The equity market has taken off. Your insurance captive’s equity portfolio has been making great returns, though you’ve noticed your equity investment allocation has breached your Cayman Islands Monetary Authority (“CIMA”), the captive insurance regulator, approved thresholds.
While this is a good problem to have, it does require action to bring your portfolio back to within approved allocation limits. It also highlights the importance of ongoing monitoring on the part of the captive’s Board of Directors with the assistance of your insurance captive manager.
Rebalancing Your Investment Portfolio
Once you have identified your investment portfolio is no longer within the approved limits, there are a few options to avoid an ongoing breach of your investment policy and the accompanying associated penalties. You can:
Invest
Invest excess funds (perhaps from over-funded operating accounts earning little) into the underweight portion of your portfolio; thus reducing the allocation to the overweight investment and bringing the portfolio back in line with your investment policy.
This has the significant benefit of avoiding triggering a potential taxable event and the associated taxes owed on any realized gains.
Liquidate
Liquidate some of your overweight holdings, bringing your asset allocations back into compliance. The sale will likely be a taxable event.
Ongoing Monitoring
Ongoing monitoring of the investment mix is an important part of the financial statement review process for your captive. While an allocation range may be part of the investment management agreement and some monitoring done by the Investment Manager, the ultimate responsibility rests with the Board.
Further reason to ensure proper Board oversight is the additional risk of relying on an Investment Manager (if there are any investments held outside of the Investment Manager’s control or knowledge). This could be something as basic as a certificate of deposit or fixed deposit held elsewhere, which can be considered as part of the entire captive’s investment allocation.
A breakdown of the investment mix as part of the period financial statement preparation and review is a very useful way to quickly check a captive is operating within its CIMA approved thresholds.
Helpful Updates to the Investment Policy
A captive can become a victim to its own success while breaching its CIMA-approved investment allocation due to temporary market rallies. This situation is something which must be rectified and should be avoided as much as possible.
There are some helpful items that can be included in an investment policy to help minimize breaches and the need for a rebalancing. You can:
Reset Target Allocation
Set a target allocation below the maximum allowable. Targets give some room for temporary strong market performance without the immediate need for rebalancing. For example: You can set a target of 25 percent equity allocation with 30 percent maximum allowable per the Investment Policy.
Allow for Rebalancing
Give a specific period to allow for rebalancing, if there is a temporary excess allocation in any asset class in the investment mix. For example: Consider an investment allocation which allows for no more than two consecutive reporting periods before rebalancing is necessary.
Change Methodology
Consider basing or weighting your investment portfolio allocation methodology on original or amortized cost rather than only market value. This will eliminate the impact of market movements on your approved portfolio allocation, reducing the need for rebalancing.
Work with an Expert
While strong equity performance is a good thing for your investment portfolio, you will need to keep an eye on your insurance captive investment mix to ensure they are within your CIMA approved limits and avoid penalties. This may feel overwhelming, which is why partnering with an experienced insurance captive manager is essential to your success.
It is important to remember that ongoing monitoring is an important part of the duties of a director as well as of the captive manager for any successful captive. At GCM, our experts review your investment mix as part of the financial statement review process and can provide guidance to minimize your risk and ensure ongoing compliance with regulatory standards. Have questions? Reach out to us today!