ACT NO, 7025



BILL NO. 27-0203

TWENTY-SEVENTH LEGISLATURE OF THE VIRGIN ISLANDS



Regular Session



2008



An Act amending Title 22 of the Virgin Islands Code adding chapter 54 to provide for the

establishment, operation and management of Captive Insurance and Reinsurance companies,

special purpose vehicles and protected cells as a means of accessing alternative sources of

capital and achieving the benefits of insurance securitization; to establish the Virgin Islands

as an international insurance center; to promote the growth, development and diversification

of the economy of the Virgin Islands and to issue tax incentives to achieve that end; and

repealing title 22 Virgin Islands Code, chapter 55



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Be it enacted by the Legislature of the Virgin Islands:



SECTION 1. Title 22, of the Virgin Islands Code is amended by adding Chapter

54 and subchapters to read as follows:



“CHAPTER 54

Subchapter One: Captive Insurers and International Reinsurers

§ 1312. Short title



This chapter may be cited as “The Alternative Market and International

Reinsurance Act”.



§ 1313. Interpretation



(a) Any captive insurance company regulated and licensed by the

Superintendent of Alternative Markets under this chapter is exempt from all other

insurance laws of the Virgin Islands, other than those contained in this chapter or

contained in specific references in this chapter.



(b) No provisions of this title, other than those contained or specifically

referred to in this chapter, apply to captive insurance companies.



(c) The Superintendent of Alternative Markets may, by rule, regulation, or

order, exempt special purpose captive insurance companies, on a-case-by-case basis,

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from provisions of this chapter which the Superintendent determines to be inappropriate

given the nature of the risks to be insured.



§ 1314. Definitions

As used in this chapter, unless the context requires otherwise:



Q) “actuary” means a person qualified as an actuary by examination of the

Institute of Actuaries in England or the Faculty of Actuaries in Scotland Casualty

Actuarial Society, or the Society of Actuaries in the United States of American or

Canada,



(2) “advisory board” means an ad hoc board of five members appointed by

and with full discretion of the SAM, possessing knowledge of technical and complex

issues that arise in the Alternative Insurance Business, which the Sam may use evaluating

the request to form or change the business plan of an applicant or licensed company.



(3) “alien captive insurance company” means an insurance company formed

to write insurance business for its parents and affiliates and licensed pursuant to the laws

of an alien jurisdiction ,a non-United States domicile, which imposes statutory or

regulatory standards in a form acceptable to the SAM on companies transacting the

business of insurance in such jurisdiction.



(4) “affiliated company” means a company in the same corporate system as a

parent, an industrial insured, or a member organization by virtue of common ownership,

control, operation, or management.



(5) “affiliated person” means an individual or an entity that is related to a

parent or owner of an entity by virtue of being: a spouse, father, mother, child, brother or

sister of such individual person; or the owner, parent or affiliated company, with respect

to any such person which is an entity.



(6) “alternative market insurer” means a company that may insure or reinsure

the risks of parents, owners, affiliates, and related business, the insurance or reinsurance

which it writes complies with the laws and regulations of the United States domicile for

direct placement of risk, and may directly insure the members of an association which

owns the alternative market insurer.



(7) “auditor” means an individual who sits and successfully passes a financial

examination and is inducted into financial charters and societies and has earned the

designation as a Certified Public Accountant or similarly recognized definition in various

countries and possesses such qualifications in insurance accountancy as the SAM, by

written order, approves, and is in good standing with respect to such qualifications.



(8) “branch business” means any insurance business transacted by a branch

captive insurance company in this Territory.



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(9) “branch captive insurance company” means an alien captive insurance

company licensed by the SAM to transact the business of insurance in this Territory

through a business unit with a principal place of business in this Territory.



(10) “branch operations” means any business operations of a branch captive

insurance company in this Territory.



(11) “broker” means an individual who places insurance risks with insurers and

international reinsurers.



(12) “consolidated debt to total capital ratio” means the ratio of the sum of:



(A) all debts and hybrid capital instruments including, , all borrowings

from banks, all senior debt, all subordinated debts, all trust preferred shares, and

all other hybrid capital instruments that are not included in the determination of

consolidated GAAP net worth issued and outstanding



(B) total capital, consisting of all debts and hybrid capital instruments

as described in subparagraph (A) plus owners’ equity determined in accordance

with GAAP for reporting to the United States Securities and Exchange

Commission.



| (13) “consolidated GAAP net worth” means the consolidated owners’ equity

determined in accordance with GAAP for reporting to the United States Securities and

Exchange Commission.



(14) “contract of insurance” includes any policy, certificate, interim receipt,

renewal receipt, or writing evidencing the contract, whether sealed or not, and a binding

oral agreement.



(15) “department” means the Office of the Commissioner of Insurance.



(16) “domestic insurance company” means a company licensed and domiciled

in the Virgin Islands.



(17) foreign insurer”: An insurer domiciled ina U. S. state.

(18) “GAAP” means generally accepted accounting principles.



(19) “GAP” as used in this chapter means the amount of risk between the

funded or secured loss premium and approved aggregate reinsurance.



(20) “general business” means insurance business that is not long-term

business.



(21) “insurance manager” means a firm that has an employee who is, or has

available to him or her, a person with such insurance knowledge and expertise as the



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SAM may consider necessary for the conduct and management of the insurance business

of any one or more insurers in a competent manner.



(22) “intermediary” means one who places reinsurance with or for an insurance

or reinsurance company.



(23) “international reinsurer” means a company that reinsures an insurance

company, including a domestic Virgin Islands company and may write excess insurance

over both self insured and primary insured risks in any domicile outside of the Virgin

Islands with a plan approved by the SAM.



(24) “long term business” means insurance business involving the making of

contracts of insurance:



(A) on human life or contracts to pay annuities on human life; but

excluding contracts for credit life insurance and term life insurance for a period of

five years or less, other than convertible and renewable term life contracts;



(B) against risks of the persons insured sustaining injury as a result of

an accident or of an accident of a specified class or dying as a result of an

accident of a specified class or becoming incapacitated in consequence of disease

or diseases of a specified class, being contracts that are expressed to be in effect

for a period of not less than five years or without limit of time and either not

expressed to be terminable by the insurer before the expiration of five years from

the taking thereof or are expressed to be terminable before the expiration of that

period only in special circumstance there mentioned; and



(C) whether by bonds, endowment certificates or otherwise whereby in

return for one or more premiums paid to the insurer a sum or series of sums is to

become payable to the person insured in the future, not being a contract falling

within paragraphs (A) or (B) of this section.



(25) “marketer” means an individual appointed by the SAM who identifies

potential companies, develops the market, and is involved in all aspects of marketing

Alternative Markets and International Reinsurance.



(26) “mutual insurance company” means a company that is not limited by

shares and carries on insurance business on the mutual principle as a cooperative

enterprise where the company is owned by its policy holders and must maintain a reserve

fund to which policy holders contribute by way of premiums.



(27) “NAIC” means National Association of Insurance Commissioners.



(28) “owner” of an entity means a person or entity holding title to any portion

of the shares, partnership interests, membership interests or other securities of an entity.



(29) “parent” means any corporation, limited liability company, partnership,

other entity or individual that directly or indirectly owns, controls, or holds with power to



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vote more than fifty percent of the outstanding voting interests of a captive insurance

company or group captive insurance company.



(30) “participant” means an entity, individual or organization as defined in

section 1348, and any affiliates of that entity, individual or organization that are insured

by a protected cell insurance company, where the losses of the participant are limited

through a participant contract to the assets of a protected cell.



(31) “participant contract” means a contract by which a protected cell insurance

company insures the risks of a participant and limits the losses of the participant to the

assets of a protected cell.



(32) “principal office” means the chief place of business required to be

maintained within the Territory by every insurer, international reinsurer, or manager

licensed under this chapter and at which the insurer’s, international reinsurer’s, or

manager’s books and records which are prescribed by this chapter are kept permanently.



(33) “protected cell” means a separate account established and maintained by a

protected cell insurance company for one or more participant.



(34) “protected cell insurance company” means a company that has been

approved by the SAM to maintain segregated accounts and to segregate each participant’s

assets, liabilities, and activities from each other and whose owner meets appropriate

capital and surplus requires appropriate C & S and reinsurance from each participants.



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(35) “qualified insurance manager” means an insurance manager who has

received a tax incentive benefit certificate from the SAM for the management of

alternative market insurers and insurance support services of other domiciled insurance

activities.

(36) “qualifying insurer or international reinsurer company” means an insurer

or authorized to write reinsurance by this Territory.

| (37) “regulations” means the regulations promulgated by the SAM pursuant to



authority established by this chapter.



(38) “SAM” means the Superintendent of Alternative Markets or the

Superintendent’s designee.



(39) “SAM licensed intermediary/broker” means an intermediary or broker,

licensed pursuant to this chapter by the SAM to act as a reinsurance intermediary or

broker of alternative market companies and international reinsurers only. A licensed

intermediary/broker is not required to be licensed by the SAM or the Division of Banking

and Insurance as a local agent or broker. Insurance agents and brokers licensed by the

Division of Banking and Insurance are not automatically SAM-licensed

intermediary/brokers, but may apply for such a_ license. SAM-. licensed



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intermediary/brokers are not automatically licensed to act as local agents or brokers, but

may apply for such a license with the Director of the Division of Banking and Insurance.



