Our insurance finance practice continues to grow at pace and is now regularly called on by clients to assist on credit facilities being put in place for Cayman licenced insurers. Traditionally the transactions and facilities we worked on in this space leaned heavily towards letter of credit ("LOC") transactions, but with the surge in growth of more complex structures and an increase in the number of Cayman based reinsurers, many of these transactions are now complex multi-jurisdictional deals involving security over Cayman shares, bank accounts and contractual rights.
As the result of the market-leading position of our insurance practice, we have had the chance to advise on many of the more complex deals in the market – which in some cases involve separate lender groups or facilities at various levels of the structure, and as such have had the opportunity to work through a number of common issues that have arisen. While there are numerous points to consider when a regulated insurer enters into a credit facility, this note focuses on our observations on issues and solutions when the collateral package being granted to a lender (or administrative/security agent) involves security over the shares of a Cayman licensed insurer.
One of the most common questions we receive from insurers and lenders is what a share charge actually is and what it means in practice. In short, a share charge is a legal right granted to the lender (as a condition to the advance of a facility) to receive a transfer of the shares should a specified event occur (an "event of default"). While the rights of the lender could be enforced via the courts when we talk about 'taking security' we more commonly mean that the lender could take possession (have the shares transferred) without requiring the input or approval of the courts and so it is common that each Cayman share charge is accompanied by a set of documents commonly referred to as 'self-help remedies'. These documents most commonly include an executed share transfer form, notices to the registered office and acknowledgements by the holder of the share register along with various other documents (including director resignation letters) to allow the lender to simply date and deliver such documents on an event of default to enforce its security and transfer the relevant shares.
Two points are particularly relevant when considering a grant of security like this in the insurance space:
- does the lender have the ability or desire to actually hold the shares if a default occurs. If not, and it still wishes to have the shares secured as collateral, consideration needs to be given to inclusion of the ability to appoint a receiver in the security documents who would handle enforcement and/sale of the shares on the lender's behalf;
- as discussed in further detail in the following paragraphs, owing the regulated nature of Cayman insurers the process of taking security over shares in such entities hits additional timing and enforcement considerations.
Where a licensee pledges its shares as security, CIMA's Regulatory Policy on Criteria for Approving Changes in Ownership and Control requires that prior conditional approval of the transfer of shares to the secured party must be sought before the shares are pledged. The secured party is then pre-approved by CIMA as a potential 100% owner of the licensee to enable it to enforce its security immediately in a default scenario by way of notification to CIMA and without needing to apply and seek regulatory approval from CIMA at such time which could delay the enforcement of their rights. The timing for obtaining the approval is 4-6 weeks and will need to be heard before CIMA's Management Committee which only meets on Tuesdays. The failure of a licensee to seek the pre-approval before charging its shares, or changing its ultimate beneficial owner without CIMA's prior approval, would be a serious breach of the company's licence, and could lead to significant penalties for both the licensee and its directors, highlighting the importance of the need for regulatory approval to be considered and actioned prior to security documentation being entered into.
In terms of the process to obtain the pre-approval, an application is required to be submitted to the Authority by the licensee describing the proposed security and providing a draft copy of the security document. A certified structure chart and corporate documents and financial statements for the secured party and each of its intermediary entities, will also need to be submitted with full CIMA diligence provided for any 10%+ individual owners of the secured party. The diligence process will be simplified if the secured party is wholly owned by an entity listed on a stock exchange recognised by the Authority, with only a certified structure chart and details of the listed status required to be provide to CIMA – an exemption which is applicable to a large majority of lenders.
A secured party should also be on notice that other regulatory approvals may be required upon the enforcement of the charge. For example, whilst the shares in the licensee could be transferred pursuant to the pre-approval obtained from CIMA, the Board could not be cleared out and immediately replaced with a new Board by the secured party – a licensed insurer must have two individual directors at all times and CIMA approval of new appointees to the Board would need to be sought and obtained before they take office on the Board. The secured party should take comfort that they would have control of the licensee and that in time the Board would be able to be reconstituted as desired, but this would not happen instantaneously upon enforcement of the transfer of the shares upon an event of default occurring. CIMA's approval process for new directors is generally 6-8 weeks, so this timing will need to be factored in. Conyers can also offer temporary independent directors who have been previously approved and are well known to CIMA to hold office for an interim period while the proposed new Board is undergoing the approval process.
Having the largest insurance finance practice on Island, Conyers has encountered and has potential solutions for the types of issues which arise when a party is seeking to take security over the shares of a regulated entity. We have considerable insight into what approaches would be agreeable to CIMA, so please reach out to us if you or a client is a lender or a licensee requiring advice on a security issue.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
