Merger, Consolidation and Sale

Cayman Captive ForumTuesday, 2 December 2014

Kevin ButlerConyers Dill &

PearmanManaging DirectorDara Keogh

KPMGPartner

Brett WigginsMetLife

Senior CounselClayton Price

Marsh Management Services CaymanManaging Director

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The Merger

Two large insurance companies merge to form “Global Insurance Company” domiciled in Canada/U.S.

The First, a healthcare insurer based in the US, maintains a captive in Bermuda, and an investment company in Cayman.

The Bermuda captive is a large company in its own right.

The Second, a Canadian insurance company, has a captive in Barbados. The Barbados captive was domiciled there for tax reasons.

Post-merger, Global Insurance Company wants to simplify its corporate structure How should the captives be handled?

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U.S.Healthcare Insurer

Bermuda Captive

Cayman Investment Company

Canadian Healthcare

Insurer

Barbados Captive

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Combined Healthcare Insurer

(H.Q.-U.S.)

BermudaCayman

Investment Company

Barbados Captive

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Should we Consolidate the Captives?

Cost of maintaining two captives

• Taxes, fees and local service provider costs• Burdens of multiple captive (e.g., board meetings,

governance)

Capital Considerations

• How much capital will be tied up?• Bermuda Solvency II/BSCR Requirements?

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Should we Consolidate the Captives?

Regulatory Relationships• Other captives/operations in domicile?• Input from regulators in other domiciles

where captive is doing business?• Observe all discontinuance

requirements -- Important not to “burn bridges” on departure

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Should we Consolidate the Captives?

Obligations to Captive’s Insurers/Lenders/ Financial Counterparties/ Guarantors

• May require consent from Lenders to re-domesticate/merge• Where asset segregation is required, consider protected cell

structure

ConclusionIn most cases, a single captive can accomplish what is needed.

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Client Considerations

Regulator Sophistication• Ability to fully understand captive operations and risks

Regulator Responsiveness• Adequate staffing to ensure timely response

Regulatory Clarity & Stability• Clear regulations that are not frequently changed

Adaptability of Captive Operations• Ease of business plan changes and additions

Reputation of Domicile

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Where to Consolidate?

• Longstanding Captive domicile• CIMA licensed one of the first captives for Harvard in 1975.

• CIMA is an experienced regulator of captives• Currently, there are 761 Class B insurers licensed in Cayman

• Licensing process tailored to each captive’s business needs and operations• Flexibility in setting required capital levels based on risk

factors specific the underlying business• Avoids unnecessary costs associated with purely formulaic

capital requirements

Cayman offers compelling advantages:

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Where to Consolidate?

Sophisticated local service

providers

Tax advantages

Effective regulation

Political stability

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How to Consolidate?

1. Merger

2. Re-Domestication

3. Portfolio Transfer

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How to Consolidate?

Merger• Set up New Cayman Entity (“NewCo”) and Merge other

entities into NewCoo Complete solution o Requires cross border mergero Simplifies corporate structureo Tax and accounting complexities.

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How to Consolidate?

Re-Domestication• Re-domesticate one or both entities to Cayman

o Complete solutiono Well established re-domestication process familiar to

Barbados and Bermuda regulatorso Potentially very quicko Ultimately merge re-domesticated entities

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How to Consolidate?

Portfolio Transfer• Create New Cayman Entity and transfer portfolio to

NewCoo No merger required; a purely contractual solution once

NewCo formed and licensedo Possible regulatory issues regarding winding up of non-

Cayman captives o Potentially incomplete solution. Residual liabilities? (e.g.,

liability inadvertently left with former captive)o a portfolio transfer may require agreement from third

parties

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Can the other Captives be sold?

Limited Market for Captive Sales

Even if bid, price not likely to be attractive

Captive usually party to Affiliated

Agreements

Seller may be concerned with

transferring contracts prepared between

affiliates to an unaffiliated party

Portfolio Transfer to Third

PartyPossible, but likely time

consuming

Third Party may not accept complete portfolio, leaving

captive with business to administer

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Solution

Re-domesticate Bermuda/Barbados

Entity to Cayman and merge

Barbados/Bermuda Entity with Cayman Entity

upon re-domestication

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Doing Business in Cayman

Regulatory Requirements

Annual Meeting/ Corporate

Governance Requirements

Cooperation/ Coordination

between CIMA and other regulators

Accounting Requirements

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Accounting Considerations

US GAAP - business combinations ASC 805 – acquisition method.

Even under a merger, an acquirer and an acquiree will need to be identified for US GAAP reporting.

The other important factor is the acquisition date.

Appropriate accounting treatment.

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The Future in Cayman

Pending Legislation and Regulatory Initiatives

• Portfolio Insurance Company (“PIC”) legislation

• Class B (iv) regulations

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