(40) “segregated account” means a separate account established and maintained

by a protected cell captive insurer:



(A) ~ in which the minimum capital and surplus required under this

chapter is provided by one or more persons or entities;



(B) _ that is formed and licensed under this chapter;

(C) _ that insures risks of separate participants by contract;



(D) with respect to which one or more of the participants are

authorized to act on matters relating to the segregated account; and



(E) that limits each participant’s losses through one or more segregated

accounts.



(41) “special purpose financial captive insurance company” SPFC means a

captive insurance company that is formed or licensed under this chapter which does not

meet the definition of any other type of captive insurance company defined in this

chapter.



] (42) “stock insurer” means an incorporated insurer with issued and outstanding

shares whose capital and surplus is owned by its shareholders.



(43) “superintendent of alternate markets” is the superintendent of the Division

of Alternative Markets and International Reinsurance Section of the Office of the

Commissioner of Insurance.



(44) “Territory” means the Territory of the Virgin Islands of the United States

of America.



(45) “Treasury rates” means the United States Treasury strips asked yield as

published in the Wall Street Journal as of a balance sheet date.



§ 1315. Creation of alternative markets and international reinsurance

section



There is established within the Office of the Commissioner of Insurance, the

Division of Alternative Markets and International Reinsurance. The Commissioner of

Insurance, with the advice and consent of the Governor, shall appoint the Sam and

determine the Sam’s compensation, and the Sam shall report to the Commissioner of

Insurance.

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§ 1316. Authority of the SAM

(a) The SAM may :



(1) generally supervise the alternative market and captive insurance

business being carried on in or from the Territory;



(2) ensure compliance with and enforcement of the laws and

regulations relating to the conduct of the alternative market and international

reinsurance businesses;



(3) examine and prepare reports pursuant to section 1317 from time to

time on all matters connected with the alternative market and international

reinsurance;



(4) summon or subpoena persons to attend a hearing or to testify as a

witness, to enforce attendance, and to compel production of books and evidence

relevant to an inquiry necessary or appropriate under this chapter;



(5) require examination of witnesses under oath, and to administer

oaths;



(6) at all reasonable times have access to and may take copies of all

the books, securities, records, and documents of any insurer, insurance manager,

agent, adjuster or broker which relate to the alternative insurance market or

international reinsurance business and any officer, agent or person in charge,

possession, custody or control of any of those books, securities, records or

documents and to issue fines against any person or entity who refuses or neglects

to afford such access;



(7) make an inquiry to any insurer, international reinsurer or

insurance manager relating to the conduct of its business or its financial affairs

and to require such insurer, international reinsurer or insurance manager to make

prompt and explicit answers and to issue fines against any person or entity which

fails or refuses to provide such information and to suspend the license of the

person or entity;



(8) issue certificates of tax incentive benefits in accordance with this

chapter; and



(9) appoint an advisory board, pursuant to section 1382a to review all

applications for licenses which may be issued under this chapter.



(b) The SAM, or any of the SAM’s employees, must not be directly or

indirectly:

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(1) a shareholder, member, manager or partner in any company or

business entity that is licensed under this chapter as an insurer carrying on

insurance business in or from the Territory; or



(2) a shareholder, member, manager or partner in a company or

business entity that is authorized under this chapter to act as an insurance

manager, agent or broker.



(c) The SAM or any of the SAM’s employees who has a conflict of interest as

defined in subsection (b) of this section shall recues himself from addressing any such

matter before the Office of the Commissioner of Insurance, Division of Alternative

Markets and International Reinsurance.



§ 1317. Registers

The SAM shall keep the following registers:



(a) A register of all licenses issued to insurers and international reinsurers

under this chapter, in which must appear:



(1) the name of the insurer or international reinsurer;



(2) the address of the insurer or international reinsurer’s principal

office within the Territory;



(3) the address of the insurer or international reinsurer’s principal

office outside the Territory;



(4) the details of the insurance or reinsurance business, including the

classes of insurance and reinsurance the insurer or international reinsurer is

licensed; and



(5) any and all other information the SAM may consider necessary or

appropriate to keep for purposes of this chapter;



(b) A register of all licenses issued under this chapter to insurance managers,

intermediaries, brokers and agents, in which must appear the names and addresses of the

insurers and international reinsurers for whom they are authorized to act;



(c) A register of the names and addresses of all directors and officers of every

insurer and international reinsurer licensed under this chapter; and



(d) A register of all actuaries approved by the Sam to provide actuarial

services under this chapter.

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§ 1318. Public information and confidential information



(a) Except as provided in section 1317, information submitted pursuant to the

provisions of this chapter is confidential and may not be made public by the SAM or an

agent or employee of the SAM, without the written consent of the entity, except that:



(1) information may be discoverable by a party in a civil action or

contested case to which the submitting captive insurance company is a party,

upon a showing by the party seeking to discover the information that:



(A) _ the information sought is relevant to and necessary for the

furtherance of the action or case;



(B) the information sought is unavailable from other non-

confidential sources; or



(C) a subpoena issued by a judicial or administrative law

officer of competent jurisdiction has been submitted to the SAM; and



(2) the SAM may disclose the information to the public officer having

jurisdiction over the regulation of insurance in a state or territory if:



(A) the public official agrees in writing to maintain the

confidentiality of the information; and



(B) _ the laws of the state or territory in which the public official

serves do not require the information to be confidential.



(b) The SAM shall post on a website and maintain on line:



(1) a list of all current regulations related to the alternative market and

international reinsurers;



(2) a current list of all licensed insurers, international reinsurers and

insurance managers, along with their principal place of business in the Territory,

the class of insurance or reinsurance they are authorized to write, their capital and

surplus; and



(3) a current list of all licensed actuaries, auditors, insurance managers

and intermediaries, and their principal place of business in the Territory.



§ 1319. Revolving fund established



(a) There is established in the Treasury of the Virgin Islands a special account

known as the “Alternative Market and International Reinsurance Revolving Fund” for

providing the financial means for the SAM to administer this chapter and for reasonable

expenses incurred in promoting the captive insurance industry in the Territory.



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(b) The fund consists of all fees, fines and other sums collected by the SAM

under this chapter as well as sums appropriated to it from time to time from the

Legislature.



All funds deposited in the fund remain available until expended. The SAM, the

Commissioner of Insurance and the Commissioner’s designee are the certifying officers

for expenditures under the fund.



(c) The SAM shall have deposited into the Fund



(1) all application fees, license fees, renewal fees, assessments and

taxes collected by the SAM under this chapter;



(2) all administrative penalties and fines; and



(3) all fees received by the SAM from international reinsurers who

assume risks only from captive insurance companies.



(d) All payments from the Fund for the hiring, training, maintenance of staff

and associated expenses, including contractual services as necessary, may be disbursed

from the Treasury only upon requests issued by the SAM, after receipt of proper

documentation regarding services rendered and expenses incurred or to be incurred.



(e) The interest on the monies on deposit in the fund must also be deposited

into the fund until balance in the fund exceeds $10,000,000. Whenever the balance in the

Fund exceeds $10,000,000, the interest must be deposited into the General Fund.



§ 1320. License fees



(a) The following initial license application fees and initial annual license

fees, subject to regulation and with full discretion of the SAM, must be charged by and

collected by the SAM and deposited in the Alternative Market and International

Reinsurance Revolving Fund:



(1) Initial License Application Fee: $500

(2) Application Review Fee by Actuary: $3,200.

(3) Annual License Fees:



(A) Insurance Managers: $500



(B) Qualified Insurance Managers: $10,000



(C) Captive Insurance Company, Class A, B and C: $2,000



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(D) Protected Cell or SPV: $5,000



(E) Qualified Insurer or Qualified International Reinsurer — all

classes: $10,000.00



(b) The SAM by regulation may alter and set reasonable fees, pursuant to the

notice requirements of title 3, Section 913.



§ 1321. Licensing; required information and documentation; fee; renewal



(a) A captive insurance company, insurance manager, intermediary, broker,

support business actuary or auditor, when permitted by its articles of incorporation,

articles of organization, operating agreement, or charter, may apply to the SAM for a

license to do all insurance business.



(1) Worker’s compensation insurance may be written only as excess of

qualified self insurance, reimbursement of high deductible plans, or as

reinsurance.



(2) In general, a special purpose captive insurance company may

insure only the risks of its parent. Notwithstanding any other provisions of this

chapter, a special purpose captive insurance company may provide insurance and

reinsurance, for risks, as approved by the SAM;



(3) A captive insurance company may not provide personal, motor

vehicle, or homeowner’s insurance coverage or any component of these

coverages;



(4) A captive insurance company may not accept or cede reinsurance

except as provided in section 1336.



