Fitch Publishes Special Report on Protected Cell Insurance Captives

Fitch Ratings believes the legal separation of the protected cells, the credit profile of the protected cell sponsor and the credit profile of the protected cell company are important considerations when analyzing a captive insurer organized as a protected cell. Accessibility, if any, to the assets in the general account is a potential credit positive. A protected cell company is an insurer that consists of a general account, or core, and one or more protected cells. A protected cell company and its protected cells are a single legal entity, though the individual protected cells are designed to be segregated from each other in the event of a protected cell's insolvency.

Cell company legislation has been enacted in several jurisdictions throughout the world, including 10 U.S. states. Clearly the legislative intent is that the assets of each cell are segregated and not available to satisfy the creditors of another cell in the event of that second cell's insolvency. However, in most jurisdictions the cells are not organized as separate legal entities. Further, there is not a substantial history of these structures being successfully defended, or even challenged, in court. This introduces uncertainty into the rating process for protected cells.

"It may be helpful to borrow insight from structured finance," said Don Thorpe, senior director of the Insurance group at Fitch, "In structured finance, it is common to obtain legal opinions regarding the enforceability of contracts and the nonconsolidation of the transaction parties in the event of one transaction party's insolvency. This is often referred to as bankruptcy remoteness."

Fitch also believes the financial strength of both the captive sponsor and the entity that sponsors the protected cell company could affect the credit profile of the individual protected cell. This will depend on the degree of linkage between the entities and structural mitigants, if any. Once again, Fitch believes there are analogies that can be drawn between protected cell companies and structured finance.

Some protected cell credit profiles may benefit from access to the assets of the protected cell company's general account. However, this will require a thorough analysis of the applicable regulations, and agreements between the protected cells and the protected cell companies, if any. Thus, this determination would rely heavily on the individual circumstances.