Guernsey enhanced its Companies Law 25 years ago to create the Protected Cell Company (PCC) – not just a first for the island, but a first in the world. Midshore Consulting Managing Director and Guernsey Finance board member Christopher Jehan discusses how it evolved from a tool for the insurance sector into wider use for the financial services industry.
A PCC consists of a core and one or more cells. The assets and liabilities of each cell are segregated from those of each other cells and, similarly, the assets and liabilities of the core are segregated from those of each of the cells.
Beginnings – The insurance sector
The PCC was originally developed for use by the Guernsey’s insurance sector to enable Guernsey licensed insurance manages to offer cells to third parties as “rent-a-captives”. The core of the PCC is owned and capitalised by the insurance manager while each cell can be offered to a client to write insurance contracts for that client’s benefit. Shares in the cell are issued to that client in order that the client has an economic interest in the cell and can benefit from any profits accruing from the business written. The cell can reinsure its liabilities into the reinsurance market in the same way as any other captive.
The PCC is also often used in insurance transformer transactions whereby the cell writes a derivative contract such as a credit default swap and the liability of the cell under that derivative contract is insured by an insurance company. The transformer provides the insurance company with exposure to a more varied form of investment product (the derivative) but through its traditional business method, the writing of an insurance policy. PCCs are also often used in insurance linked securities transactions and catastrophe bond issues.
Another use of the PCC is in the life sector, whereby each policyholder has their portfolio of assets held by their own cell, segregated from all other cells and ensuring that any claim does not have call on the assets of other cells.
Early adoption by the fund sector
Within a year of the introduction of the PCC, their use had spread from the insurance sector into the investment fund sector. Today the PCC remains in common usage for open-ended funds (over 50% of open-ended umbrella funds are constituted as PCCs) and are also used for a significant number of closed-ended umbrella funds.
For investment funds, the attraction of a PCC is the avoidance of any cross-class contagion if a class or portfolio within an umbrella fund becomes insolvent and if the creditors attempt to enforce judgments against assets within other classes.
As with the insurance sector, the fund sector now has many “rent-a-cell” protected cell companies, whereby a fund manager or administrator owns the core shares in a PCC and allows various investment managers (or promoters) to create a relatively inexpensive fund that they can manage and market.
Wider usage throughout the financial services industry
The usage of the Protected Cell Company, with its legal segregation of assets and liabilities, continued to spread throughout the Guernsey financial services industry. A few examples are:
Housing multiple General Partners – where a number of limited partnerships are launched as funds the general partner for each can be set-up as a separate cell of a Protected Cell Company.
Wealth Protection – the administrator operating the PCC owns a large number of shares in the core of the PCC; each separate client has a small shareholding in their cell, which houses their assets. The clients own 100% of the assets in their cell by being the only shareholder of the cell, however there is little to no risk of the PCC becoming a controlled foreign company or any client being seen as a controlling shareholder of the PCC.
Pension Scheme asset holding – each individual’s pension scheme owns one or more cells of a PCC, which owns the underlying assets on the relevant pension holder’s behalf.
Yacht crew management and payroll – each cell relates to a different yacht; the crew for that yacht are engaged and paid by the relevant cell.
‘Deal-by-deal’ investments – an alternative to a fully managed private equity or real estate investment fund; the investor has the option to invest in each investment as it is identified by the investment advisory team by investing in the relevant cell. This route gives greater transparency on investments and gives investor more flexibility and control over their investments.
Conclusion
Protected Cell Companies have been a competitive product over the past quarter century, their uses are myriad and, as the Guernsey industries (finance and otherwise) continue to diversify we can only guess what future uses the PCC may be put to. This is true not only of the PCC but the subsequently spawned Incorporated Cell Company (ICC).
As with all “products” evolution over time is necessary, and the Guernsey financial services industry has identified a number of improvements that can be made to the PCC, which will shortly be engaging with government to make proposals that will protect the flexibility and versatility of this well-used product. Watch this space!