(b) To conduct insurance business in this Territory, a captive insurance

company, insurance manager, intermediary, broker, actuary and auditor shall:



(1) obtain from the SAM a license authorizing it to conduct insurance

business in this Territory;



(2) hold at least one board of directors meeting, or in the case of a

limited liability company a meeting of the managing board, each year in this

Territory



(3) maintain its principal place of business in this Territory, or in the

case of a branch captive insurance company, maintain the principal place of

business for its branch operations in this Territory, including books and records;

and

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(4) appoint a resident agent to accept service of process and to

otherwise act on its behalf in this Territory. In the case of a captive insurance

company formed as a corporation, a nonprofit corporation, or a limited liability

company, whenever the registered agent cannot with reasonable diligence be

found at the registered office of the captive insurance company, the SAM must be

an agent of the captive insurance company upon whom any process, notice or

demand may be served:



(c) (1) Before receiving a license, a captive insurance company, insurance

manager, intermediary, broker, actuary or auditor:



(A) formed as a corporation or a nonprofit corporation, shall

file with the SAM a certified copy of its articles of incorporation and

bylaws, a statement under oath of its treasurer or other authorized officer

showing its financial condition, and any other statements or documents

required by the SAM;



(B) formed as a limited liability company, shall file with the

SAM a certified copy of its articles of organization and operating

agreement, a statement under oath by its managers showing its financial

condition, and any other statements or documents required by the SAM;



(2) In addition to the information required by paragraph (1), an

applicant captive insurance company shall file with the SAM evidence of:



(A) — the amount and liquidity of its projected assets relative to

the risks to be assumed;



(B) — the adequacy of the expertise, experience, and character of

the person who will manage it;



(C) _ the overall soundness of its plan of operation;



(D) — the adequacy of the loss prevention programs of its parent,

member organizations, affiliates, or industrial insureds as applicable; and



(E) — such other factors considered relevant by the SAM in

ascertaining whether the proposed captive insurance company will be

likely to meet its policy obligations.



(3) In addition to the information required by paragraphs (1) and (2)

an applicant protected cell insurance company shall file with the SAM:



(A) a business plan demonstrating how the applicant will

account for the loss and expense experience of each protected cell at a

level of detail found to be sufficient by the SAM, and how it will report

the experience to the SAM;



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(B) a statement acknowledging that all financial records of the

protected cell insurance company, including records pertaining to any



protected cells, must be made available for inspection or examination by

the SAM;



(C) all contracts or sample contracts between the protected cell

insurance company and any participants; and



(D) evidence that expenses will be allocated to each protected

cell in an equitable manner.



(4) Information submitted under this section is confidential as

provided in section 1318, except that information is discoverable by a party in a

civil action or contested case to which the captive insurance company that

submitted the information is a party, upon a specific finding by the court that:



(A) The captive insurance company is a necessary party to the

action and not joined only for the purposes of evading the confidentiality

provisions of this chapter;



(B) The information sought is relevant, material to, and

necessary for the prosecution or defense of the claim asserted in litigation;

and



(C) The information sought is not available through another

source.



(d) (1) A captive insurance company shall pay to the SAM a nonrefundable

fee of $500 for processing its application for license. In addition, the SAM may retain

legal, financial, and examination services from outside the Government to examine and

investigate the application, the reasonable cost of which may be charged against the

applicant, or the SAM may use internal resources to examine and investigate the

application for a fee of $3000.



(2) Section 1333 applies to examinations, investigations, and

processing conducted under this section.



(3) In addition, a captive insurance company shall pay an application

fee of $500 and a license fee for the year of registration of $2000 and an annual

renewal fee of $2000.



(e) If the SAM is satisfied that the documents and statements filed by the

captive insurance company comply with the provisions of this chapter, the SAM may

grant a license authorizing the company to do insurance business in this Territory until

March 1 of each year at which time the license may be renewed.

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(f) A foreign or alien captive insurance company, upon approval of the SAM

or the SAM’S designee, may become a domestic captive insurance company by

complying with all of the requirements of law relative to the organization and licensing of

a domestic captive insurance company of the same or equivalent type in this Territory

and by filing with Office of the Lieutenant Governor its articles of association, charter, or

other organizational document, with appropriate amendments to them adopted in

accordance with the laws of this Territory bringing those articles of association, charter,

or other organizational document into compliance with the laws of this Territory. After

the approval of the SAM, the captive insurance company is entitled to the necessary or

appropriate certificates and licenses to continue transacting business in this Territory and

is subject to the authority and jurisdiction of this Territory. In connection with this

redomestication, the SAM may waive any requirements for public hearings. It 1s not

necessary for a company redomesticating into this Territory to merge, consolidate,

transfer assets, or otherwise engage in any other reorganization, other than as specified in

this section. It is not necessary for a redomesticated company to obtain the consent of

any other jurisdiction in order to be licensed to transact business in or from within the

Territory.



(g) (1) A non-U.S. taxpayer shall pay a 1% repatriation fee to SAM on all

retained earnings of the redomesticating company.



§ 1322. Conditions of all licenses



(a) It is a condition of every license issued under this chapter, breach of which

renders the license subject to cancellation by the SAM that:



(1) The licensed insurer, insurance manager, intermediary, broker,

actuary and auditor must be aware of the content of each license application and

business plan submitted with the license application, shall monitor for material

changes in information submitted with the license application and the changes in

the officers of the licensees’ business organization and shall immediately notify

SAM of:



(A) any material change in the information supplied in or

accompanying the application or in the documents submitted with the

application of which the licensee is aware, or



(B) — the removal from office or the resignation of any director,

officer partner or member of the licensee, and the reason for the removal

or resignation from office of which the licensee was aware.



(2) No shares or other interest, whether legal or equitable, in the

licensee may be issued, transferred or otherwise disposed of and no appointment

of a director, officer, partner or member may be made without the prior written

consent of the SAM.



(3) The licensee may not without the prior written consent of the

SAM:

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(A) enter into any merger, amalgamation, consolidation or

reorganization;



(B) transfer, other than in the ordinary course of business by

way of reinsurance any of its contracts of insurance or the whole or any

part of its property, assets or liabilities;



(C) charge or pledge the whole or any part of its assets;

(D) — change its name from that set out in its license;



(E) engage in or carry on insurance business other than that of

the class or classes of insurance named in the license or other than

specified therein;



(F) alter the terms of its articles of incorporation, articles of

organization or other instrument of incorporation or formation.



(b) The SAM may not grant to a licensee approval for any transaction

described in paragraph (a) a unless the SAM is satisfied that:



(1) the proposed insurer involved in the merger, amalgamation,

consolidation or merger with the licensee is licensed or qualified to be licensed

under this chapter; and



(2) the paid-in capital and unimpaired surplus of such proposed insurer

after the merger, amalgamation, consolidation or reorganization will be in

amounts that are approved by the auditor and actuary of the proposed insurer and

are acceptable to the SAM.



(c) With every application for a license under this chapter, the applicant shall

file with the SAM a business plan. The SAM may rely upon the business plan as a

condition of issuing a license.



(d) Every licensed insurer shall file with the SAM any proposed change in the

business plan. Unless advised otherwise by the SAM, the insured may effect the

requested change to the business plan after thirty days after the SAM receives the request.



(e) The SAM may approve or deny the requested change to the business plan

in its discretion.



(f) All licensed managers, whether qualified or not, shall report to the SAM

any and all actual and proposed changes to the business plan of an insurer or international

reinsurer.

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§ 1323. Captive reinsurance companies



(a) A captive reinsurance company, if permitted by its articles of

incorporation or charter, may apply to the SAM for a license to write reinsurance

covering property and casualty insurance or reinsurance contracts. A captive reinsurance

company authorized by the SAM may write reinsurance contracts covering risks in any

state or territory with the specific written approval of the SAM.



(b) To conduct business in this Territory, a captive reinsurance company



shall:

(1) obtain from the SAM a license authorizing it to conduct business

as a captive reinsurance company in this Territory;

(2) hold at least one board of directors’ meeting each year in this

Territory on the island where its principal place of business is located;

(3) maintain its principal place of business in this Territory; and

(4) appoint a registered agent to accept service of process and act

otherwise on its behalf in this Territory.

(c) Before receiving a license, a captive reinsurance company shall file with

the SAM:



(1) a certified copy of its charter and bylaws;



(2) a statement under oath of its president and secretary showing its

financial condition; and



(3) other documents required by the SAM.



(d) In addition to the information required by subsection (c), the applicant

captive reinsurance company shall file with the SAM evidence of:



(1) the amount and liquidity of its assets relative to the risks to be

assumed;



(2) the adequacy of the expertise, experience, and character of the

person who manages it;



(3) the overall soundness of its plan of operation; and

(4) other overall factors considered relevant by the SAM in



ascertaining if the proposed captive reinsurance company is able to meet its policy

obligations.

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(e) Information submitted pursuant to this section is confidential as provided

in section 1318, except that information is discoverable by a party in a civil action or

contested case to which the captive insurance company that submitted the information is

a party, upon a finding by the court that:



(1) the captive is a necessary party to the action and not joined only

for the purposes of evading the confidentiality provisions of this chapter;



(2) the information sought is relevant, material to, and necessary for

the prosecution or defense of the claim asserted in litigation; and



| (3) the information sought is not available through another source.



(f) Captives existing before the effective date of this chapter have one year

from the effective date to comply with all new regulations as described in this chapter.



§ 1324. Adoption of name



A captive insurance company or captive reinsurance company, insurance

manager, intermediary, broker, auditor, actuary or any other entity that may be licensed

under this chapter may not adopt a name that is the same as, deceptively similar to, or



likely to be confused with or mistaken for any other existing business name registered in

{ this Territory or in the state or country in which it will conduct business.



