CSI International Underwriting (Cayman) Ltd.
There has been an increasing demand from Cayman captives to place their assets with on island investment managers. JS de Jager of CSI International Underwriting (Cayman) and Scott Elphinstone of Five Continents Financial get down to brass tacks...
Why should Cayman Islands captives and those domiciled elsewhere turn to Cayman to invest surplus premiums and/or capital?
I think the main reason is industry experience. With captive insurance being a large industry in the Cayman Islands, local investment managers have extensive experience of dealing with captive portfolios. They understand the local regulatory requirements, the considerations when the portfolio is pledged against credit facilities and the often complex tax rules that captives operate under. Cayman’s investment managers use this knowledge to manage portfolios to be compliant with all of these essential requirements. For some Cayman captives, hiring a local investment manager is an important step to establishing the required ‘mind and management’ in the Cayman Islands rather than another country that might seek tax revenue from that captive.
How do investment requirements for those domiciled in Cayman differ from those elsewhere?
There is considerable flexibility in the Cayman regulations on captive investment portfolios compared to most onshore regulatory environments. The investments that can and cannot be held by a captive are generally not defined in the law or regulations. Investment managers often work with captive managers and their clients to assist in the preparation of investment policies that are presented to the Cayman Islands Monetary Authority (CIMA) for their approval.
How are captive investments taxed in Cayman?
There are no taxes imposed by Cayman law on investments held by captive insurance companies. However, many captives located in Cayman have very complex tax arrangements with the countries from which their premiums are paid.
This often results in investment income being taxable in that foreign country. It is critically important that investment managers fully understand the tax situation of their client and act to minimise the impact of those taxes on the portfolio.
What are the most attractive investment options for captives at the moment?
A traditional mix of bonds and equities remain the most attractive investment strategy. With the US Federal Reserve adopting a zero interest rate policy, investments in bonds are not as attractive as in the past. Investing in common equities has provided the majority of return in captive portfolios for the last few years and this continues to look attractive in a low interest rate environment.
We feel that a captive portfolio should continue to hold liquid, short duration, high quality, fixed income instruments to reduce portfolio risk and provide a ready source of cash to make claim payments.
The equity portfolio should also be globally diversified and contain the shares of very large global companies to reduce risk and enhance liquidity.
What do captives need to bear in mind when taking these routes?
Equity prices are much more volatile than bonds so, over the short term, the portfolio could decline materially. Over the long term, which is where captive portfolios should be focused, the volatility of annualised returns on equities prices tend to be lower.
Even portfolios exposed to equities during the financial crisis have recovered very well as long as they stayed invested.
Insurance-linked securities are gaining traction around the globe—what is attractive about these instruments?
They are an attractive way for risk capital to enter the insurance market. Investors can avoid the cost and complexities of setting up their own reinsurance company or captive insurance company and enter into a market that has an attractive return on capital, in a low interest rate environment.
How are some of the more traditional Cayman Islands investment options faring at the moment, some five or six years after the financial crisis?
Both traditional equity and fixed income investments have done very well in the post-crisis period as the US Federal Reserve and other central banks have flooded the market with liquidity. Returns well in excess of bank deposits have been easily achievable over this period. In addition to this, taking risk in captive investment portfolios has also been very well rewarded.
