CELL AND SERIES GUIDE 2016 | GF&M STATE OF THE SERIES LLC CAPTIVE

Jeffrey Simpson, Andrew Rennick and Daniel Fitzgerald of Gordon, Fournaris & Mammarella survey the series landscape and review the different approaches that domiciles and practitioners are taking

ince Delaware licensed the first purposes of contracting, suing and being certificate of authority. Other states license series LLC captive insurance sued. the core as a protected cell captive and per- company in 2010, series have mit the core to form series that are licensed been among the fastest growing Series formation as protected cells. By complying with the and most popular forms of cap- To form a series, the core enters into an segregation of assets, liabilities, profits Stives, with hundreds formed across several operating agreement, often called a “Series and losses required for series under the domiciles. Sponsors and users of series LLC Agreement”, with the series’ owners. While respective LLC acts, the individual series structures are increasingly attracted to the a few states require a public filing to form satisfy the protected cell statutes’ require- flexibility, cost savings and administrative a series, most states where series LLC cap- ments regarding separation of assets and efficiency. In response to the demand for tives are popular do not. liabilities. The Series Agreement between series structures, states have taken action. the series’ owner and the core satisfies the Some states have interpreted their stat- protected cell statutes’ requirement for a utes to allow the licensing of series while “The last six years have participant contract. In this way, the pro- others have amended their statutes to tected cell regulatory regime is mapped expressly permit the licensing of series. given practitioners and onto a series LLC structure. Finally, Del- Delaware updated its captive insurance aware adopted a new method last year statute in 2015 to formalise the licensing, regulators comfort and now recognises an SCIC as a type of taxation, reporting and governance of captive insurer, allowing an SCIC to file what it now calls a “series captive insur- that series captive its own application and obtain its own ance company” (SCIC). And this year, certificate of authority. North Carolina, a state whose LLC act structures actually work does not allow for series, amended its Operating a series captive statute to expressly allow licens- as intended. Over that The typical series structure is established ing of entities formed in other states time, the use of series so that the core serves as an administra- so that a foreign series LLC could be tive centre and the insurance business licensed in North Carolina as a special has increased while is transacted by the series. Occasion- purpose captive. ally, however, the core serves as a direct regulation has been writer and reinsures to its series. What is a series? While very similar to protected cells, refined” Cash flow series differ in that they are typically When we first started forming series more than mere accounting conven- structures, the core usually served as a tions. Several states’ LLC acts permit LLCs Licensing a series common paymaster for the structure, pro- to designate series of owners, managers, or States vary in their approaches to licensing curing service providers for the series and assets and liabilities, which are segregated a series to transact business as a captive. assessing the series by charging access fees from each other and from the LLC gener- Some states license the core as a special and passing through costs. However, since ally (core). The authorising statutes usually purpose captive and grant individual series the core is regulated as a captive insurer, recognise series as separate persons for supplemental licences under the core’s many captive managers and sponsors have 8 Cell and Series Guide 2016 captivereview.com GF&M | CELL AND SERIES GUIDE 2016 found it to be less burdensome to address definition of captive insurance company series fees and expenses through captive now includes SCICs, if the SCIC is man- management agreements. Treating the aged by a board of managers, an annual core more as the “hub in the wheel” and meeting in Delaware is required, and each Andrew Rennick less as an active administrative and profit SCIC must adopt and comply with a con- centre results in fewer transactions and flict of interest policy. simpler financial statements, and enables With respect to reporting, series may the sponsors to distribute fee income with- participate in a consolidated audit of the Andrew Rennick is an associate at the Wilmington out needing regulatory approval. series LLC provided that the financial law firm of Gordon, Fournaris & Mammarella, P.A. condition of each series is accounted for Andrew’s practice focuses on the formation, regula- tion, and governance of captive insurance companies. Account opening challenges separately within the consolidated audit. While the ability to form a series without Most states also permit the filing of a con- a state filing provides