THE PROTECTED CELL COMPANY PCC

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

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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.

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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.

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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.

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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
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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.
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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
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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
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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
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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)
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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 [phone] Email
cscott_at_arm.co.gg www.arm.co.gg