§ 1325. Capitalization requirements; security requirements for branch

captive insurance companies; restriction on payment of dividends



(a) The SAM may not issue a license to a captive insurance company unless

the company possesses and maintains unimpaired paid in capital and surplus of:



(1) in the case of a protected cell insurance company, not less than one

hundred thousand dollars; however, if the protected cell insurance company does

not assume any risk, the SAM may reduce this amount to an amount less than

one hundred thousand dollars;



(2) in the case of a special purpose captive insurance company, an

amount determined by the SAM after giving due consideration to the company’s

business plan, feasibility study, and pro-formas, including the nature of the risks

to be insured.



(b) Except for a protected cell insurance company that does not assume any

risk, the capital must be in the form of cash, cash equivalent, or an irrevocable letter of



credit issued by a bank chartered by this Territory or a member bank of the Federal



Reserve System with a branch office in this Territory or as approved by the SAM.



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18



(c) For a protected cell insurance company that does not assume any risk, the

capital also may be in the form of other high quality securities as approved by the SAM;

But until the requirements of this section have been met in full, and satisfactory evidence

of the requirements has been submitted to the SAM, the license is provisional only and

does not permit the company to insure risks of unaffiliated persons, other than controlled

unaffiliated businesses, during the provisional period.



(d) Notwithstanding any provision in this chapter to the contrary, the SAM

may consider as part of the capital stated in this section the value of cash or letters of

credit. The SAM may prescribe additional capital and surplus based upon the class,

volume, and nature of insurance business transacted by the captive insurance company or

segregated account.



(e) The SAM may not issue a license to a captive insurance company unless

the company possesses and maintains unimpaired paid-in capital and surplus of:



(1) In the case of an insurer of:

Class A - $100,000

Class B - $200,000

Class C - $300,000

Class A insurer may insure or reinsure general business risks;

Class B insurer may insure or reinsure long term risks; and a

Class C insurer may insure or reinsure both long term and general business risks.



(f) Contributions to a captive insurance company incorporated as a nonprofit

corporation must be in the form of cash, cash equivalent, or an irrevocable letter of credit

issued by a bank chartered by this Territory or a member bank of the Federal Reserve

System with a branch office in this Territory or as approved by the SAM.



(g) The SAM may issue a license expressly conditioned upon the captive

insurance company providing to the SAM satisfactory evidence of possession of the

minimum required unimpaired paid in capital. Until this evidence is provided, the

captive insurance company may not issue any policy, assume any liability, or otherwise

provide coverage. The SAM summarily may revoke the conditional license without legal

recourse by the company if satisfactory evidence of the required capital is not provided

within a maximum period of time, not to exceed one year, to be established by the SAM

at the time the conditional license is issued.



(h) The SAM may prescribe additional capital or net assets based upon the

type, volume, and nature of insurance business transacted. Contributions in connection

with these prescribed additional net assets or capital must be in the form of:



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(1) cash;

(2) cash equivalent;



(3) an irrevocable letter of credit issued by a bank chartered by this

Territory or a member bank of the Federal Reserve System with a branch office in

this Territory or as approved by the SAM; or



(4) securities invested as provided in section 1335.



(i) In the case of a branch captive insurance company, as security for the

payment of liabilities attributable to branch operations, the SAM shall require that a trust

fund, funded by an irrevocable letter of credit or other acceptable asset, be established

and maintained in the United States for the benefit of United States policyholders and

United States ceding insurers under insurance policies issued or reinsurance contracts

issued or assumed, by the branch captive insurance company through its branch

operations. The amount of the security may be no less than the capital and surplus

required by this chapter and the reserves on these insurance policies or reinsurance

contracts, including reserves for losses, allocated loss adjustment expenses, incurred but

not reported losses and unearned premiums with regard to business written through

branch operations; however, the SAM may permit a branch captive insurance company

that is required to post security for loss reserves on branch business by its international

reinsurer to reduce the funds in the trust account required by this section by the same

amount so long as the security remains posted with the international reinsurer. If the

form of security selected is a letter of credit, the letter of credit must be established by, or

issued or confirmed by, a bank chartered in this Territory or a member bank of the

Federal Reserve System.



(j) A captive insurance company may not pay a dividend out of, or other

distribution with respect to, capital or surplus, in excess of the limitations set forth in

section 1328 without the prior approval of the SAM. Approval of an ongoing plan for the

payment of dividends or other distributions must be conditioned upon the retention, at the

time of each payment, of capital or surplus in excess of amounts specified by, or

determined in accordance with formulas approved by, the SAM.



(k) An irrevocable letter of credit which is issued by a financial institution

other than a bank chartered by this Territory or a member bank of the Federal Reserve

System, must meet the same standards as an irrevocable letter of credit which has been

issued by either entity.



§ 1326. Minimum capitalization or reserves

(a) In addition to the capitalization requirements contained in section 1325,



the SAM may prescribe additional capital or surplus based upon the type, volume, and

nature of the insurance business transacted.

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20



(b) A captive reinsurance company may not pay a dividend out of, or other

distribution with respect to, capital or surplus in excess of the limitations, without the

prior approval of the SAM. Approval of an ongoing plan for the payment of dividends or

other distributions must be conditioned upon the retention, at the time of each payment,

of capital or surplus in excess of amounts specified by, or determined in accordance with

formulas approved by, the SAM.



(c) Every applicant must maintain an amount of capital determined by the

SAM in accordance with the business plan on file with the SAM, provided, however, the

amount of capital may be less than the amount fixed by this chapter.



§ 1327. Minimum margin of solvency



The SAM may not issue a license to a captive insurance company unless it

maintains a “minimum margin of solvency”. A minimum margin of solvency is twenty

percent (20%) of the net written premiums up to five million dollars, with a minimum of

one hundred thousand dollars; for a company with net written premiums of greater than

five million dollars, the minimum capital is one million dollars, plus ten percent.



(a) In determining the minimum margin of solvency, for classes of insurance

other than life insurance business and long-term insurance business, a captive insurance

company’s contingent and prospective liabilities does not include incurred but not

reported losses, or unincurred losses under outstanding contracts of insurance.



(b) Notwithstanding anything in this section to the contrary, the SAM may

require a greater margin of solvency, in a particular case.



(c) SAM may consider letters of credit posted as “gap” security as capital and

surplus for solvency purposes.



§ 1328. Restriction on payment of dividends; liability



(a) A corporation or other entity may declare and pay dividends or make other

1 distributions in cash or its bonds or its property, including the shares or bonds of other

corporations, on its outstanding shares, except when the corporation is insolvent or would

thereby be made insolvent, or when the declaration, payment or distribution would be

contrary to any restrictions contained in the certificate of incorporation or organizational

document.



(b) Dividends may be declared or paid and other distributions may be made

out of surplus only, so that the net assets of the corporation or entity remaining after such

declaration, payment or distribution at least equals the amount of its stated capital.



(c) Directors of a corporation or managers of an LLC who vote for or concur

in any of the following corporate actions are jointly and severally liable to the corporation

or LLC for the benefit of its creditors, shareholders or members, to the extent of any

injury suffered by such persons, respectively, as a result of such action:



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(1) The declaration of any dividend or other distribution to the extent

that it is contrary to the provisions of paragraphs (a) and (b) of this section.



(2) The distribution of assets to shareholders or members after

dissolution of the corporation or LLC without paying or adequately providing for

all known liabilities of the corporation or LLC, excluding any claims not filed by

creditors within the time limit set in a notice given to creditors.



§1329a. Segregation of accounts



(a) An international insurance company that is domiciled or licensed to do

business in any State of the United States, or that is otherwise subject to United States

federal income taxation as if it were so domiciled or licensed, shall regularly employ in

its books of accounts a detailed segregation of receipts, expenditures, assets, liabilities

and net worth that clearly distinguishes the income derived from insuring United States

risks from the income derived from insuring other foreign risks by first allocating such

items which are specifically identifiable as pertaining exclusively to the United States

risks.



(b) Investment income earned on reserves pertaining to United States risks



constitute investment income pertaining to the United States risks.



§ 1329. Incorporation of a captive reinsurance company



(a) A captive reinsurance company must be incorporated as a stock insurer

with its capital divided into shares and held by its shareholders.



(b) A captive reinsurance company may not have fewer than three

incorporators of whom at least two must be residents of this Territory.



(c) Before the articles of incorporation are transmitted to the Office of the

Lieutenant Governor, Division of Corporations and Trademarks, the incorporators shall

petition the SAM to issue a certificate finding that the establishment and maintenance of

the proposed corporation promotes the general good of the Territory. In arriving at this

finding the SAM shall consider:



(1) the character, reputation, financial standing, and purposes of the

incorporators;



(2) the character, reputation, financial responsibility, insurance

experience, and business qualifications of the officers and directors; and



(3) other factors the SAM considers advisable.



(d) The capital stock of a captive reinsurance company must be issued at par

value or greater.

22



(e) At least one of the members of the board of directors of a captive

reinsurance company incorporated in this Territory must be a resident of this Territory.



§ 1330 Incorporation options and requirements



(a) In the case of a captive insurance company seeking a license to transact

business in the Territory, and formed as a corporation, a nonprofit corporation, or a

limited liability company, before the articles of incorporation or articles of organization

are transmitted to the Office of the Lieutenant Governor, the incorporators or organizers

shall petition the SAM to issue a certificate setting forth a finding that the establishment

and maintenance of the proposed entity will promote the general good of the Territory.