ease of formation, solidated annual report with schedules for one drawback is the inability to obtain a each series, except Delaware now requires good standing certificate (GSC) for the that each SCIC file a separate annual series. This may cause difficulties opening report. States are split over statements of Daniel Fitzgerald bank or brokerage accounts in the series’ actuarial opinion (SAO); some require each name. One solution is to form a subsidi- series to submit its own SAO while others ary LLC which is 100% owned by the series permit a consolidated SAO. Daniel Fitzgerald is an associate at the Wilmington and holds the series’ assets. Accounts are Because a series can contract in its own law firm of Gordon, Fournaris & Mammarella, P.A. opened in the subsidiary LLC’s name on name, licensing a series as a captive can Daniel’s practice focuses on the formation, regulation, the strength of its GSC. However, this help address the “intra-company contract- and governance of captive insurance companies, as approach has the effect of separating the ing” challenge faced by unincorporated well as general corporate law and business counsel- ling in connection with issues involving entity forma- series from its assets. Care must be taken to protected cells. Generally, because unin- tion and governance. ensure that the series can access the assets corporated cells do not have authority to held in its subsidiary LLC to pay claims and contract in their own name, they cannot expenses, and the arrangement should be contract with one another. As such, rein- disclosed to the regulators. Another com- surance among related captives or captives mon approach is to produce a secretary’s operated by a single manager can only be certificate, signed by the secretary of the accomplished through another vehicle Jeffrey Simpson core, which delineates the authority and outside of the cell company. However, in includes appropriate exhibits. In our expe- a series structure, series can contract with rience, the secretary’s certificate often one another so that intra-company con- Jeffrey Simpson is a director at the Wilmington satisfies a bank and will avoid the ancillary tracting, including intra-company reinsur- law firm of Gordon, Fournaris & Mammarella. Jeff’s difficulties and costs that arise from form- ance, is possible. practice focuses on the formation, regulation and ing subsidiary LLCs. governance of captive insurance companies. He is a founder and director of the Delaware Captive Insur- Capitalisation ance Association. Administrative and regulatory efficiencies Series have been able to provide capital Series were originally envisioned as a way relief, particularly at the formation stage. of achieving administrative and regula- Most regulators have used their discretion Summary tory efficiencies, and they have delivered to permit minimum capital and surplus The last six years have given practitioners streamlined management and regulatory as low as $25,000, with the caveat that, by and regulators comfort that series captive reporting. Series benefit from versatility the end of the first year, the series must structures actually work as intended. Over in governance models, which may include achieve and maintain a healthy premium that time, the use of series has increased establishing a separate board of managers to surplus ratio. while regulation has been refined. Accord- and officers for the series or delegating ingly, we not only expect continued growth, management authority for the series to Taxes but also more creativity. However, a robust the officers and managers of the core. The Another attractive feature of series is lower series market has increased the cost of reg- governance requirements under captive premium taxes. Almost all states assess ulating series, and the refinement process statutes are generally directed at the core the premium tax to the core, based on has led to the elimination of some regu- and not the individual series, since only the series structure’s aggregate premium. latory efficiencies. While we expect that the core falls within statutory definitions Typically, the core allocates the premium trend to continue in the form of requiring of “captive insurance company”. Accord- tax liability to the various series, as if each separate SAOs and increases in taxes and ingly, series management is delegated were directly subject to the premium tax. fees charged to series, we anticipate that to the core, requirements for a resident In those states, a minimum premium tax is the premium taxes will still be less than manager, an annual meeting in the state, not applied at the series level. In Delaware, those charged to pure captives and that the and a conflict of interest policy for man- however, since 2015, each SCIC is assessed administrative efficiencies, flexibility in agers and officers are satisfied at the core its own premium tax, subject to a $3,500 governance, and capital relief will continue level. In Delaware, because the statutory minimum. to make series an attractive form. 9 Cell and Series Guide 2016 captivereview.com