
• One cell may transact with another or the core
• RAC paying client

Cell A
Cell C
Cell B
Program B
Program A
Program C
Hospital B
Hospital A
VAPs
2005 policies
2004 policies
2006 policies
14
Benefits

• Security for fronting insurers
• Safely isolated from other business
• Easy to create additional segregated accounts (vs
  new captive)
• Easy to close segregated accounts once all
  liabilities have been closed out
• Access to fully funded Direction(s)

15
Considerations/ Pitfalls

• Business Considerations
• Many insurers are unfamiliar with
  structure/wordings requirements
• Untested by insolvency/ litigation
• Each cell requires its own banking and investment
  accounts
• Board actions required for dividending
• Sponsors in complete control of organization

16
Legal Pitfalls / Discussion

• Governing law
• Disclosure
• Contracting Party
• Dividends

17
Legal Pitfalls / Discussion Cont/d.

• Is core capital at risk?
• Is there company-wide or account-by-account
  governance?
• Is commingling of investments or other assets
  permitted?
• Can accounts contract with each other?

18
Considerations/ Pitfalls

• Tax and Accounting Issues
• Will auditors perform a single audit or an
  account-by-account audit?
• risk transfer criteria
• Self insured risks
• Fully funded risks
• Section 56 Direction, deposit accounting
• U.S. 953(d) election will be made for all or none
  of the cells at the Company level