In arriving at this finding the SAM shall consider:



(1) the character, reputation, financial standing, and purposes of the

incorporators or organizers;



(2) the character, reputation, financial responsibility, insurance

experience, and business qualifications of the officers and directors or managers;

and



(3) other aspects as the SAM considers advisable.



(b) The articles of incorporation or articles of organization, the certificate

issued pursuant to subsection (a) if any, and the organization fees required by the Virgin

Islands Code, as applicable, must be transmitted to the Office of the Lieutenant Governor,

which shall record both the articles of incorporation or articles of organization and the

certificate.



(c) In the case of a captive insurance company licensed as a branch captive

insurance company, the alien captive insurance company shall petition the SAM to issue

a certificate setting forth the SAM’s finding that, after considering the character,

reputation, financial responsibility, insurance experience, and business qualifications of

the officers and directors or managers of the alien captive insurance company, the

licensing and maintenance of the branch operations will promote the general good of the

Territory. The alien captive insurance company may register to do business in this

Territory after the SAM’s certificate has been issued.



(d) The capital stock or membership interests of a captive insurance company

incorporated as a stock insurer or limited liability company must be issued at not less

than par value.



(e) In the case of a captive insurance company formed as a corporation or a

nonprofit corporation, the corporation must have at least three directors. In the case of a

captive insurance company formed as a limited liability company, at least one of the

managers of the captive insurance company must be a resident of this Territory.

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23



(f) A captive insurance company formed as a corporation, a nonprofit

corporation, or a limited liability company, pursuant to this chapter has the privileges and

is subject to the provisions of the general corporation law, including the Virgin Islands

Nonprofit Corporations law for nonprofit corporations and the Virgin Islands Uniform

Limited Liability Company Act for limited liability companies, as applicable, as well as

the applicable provisions contained in this chapter. If a conflict occurs between a

provision of the general corporation law, including the Virgin Islands Nonprofit

Corporations statute for nonprofit corporations and the Virgin Islands Uniform Limited

Liability Company Act for limited liability companies, as applicable, and a provision of

this chapter, the latter controls. The provisions of this title pertaining to mergers,

consolidations, conversions, mutualizations, and redomestications apply in determining

the procedures to be followed by a captive insurance company in carrying out any of the

transactions described in those provisions, except the SAM may waive or modify the

requirements for public notice and hearing in accordance with regulations which the

SAM may promulgate addressing categories of transactions. Ifa notice of public hearing

is required, but no one requests a hearing, the SAM may cancel the hearing.



(g) The articles of incorporation or bylaws of a captive insurance company

may authorize a quorum of a board of directors to consist of no less than one third of the

fixed or prescribed number of directors as provided for in this chapter. In the case of a

limited liability company, the articles of organization or operating agreement of a captive

insurance company may authorize a quorum to consist of no less than one third of the

managers required by the articles of organization or the operating agreement.



§ 1331. Reports



(a) A captive insurance company may not be required to make an annual

report except as provided in this chapter.



(b) Before March 1 of each year, a captive insurance company or a captive

reinsurance company shall submit to the SAM a report of its financial condition, verified

by oath of one of its executive officers. Except as provided in sections 1325 and 1328, a

captive insurance company or captive reinsurance company shall report using generally

accepted accounting principles; or in accordance with generally accepted accounting

principles; or in accordance with standards acceptable to the NAIC, unless the SAM

approves the use of statutory accounting principles, with useful or necessary

modifications or adaptations required or approved or accepted by the SAM for the type of

insurance and kinds of insurers to be reported on, and as supplemented by addition

information required by the SAM. In addition, all companies shall submit to the SAM

certified audited financials by June 30 of each year. The SAM by regulation shall

prescribe the forms on which pure captive insurance companies and industrial insured

captive insurance companies report. Information submitted pursuant to this section is

confidential as provided in section 1318. The SAM may require that the annual financial

statements of a captive insurance company be certified by an independent auditor when

the SAM determines that such certification is in the best interest of the policyholders or

the Territory, but any captive insurance company engaged in life insurance business or

long term insurance business shall submit certified financial statements each year. An

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24



annual actuarial statement of opinion is required. However, SAM may waive this

requirement, but not for two consecutive years.



(c) Sixty days after the fiscal year end, a branch captive insurance company

shall file with the SAM a copy of all reports and statements required to be filed under the

laws of the jurisdiction in which the alien captive insurance company is formed, verified

by oath by two of its executive officers. If the SAM is satisfied that the annual report

filed by the alien captive insurance company in its domiciliary jurisdiction provides

adequate information concerning the financial condition of the alien captive insurance

company, the SAM may waive the requirement for completion of the captive annual

statement for business written in the alien jurisdiction. Such waiver must be in writing

and subject to public inspection.



(d) All accounts of a licensed insured must be reviewed by the insured’s

approved auditor in order to generate the report.



(e) The report must contain a statement of the condition of the insurer’s

affairs at the end of the preceding fiscal year, and must:



(1) be in a form and content as prescribed by regulations;



(2) exhibit the assets, liabilities, receipts and expenditures of the

insurers or international reinsurer for the preceding fiscal year.



(3) exhibit particulars of the business transacted by the insurer or

international reinsurer in or from the Territory during the preceding fiscal year;

and



(4) contain a statement from insurer’s approved auditor that it has

examined the books and records of the insurer and international reinsurer and is

satisfied that the insurer and international reinsurer is not in breach of any of the

conditions of its license or in contravention of any provision of this chapter or by

regulations.



(f) For the purposes of the report required by this section, the assets of the

insurer or international reinsurer must be valued and its liabilities must be calculated by

the SAM in accordance with this chapter and regulations.



(g) The report may not show as assets the unpaid balances owing by agents or

other insurers that are more than six months overdue or bills receivable on account

thereof or trade receivables more than one year overdue, or investment in office furniture

or equipment, or unpaid capital, or unpaid premium on subscribed shares of capital stock,

nor may such report include as assets any investments prohibited or not authorized by this

chapter or the regulations.

———

25



§ 1332. Discounting of loss and loss adjustment expense reserves



(a) A protected cell insurance company or a captive reinsurance company

may discount its loss and loss adjustment expense reserves at treasury rates applied to the

applicable payments projected through the use of the expected payment pattern

associated with the reserves.



(b) A protected cell insurance company and a captive reinsurance company

shall file annually an actuarial opinion on loss and loss adjustment expense reserves

provided by an independent actuary licensed under this chapter. The actuary may not be

an employee of the captive company or any of its affiliates, or an employee of a parent of

the captive or an owner of the captive company or its affiliates.



(c) The SAM may disallow the discounting of reserves if a protected cell

insurance company or a captive reinsurance company violates a provision of this chapter.



§ 1333. Inspections and examinations; confidentiality of reports; limitations

applicable to branch captive insurance companies; application of general provisions



(a) At least once every three years, which may be extended to five years by

the SAM, and whenever the SAM determines it to be prudent, the SAM, or competent

person appointed by the SAM, shall visit any captive insurance company and thoroughly

inspect and examine its affairs to ascertain its financial condition, its ability to fulfill its

obligations, and whether it has complied with this chapter. The scope of the examination

is determined by the SAM upon application, and the SAM may determine that an

examination is not necessary, if a captive insurance company during that period is subject

to a comprehensive annual audit by independent auditors approved by the SAM and a

scope satisfactory to the SAM. The expenses and charges of the examination must be

paid to the Territory by the company examined, and the SAM shall issue its bills for the

proper charges incurred in all examinations.



(b) All examination reports, preliminary examination reports or results,

working papers, recorded information, documents and copies of documents produced by,

obtained by, or disclosed to the SAM or any other person in the course of an examination

made under this section are confidential and are not subject to subpoena and may not be

made public by the SAM or an employee or agent of the SAM without the prior written

consent of the company, except to the extent provided in this subsection.



(1) Nothing in this subsection prevents the SAM from using the

information in furtherance of the SAM’s regulatory authority under this chapter.



(2) The SAM may grant access to the information to public officers

having jurisdiction over the regulation of insurance in any other territory, state or

country, or to law enforcement officers of this Territory or any other territory,

state, or agency of the federal government at any time, so long as the officers

receiving the information agree in writing to hold it in a manner consistent with

this section.

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26



(c) (1) This section applies to all business written by a captive insurance

company; however, the examination for a branch captive insurance company must be of

branch business and branch operations only, as long as the branch captive insurance

company provides annually to the SAM, a certificate of compliance, or its equivalent,

issued by or filed with the licensing authority of the jurisdiction in which the branch

captive insurance company is formed and demonstrates to the SAM’s satisfaction that it

is Operating in sound financial condition in accordance with all applicable laws and

regulations of that jurisdiction.



(2) As a condition of licensure, the alien captive insurance company

shall grant authority to the SAM for examination of the affairs of the alien captive

insurance company in the jurisdiction in which the alien captive insurance

company is formed.



§ 1334. Suspension or revocation of license



(a) The license of a captive insurance company, insurance manager,

intermediary broker, actuary and auditor to conduct an insurance business in this

Territory may be suspended or revoked by the SAM for:



(1) insolvency or impairment of capital or surplus;

(2) failure to meet the requirements of sections 1325 or 1328;



(3) refusal or failure to submit an annual report, as required by section

1331, or any other report or statement required by law or by lawful order of the

SAM;



(4) failure to comply with its own charter, bylaws, or other

organizational documents;



(5) failure to submit to examination or any legal obligation relative to

an examination, as required by section 1333;



| (6) refusal or failure to pay the cost of examination as required by

section 1333;



(7) use of methods that, although not otherwise specifically prohibited

by law, nevertheless render its operation detrimental or its condition unsound with

respect to the public or to its policyholders; or



(8) failure otherwise to comply with laws of this Territory.

