A noughties hit


Segregated account companies (SACs), known as protected cell companies in other jurisdictions, have been a feature of Bermuda corporate law since the structure was first pioneered by private act of the Bermuda Parliament in the early 1990s. Although certainly not new, SACs continue to be a useful tool for both captive and commercial insurers. This article aims to reintroduce the concept of SACs by providing a refresher to readers on the structure and the merits of this corporate mechanism.

Although SACs could previously be established by private act, the current SAC regime was introduced by statute in Bermuda in 2000 through the Segregated Accounts Companies Act. Since the introduction of the SAC Act, Bermuda’s SACs have been a popular vehicle in the insurance industry, both as a standalone structure, and via the ‘rent-a-captive’ model. A captive can either be registered as a SAC and set up its own segregated accounts, or use a segregated account of an existing Bermuda provider for a particular business programme, for example, a rent-a-captive.

What is a SAC?

The key concept is that the SAC Act permits a Bermuda company to set up separate accounts, the assets and liabilities of which are statutorily segregated from any other accounts and the general business of the company. This allows an insurer to place certain business, for example, a programme related to political risk in a developing country, in a different account than, say, business related to a worker’s compensation programme in the US. The insurer is, therefore, able to ringfence its insurance business without going through the expense and complexity of setting up a new company.

A traditional company/subsidiary structure would appear as indicated in Figure 1 (see issue 122):

A segregated accounts structure, by contrast, would look like Figure 2 (see issue 122):

The SAC structure was successfully tested in the Bermuda courts in the case of BNY AIS Nominees v New Stream Capital Fund in 2009 known as the Gottex case. As illustrated, the segregated accounts are accounts, and not incorporated entities. A segregated account does not have a separate legal personality like a company. However, the SAC Act does provide that a SAC can enter into contracts, and sue and be sued in respect of a particular segregated account.

To evidence this process, the SAC will execute any contracts on behalf of its segregated accounts. For example, ABC Insurance acting on behalf of Segregated Account number one. Further, in the event of insolvency of a particular segregated account, it is possible for a receiver to be appointed in respect of that segregated account only without affecting the integrity of the rest of the structure.

How to set up a SAC

A party could either: (i) Set up a Bermuda exempted company and register it as a SAC; or (ii) rent a segregated account from an existing Bermuda SAC.

To set up a SAC, the party would need to incorporate a Bermuda exempt company and have a company licensed as an insurer by the Bermuda Monetary Authority (BMA) under the Insurance Act of 1978 and its related regulations. Captive insurers are generally registered as Class 1, 2 or 3 for general business, or Class A or B for long-term business. These classes of insurers are considered non-commercial, and are consequently exempt from the enhanced capital and solvency requirements applicable to Bermuda’s commercial insurers under Bermuda’s Solvency II equivalence regime.

The captive will need to hold an insurance licence, and comply with the ongoing requirements applicable to its relevant licence classification. This requires holding the minimum statutory capital in the general account, and collateral related to the business programmes in each segregated account. Only one licence is required even if the company has multiple segregated accounts.

The SAC is also required to appoint and maintain a segregated account representative in Bermuda who must be approved by the finance minister. In the case of an insurer registered under the SAC Act, this is typically the principal representative who is already appointed under the Insurance Act.

Rather than setting up a SAC, a party may elect to use an existing SAC structure. This rent-a-captive approach may be advantageous as it is relatively quick and easy to implement and the account owner will only pay its pro rata share of the operating expenses of the SAC. The account owner, however, will generally not have control over the SAC, although it may have authority to direct the operations of the segregated account if set out in the governing instrument, for example, through an advisory committee.

Regardless of whether a separate SAC or a rent-a-captive structure is used, the ownership of the segregated account will need to be documented. The SAC has considerable flexibility in how the ownership of segregated accounts may be structured. The parties can craft documents that are suitable to their needs and the only essential requirements are that the governing instrument should be subject to Bermuda law and legal process.

The relationship between the account owners of a segregated account, the segregated account and the company can be: (i) contractual only; or (ii) by way of ownership of shares linked to a segregated account. In both cases, it will be governed by a governing instrument.

In the case of a contractual arrangement, this relationship will be documented by a participation agreement. In the case of a share arrangement, this will be evidenced in the bye-laws of the company, or a shareholders’ agreement, or both.

A contractual participation agreement is generally the most straightforward structure, although there may be tax reasons as to why a share structure is preferred.

In the contractual structure the account owners enter into a participation agreement with the SAC and the segregated account, as illustrated in Figure 3 (see issue 122).

For share arrangements, generally preference shares of the SAC are issued, which are then linked exclusively to the segregated account, as shown in Figure 4 (see issue 122).

The SAC Act provides significant flexibility in how the segregated accounts are structured. The parties are also free to draft bespoke terms on how profits and expenses are allocated, how business is written, and generally how the business of each account is managed.

SACs have also been used to house fully collateralised special purpose business, and to separate active and run-off programmes.

Consequently, SACs continue to be a useful tool facilitating innovation for captive and commercial insurers.

The BMA is also considering adding a further structure: incorporated segregated account companies (ISACs). ISACs will facilitate segregation through separate incorporated segregated accounts.

ISACs would have separate legal personality, but are expected to have a simplified incorporate and insurance regulatory process with the BMA.

ISACs and the success of the SAC structure demonstrate Bermuda’s continued commitment to excellence and innovation in the captive and commercial insurance space.
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