(b) If the SAM finds, upon examination, hearing, or other evidence, that a



captive insurance company has committed any of the acts specified in subsection (a) of

this section, the SAM may suspend or revoke such license if the SAM considers it in the

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27



best interest of the public and the policyholders of the captive insurance company,

notwithstanding any other provision of this chapter.



§ 1335. Applicability of investment requirements; loans



(a) A captive insurance company, a captive reinsurance company, a special

purpose captive insurance company, and a protected cell insurance company are not

subject to any restrictions on allowable investments contained in this chapter; however,

the SAM may request a written investment plan and may prohibit or limit an investment

that threatens the solvency or liquidity of the company.



(b) A Captive insurance company may make loans to its parent company or

affiliates, but only upon the prior written approval of the SAM, and such loans must be

evidenced by a note in a form approved by the SAM. Loans of minimum capital and

surplus funds required by sections 1325 and 1328 are prohibited.



§ 1336. Reinsurance; effect on reserves



(a) A captive insurance company may provide reinsurance, as authorized in

this chapter, on risks ceded by any other insurer.



(b) A captive insurance company may take credit for reserves on risks or

portions of risks ceded to international reinsurers complying with the provisions of this

chapter, regulations and as approved by the SAM. A captive insurer may not take credit

for reserves on risks or portions of risks ceded to a international reinsurer if the



international reinsurer is not in compliance with this chapter, regulations or not approved

by the SAM.



§ 1337. No requirement to join ratings organization

A captive insurance company is not required to join a ratings organization.



§ 1338. Participation in plan, pool, association, or guaranty or insolvency

fund



(a) A captive insurance company, including a captive insurance company

organized as a reciprocal insurer under this chapter, may not join or contribute financially

to a plan, pool, association, or guaranty or insolvency fund in this Territory, and a captive

insurance company, or its insured or its parent or any affiliated company or any member

organization of its association, or in the case of a captive insurance company organized as

a reciprocal insurer, a subscriber of the company, may not receive a benefit from a plan,

pool, association, or guaranty or insolvency fund for claims arising out of the operations

of such captive insurance company, except as provided in paragraph (b) below.



(b) — This section does not apply to cross insurance arrangements among groups

of captive insurance companies whereby each participating company insures risks of

business operations related to other participating companies; provided that such

28



arrangements do not involve reinsurance or guaranties among participating captive

insurance companies.



§ 1339. Premium Tax payment; rates



No Premium taxes are applicable for any policies written by companies pursuant

to this chapter.



§ 1340. Annual captive reinsurance tax



(a) Unless it is approved for tax incentive benefits under section 1376 and has

received a contract under section 1378, a captive reinsurance company shall pay to the

SAM by March | of each year a captive reinsurance tax of five thousand dollars.



(b) The tax provided in this section is the only tax collectible pursuant to the

laws of this Territory from a captive reinsurance company, and neither tax on reinsurance

premiums nor any other taxes may be levied or collected from a captive reinsurance

company by the Territory, except taxes on real and personal property used in the

production of income.



(c) A captive reinsurance company failing to make returns or to pay all taxes

required by this section is subject to sanctions as provided in this chapter.



§ 1341. Rules, regulations, and orders



The SAM may promulgate and from time to time amend rules and regulations,

and issue such orders relating to captive insurance companies as are necessary to enable

the SAM to carry out the provisions of this chapter.



§ 1342. Applicability of provisions relating to insurance reorganizations,

receiverships, and injunctions; sponsored captive insurance company assets and

capital provisions



(a) Except as otherwise provided in this section, the terms and conditions set

forth in this title pertaining to insurance reorganizations, receiverships, and injunctions

apply in full to captive insurance companies formed or licensed under this chapter.



(b) In the case of a sponsored captive insurance company:



(1) the assets of the protected cell may not be used to pay expenses or

claims other than those attributable to the protected cell; and



(2) its capital and surplus at all times must be available to pay

expenses of or claims against the sponsored captive insurance company and may

not be used to pay expenses or claims attributable to a protected cell.

0 — ———————————EEN—Ee



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§ 1346. Formation of captive insurance company; establishing protected

cells



(a) One or more entities may form a protected cell insurance company under

this chapter.



(b) A protected cell insurance company formed or licensed under this chapter

may establish and maintain one or more protected cells to insure risks of one or more

participants, subject to the following conditions:



(1) each protected cell must be accounted for separately on the books

and records of the captive insurance company to reflect the financial condition

and results of operations of the protected cell, net income or loss, dividends or

other distributions to participants, and other factors may be provided in the

participant contract or required by the SAM;



(2) the assets of a protected cell must not be chargeable with liabilities

arising out of any other insurance business the sponsored captive insurance

company may conduct;



(3) no sale, exchange, or other transfer of assets may be made by the

captive insurance company between or among any of its protected cells without

the consent of the protected cells;



(4) no sale, exchange, transfer of assets, dividend, or distribution may

be made from a protected cell or participant without the SAM’s approval and in

no event may the approval be given if the sale, exchange, transfer, dividend, or

distribution would result in insolvency or impairment with respect to a protected

cell;



(5S) a protected cell insurance company annually shall file with the

SAM such financial reports as the SAM requires which includes, but are not

limited to, accounting statements detailing the financial experience of each

i protected cell;



(6) a protected cell insurance company shall notify the SAM in writing

within ten business days of a protected cell that is insolvent or otherwise unable to

meet its claim or expense obligations;



(7) no participant contract may take effect without the SAM’s prior

written approval, and the addition of each new protected cell and withdrawal of

any participant of any existing protected cell constitutes a change in the business

plan requiring the SAM’s prior written approval.



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30

§ 1348. Participants in protected cell insurance companies



(a) An association, a corporation, a limited liability company, a partnership, a

trust, or other business entity may be a participant in a protected cell insurance company

formed or licensed pursuant to this chapter.



(b) The owner may be a participant in a protected cell insurance company.



(c) A participant need not be a shareholder of the protected cell insurance

company or an affiliate of the company.



§ 1349. Terms and conditions for protected cell insurance companies;

exception



In the case of a protected cell insurance company:



(a) a protected cell need not be established solely for the purpose of effecting

insurance securitizations, but may be established for the purpose of isolating the expenses

and claims of a protected cell insurance company participant; and



(b) the protected cell insurance company shall attribute all insurance

obligations, assets, and liabilities relating to a participant’s risks to the participant’s

protected cell.



Subchapter Two: Special Purpose Financial Captives

§ 1351. Purpose



This subchapter provides for the creation of Special Purpose Financial Captives

(SPFCs) exclusively to facilitate the securitization of one or more risks, as a means of

accessing alternative sources of capital and achieving the benefits of securitization.

SPFCs are created for the limited purpose of entering into an SPFC contract and

insurance securitization transactions and into related agreements to facilitate the

accomplishment and execution of those transactions. The creation of SPFCs is intended

to achieve greater efficiencies in structuring and executing insurance securitizations, to

diversify and broaden insurers’ access to sources of capital, to facilitate access for many

insurers to insurance securitization and capital markets financing technology, and to

further the economic development and expand the interest of the Territory through its

captive insurance program.



§ 1352. Definitions

For purposes of this subchapter:



(a) “Court” means the Superior Court of the Virgin Islands.

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31



(b) “affiliated company” means a company in the same corporate system as a

parent, by virtue of common ownership, control, operation, or management.



(c) “contested case” means a proceeding in which the legal rights, duties,

obligations, or privileges of a party are required by law to be determined by the Court

after an opportunity for hearing.



(d) “control” including the terms “controlling”, “controlled by”, and “under

common control with” means the possession, direct or indirect, of the power to direct or

cause the direction of the management and policies of a person, whether through the

ownership of voting securities, by contract other than a commercial contract for goods or

non-management services, or otherwise, unless the power is the result of an official

position with or corporate office held by the person. Control is presumed to exist if a

{ person, directly or indirectly, owns, controls, holds with the power to vote, or holds

proxies representing ten percent or more of the voting securities of another person. This

presumption may be rebutted by a showing that control does not exist. Notwithstanding

other provisions of this section, for purposes of this subchapter, the fact that an SPFC

exclusively provides reinsurance to a ceding insurer under an SPFC contract is not by

itself sufficient grounds for a finding that the SPFC and ceding insurer are under common



control.



(e) “counterparty” means an SPFC’s parent or affiliated company, as ceding

insurer to the SPFC contract, or subject to the prior approval of the SAM, a nonaffiliated

company.



(f) “fair value” means:



(1) as to cash, the amount of it; and

(2) as to an asset other than cash:



(A) — the amount at which that asset could be bought or sold in a

current transaction between arms length, willing parties;



(B) — the quoted mid-market price for the asset in active markets

must be used if available; and



(C) if quoted mid-market prices are not available, a value

determined using the best information available considering values of

similar assets and other valuation methods, such as present value of future

cash flows, historical value of the same or similar assets, or comparison to

values of other asset classes, the value of which have been historically

related to the subject asset.



(g) “insolvency” or “insolvent” means that the SPFC or one or more of its

protected cells is unable to pay its obligations when they are due, unless those obligations

are the subject of a bona fide dispute, or the SAM previously has established by order



a

a a



32



other criteria for determining the solvency of the SPFC or one or more of its protected

cells, in which case the SPFC is insolvent if it fails to meet that criteria.



(h) “insurance securitization” means a package of related risk transfer

instruments, capital market offerings, and facilitating administrative agreements by which

proceeds are obtained by an SPFC directly or indirectly through the issuance of

securities, which complies with applicable securities law, and which proceeds are held in

trust pursuant to the provisions of this subchapter to secure the obligations of the SPFC

under one or more SPFC contracts with a counterparty, where investment risk to the

holders of these securities 1s contingent upon the obligations of the SPFC to the

counterparty under the SPFC contract in accordance with the transaction terms.



(1) “management” means the board of directors, managing board, manager or

other individual or individuals vested with overall responsibility for the management of

the affairs of the SPFC, including the election and appointment of officers or other of

those agents to act on behalf of the SPFC.



Gj) “organizational document” means the SPFC’s articles of incorporation,

articles of organization, bylaws, operating agreement, or other foundational documents

that establish the SPFC as a legal entity or prescribes its existence.



(k) “parent” means any corporation, limited liability company, partnership,

entity or individual that directly or indirectly owns, controls, or holds with power to vote

more than fifty percent of the outstanding voting securities of an SPFC.



(1) “permitted investments” means those investments that meet the

qualifications pursuant to section 1365.



(m) “protected cell” means a separate account established and maintained by

an SPFC for one SPFC contract and the accompanying insurance securitization with a

counterparty as further provided for in this chapter.



(n) “qualified United States financial institution” means, for purposes of

meeting the requirements of a trustee as specified in section 1365, a financial institution

that is eligible to act as a fiduciary of a trust, and is:



(1) organized or, in the case of a United States branch or agency office

of a foreign banking organization, is licensed under the laws of the United States

or the Territory; and



(2) regulated, supervised, and examined by federal, state or Territorial

authorities having regulatory authority over banks and trust companies.



(0) “securities” means those different types of debt obligations, equity,

surplus certificates, surplus notes, funding agreements, derivatives, and other legal forms

of financial instruments.



Ee

|p ie me Ee eS ee ES Ee eee



33

(p) “securities commissioner” means the Lieutenant Governor or the

Lieutenant Governor’s designee;

(q) “SPFC” or “Special Purpose Financial Captive” means a captive insurance



company which has received a license from the SAM for the limited purposes provided

for in this subchapter.



(r) “SPFC contract” means a contract between the SPFC and the counterparty

pursuant to which the SPFC agrees to provide insurance or reinsurance protection to the

counterparty for risks associated with the counterparty’s insurance or reinsurance

business.



(s) “SPFC securities” means the securities issued by an SPFC.



(t) “surplus note” means an unsecured subordinated debt obligation deemed

to be a surplus certificate and otherwise possessing characteristics consistent with

paragraph 3 of the Statement of Statutory Accounting Principles No. 41, as amended,

National Association of Insurance Commissioners (NAIC).



(u) “third party” means a person unrelated to an SPFC or its counterparty, or

both, that has been aggrieved by a decision of the SAM regarding that SPFC or its

activities.



§ 1353. Relation to other Title 22 provisions



(a) No provisions of Title 22, other than those specifically referenced in this

subchapter apply to an SPFC, and those provisions apply only as modified by this

subchapter. If a conflict occurs between a provision of Title 22 and a provision of this

subchapter, the latter controls.



(b) The SAM, by rule, regulation, or order, may exempt an SPFC or its

protected cells, on a case by case basis, from provisions of this subchapter that he

determines to be inappropriate given the nature of the risks to be insured.



§ 1354. License to transact business in Territory; contents of application;

fees; foreign corporations



(a) An SPFC, when permitted by its organizational documents, may apply to

the SAM for a license to transact insurance or reinsurance business as authorized by this

subchapter. An SPFC may insure or reinsure only the risks of its counterparty.

Notwithstanding any other provision of this subchapter, an SPFC may purchase

reinsurance to cede the risks assumed under the SPFC contract as approved by the SAM.



(b) To transact business in this Territory an SPFC shall:



ere nS

ne



34



(1) obtain from the SAM a license authorizing it to conduct insurance

or reinsurance business, or both, in this Territory;



(2) hold at least one management meeting each year in this Territory;



(3) maintain its principal place of business in this Territory;



(4) appoint a resident registered agent to accept service of process and

to otherwise act on its behalf in this Territory. If the registered agent, with

reasonable diligence, is not found at the registered office of the SPFC, the SAM



must be an agent of the SPFC upon whom any process, notice, or demand may be

served;



(5) provide such documentation of the insurance securitization as

requested by the SAM immediately upon closing of the transaction, including:



(A) an opinion of legal counsel with respect to compliance with

this subchapter and any other applicable laws as of the effective date of



the transaction; and



(B) a statement under oath of its president and secretary, or

manager, showing its financial condition; and



(6) provide a complete set of the documentation of the insurance

securitization to the SAM shortly following closing of the transaction



(c) A complete SPFC application must include the following:

(1) a certified copy of its organizational documents; and

(2) evidence of:



(A) _ the amount and liquidity of its assets relative to the risks to

be assumed;



(B) the adequacy of the expertise, experience, and character of

the person or persons who manages it;



(C) the overall soundness of its plan of operation;



(D) other factors considered relevant by the SAM in

ascertaining whether the proposed SPFC is able to meet its policy

obligations; and



(E) the applicant SPFC’s financial condition, including the

source and form of the minimum capitalization to be contributed to the

SPFC.



halen SSS SS

35



(3) A plan of operation, consisting of a description of or statement of

intent with respect to the contemplated insurance securitization, the SPFC

contract, and related transactions, which must include:



(A) — draft documentation or, at the discretion of the SAM, a

written summary of all material agreements that are entered into to

effectuate the SPFC contract and, before effecting such, the insurance

securitization, to include the names of the counterparty, the nature of the

risks being assumed, the proposed use of protected cells, if any, and the

maximum amounts, purpose, and nature and the interrelationships of the

various transactions required to effectuate the insurance securitization;



(B) the source and form of additional capitalization to be

contributed to the SPFC;



(C) the proposed investment strategy of the SPFC;



(D) a description of the underwriting, reporting, and claims

payment methods by which losses covered by the SPFC contract are

reported, accounted for, and settled; and



(E) a pro forma balance sheet and income statement illustrating

various stress case scenarios for the performance of the SPFC under the

SPFC contract.



(4) biographical affidavits in NAIC format of all of the prospective

SPFC’s officers and directors and managers, providing their legal names, any

names under which they have or are conducting their affairs, and any affiliations

with other persons, together with other biographical information as the SAM may

request.



(5) An affidavit from the applicant SPFC verifying:

(A) — the applicant SPFC meets the provisions of this subchapter;



(B) _ the applicant SPFC operates only pursuant to the provisions

in this subchapter;



(C) the applicant SPFC’s investment strategy reflects and takes

into account the liquidity of assets and the reasonable preservation,

administration, and asset management of such assets relative to the risks

associated with the SPFC contract and the insurance securitization

transaction;



(D) the securities proposed to be issued are valid legal

obligations that are either properly registered with the Office of the

36



Lieutenant Governor, Division of Banking and Insurance or constitute an

exempt security or form part of an exempt transaction under Virgin

Islands law; and



(E) unless otherwise exempted by the SAM, the trust

agreement, the trusts holding assets that secure the obligations of the

SPFC under the SPFC contract, and the SPFC contract with the

counterparty in connection with the contemplated insurance securitization

are structured pursuant to the provisions in this subchapter.



(6) Any other statements or documents required by the SAM to

evaluate and complete the licensing of the SPFC.



(d) In addition to the information required by subsection (c), and to the

provisions of section 1358, if a protected cell is used, an applicant SPFC shall file with

the SAM:



(1) a business plan demonstrating how the applicant accounts for the

loss and expense experience of each protected cell at a level of detail found to be

sufficient by the SAM, and how it reports the experience to the SAM;



(2) a statement acknowledging that all financial records of the SPFC,

including records pertaining to any protected cells, must be made available for

inspection or examination by the SAM;



(3) all contracts or sample contracts between the SPFC and any

counterparty, related to each protected cell; and



(4) a description of the expenses allocated to each protected cell.



(e) Information submitted pursuant to this subsection is confidential and is

subject to section 1373.



(f) Sections 1333 and 1334 apply to examinations, investigations, and

processing conducted pursuant to the authority of this subchapter.



(g) To transact insurance or reinsurance business in this Territory, an SPFC

shall pay to the SAM:



(1) a nonrefundable fee of five hundred dollars for processing its

application for license. In addition, the SAM may retain legal, financial, and

examination services from outside the Government to examine and investigate the

application, the reasonable cost of which may be charged against the applicant, or

the SAM may use internal resources to examine and investigate the application

for a fee of twelve thousand dollars, half of which is payable upon filing of the

application and the remainder upon licensure, or both;



EE

Leen ee ee ——————EEEESS==—=E=E=

37



(2) a license fee for the year of registration of five hundred dollars and

an annual renewal fee of five hundred dollars;



(3) an annual review fee of thirty two hundred dollars or, if higher, the

actual cost as determined by the SAM; and



(4) premium taxes as required by this subchapter.



(h) The SAM may grant a license authorizing the SPFC to transact insurance

or reinsurance business as an SPFC in this Territory until March first, at which time the

license may be renewed, upon finding that the:



(1) proposed plan of operation provides a reasonable and expected

successful operation;



(2) terms of the SPFC contract and related transactions comply with

this subchapter;



(3) proposed plan of operation is not hazardous to any counterparty;



(4) commissioner of the state of domicile of each counterparty has

notified the SAM in writing or otherwise provided assurance satisfactory to the

SAM that it has approved or not disapproved the transaction; and



(5) the license authorizing the SPFC to transact business is limited

only to the insurance or reinsurance activities that the SPFC is allowed to conduct

pursuant to this subchapter.



(1) In evaluating the expectation of a successful operation, the SAM shall

consider, among other factors, whether the proposed SPFC, and its management are of

known good character and reasonably believed not to be affiliated, directly or indirectly,

through ownership, control, management, reinsurance transactions, or other insurance or

business relations, with a person known to have been involved in the improper

manipulation of assets, accounts, or reinsurance.



(Qj) A foreign or alien corporation or limited liability company, upon approval

of the SAM, may become a domestic SPFC by complying with all of the provisions of

this subchapter and by filing with the Office of the Lieutenant Governor its

organizational documents, together with appropriate amendments to it, as may be adopted

pursuant to the provisions of this subchapter to bring these organizational documents into

compliance with this subchapter. After this is accomplished, the foreign or alien

corporation or limited liability company is entitled to the necessary or appropriate

certificates or licenses to transact business as an SPFC in this Territory and is subject to

the authority and jurisdiction of this Territory. In connection with this redomestication,

the SAM may waive any requirements for public hearings. It is not necessary for a

corporation or limited liability company redomesticating into this Territory to merge,



ie!

j= RN a a er TS ee Ee Ee eS ee



38



consolidate, transfer assets, or otherwise engage in another reorganization, other than as

specified in this section.



§ 1355. Organization requirements; privileges and restrictions



(a) An SPFC may be established as a stock corporation, limited liability

company, mutual, partnership, or other form of organization approved by the SAM.



(b) The SPFC’s organizational documents must limit the SPFC’s authority to

transact the business of insurance or reinsurance to those activities the SPFC conducts to

accomplish its purpose as expressed in this subchapter.



(c) The SPFC may not adopt a name that is the same as, deceptively similar

to, or likely to be confused with or mistaken for another existing business name

registered in this Territory.



(d) An SPFC may not have fewer than three incorporators or organizers of

whom not fewer than two must be residents of this Territory.



(e) Before transmitting its organizational documents to the Office of the

Lieutenant Governor, the incorporators or organizers shall petition the SAM to issue a

certificate setting forth a finding that the establishment and maintenance of the proposed

SPFC promotes the general good of the Territory. In arriving at this finding the SAM

shall consider:



(1) the character, reputation, financial standing, and purposes of the

incorporators or organizers;



(2) the character, reputation, financial responsibility, insurance

experience, and business qualifications of the officers, directors, partners,

members, manager, or organizers, as applicable;



(3) other aspects as the SAM considers advisable.



(f) The organizational documents, the certificate issued pursuant to

subsection (e), and the required organization fees must be transmitted to the SAM and the

Office of the Lieutenant Governor, Division of Corporations and Trademarks who shall

record the relevant organizational documents.



(g) At least one of the members of the management of the SPFC must be a

resident of this Territory.



(h) An SPFC formed pursuant to the provisions of this subchapter has the

privileges of and is subject to the provisions of the Virgin Islands Code, applicable to its

formation, as well as the applicable provisions contained in this subchapter. If a conflict

occurs between a provision of the applicable law and a provision of this subchapter, the

1 a IT a eS Se SS S|

39



latter controls. Nothing contained in this subsection with respect to an SPFC may

abrogate, limit, or rescind in any way the authority of the Director of the Division of

Banking and Insurance.



§ 1356. Capitalization



(a) An SPFC initially shall possess and after that maintain minimum

capitalization of not less than two hundred and fifty thousand dollars. All of the

minimum initial capitalization must be in cash. All other funds of the SPFC in excess of

its minimum initial capitalization must be in the form of cash, cash equivalent, or

securities invested as provided in section 1365 and approved by the SAM.



(b) Additional capitalization for the SPFC must be determined, if so required,

by the SAM after giving due consideration to the SPFC’s business plan, feasibility study,

pro-formas, and the nature of the risks being insured or reinsured, which may be

prescribed in formulas approved by the SAM.



(c) All of the minimum capitalization must be held in a bank or financial

institution within the Territory.



§ 1357. Authorized contracts

(a) An SPFC may insure only the risks of a counter party.



(b) An SPFC may not issue a contract for assumption of risk or

indemnification of loss other than an SPFC contract. However, the SPFC may cede risks

assumed through an SPFC contract to third party international reinsurers through the

purchase of reinsurance or retrocession protection on terms approved by the SAM.



(c) An SPFC may enter into contracts and conduct other commercial activities

related or incidental to and necessary to fulfill the purposes of the SPFC contract,

insurance securitization, and this subchapter. Those activities may include: entering into

SPFC contracts; issuing securities of the SPFC in accordance with applicable securities

law; complying with the terms of these contracts or securities; entering into trust, swap,

tax, administration, reimbursement, or fiscal agent transactions; or complying with trust

indenture, reinsurance, or retrocession, and other agreements necessary or incidental to

effectuate an insurance securitization in compliance with this subchapter or the plan of

operation approved by the SAM.



(d) (1) An SPFC may discount its reserves at discount rates as approved by

the SAM.



(2) An SPFC shall file annually an actuarial opinion on reserves

provided by an approved and licensed independent actuary.

40

§ 1358. Protected cells



(a) This section and section 1359 provide a basis for the creation and use of

protected cells by an SPFC as a means of accessing alternative sources of capital,

lowering formation and administrative expenses, and generally making insurance

securitizations more efficient.



(b) An SPFC may establish and maintain one or more protected cells with

prior written approval of the SAM and subject to compliance with the applicable

provisions of this subchapter and the following conditions:



(1) a protected cell must be established only for the purpose of

insuring or reinsuring risks of one or more SPFC contracts with a counterparty

with the intent of facilitating an insurance securitization;



(2) each protected cell must be accounted for separately on the books

and records of the SPFC to reflect the financial condition and results of operations

of the protected cell, net income or loss, dividends, or other distributions to the

counterparty for the SPFC contract with each cell, and other factors as may be

provided in the SPFC contract, insurance securitization transaction documents,

plan of operation, or business plan, or as required by the SAM;



(3) amounts attributed to a protected cell under this chapter, including

assets transferred to a protected cell account, are owned by the SPFC, and the

SPFC may not be, or may not hold itself out to be, a trustee with respect to those

protected cell assets of that protected cell account;



(4) all attributions of assets and liabilities between a protected cell and

the general account must be in accordance with the plan of operation approved by

the SAM. No other attribution of assets or liabilities may be made by an SPFC

between the SPFC’s general account and its protected cell or cells. The SPFC

shall attribute all insurance obligations, assets, and liabilities relating to an SPFC

contract and the related insurance securitization transaction, including any

securities issued by the SPFC as part of the insurance securitization, to a

particular protected cell. The rights, benefits, obligations, and liabilities of any

securities attributable to that protected cell and the performance under an SPFC

contract and the related securitization transaction and any tax benefits, losses,

refunds, or credits allocated, or any of them, at any point in time pursuant to a tax

allocation agreement between the SPFC and the SPFC’s counterparty, parent, or

company or group company, or any of them, in common control with them, as the

case may be, including any payments made by or due to be made to the SPFC

pursuant to the terms of the agreement, must reflect the insurance obligations,

assets, and liabilities relating to the SPFC contract and the insurance securitization

transaction that are attributed to a particular protected cell;



(5) the assets of a protected cell must not be chargeable with liabilities

arising out of an SPFC contract related to or associated with another protected

41



cell. However, one or more SPFC contracts may be attributed to a protected cell

so long as those SPFC contracts are intended to be, and ultimately are, part of a

single securitization transaction;



(6) a sale, an exchange, or another transfer of assets may not be made

by the SPFC between or among any of its protected cells without the consent of

the SAM, counterparty, and each protected cell;



(7) except as otherwise contemplated in the SPFC contract or related

insurance securitization transaction documents, or both, a sale, an exchange, a

transfer of assets, a dividend, or a distribution may not be made from a protected

cell to a counterparty or parent without the SAM’s approval and may not be

approved if the sale, exchange, transfer, dividend, or distribution would result in

insolvency or impairment with respect to a protected cell; and



(8) an SPFC may pay interest or repay principal, or both, and make

distributions or repayments in respect of any securities attributed to a particular

protected cell from assets or cash flows relating to or emerging from the SPFC

contract and the insurance securitization transactions that are attributable to that

particular protected cell in accordance with this subchapter or as otherwise

approved by the SAM.



(c) An SPFC contract with or attributable to a protected cell does not take

effect without the SAM’s prior written approval, and the addition of each new protected

cell constitutes a change in the business plan requiring the SAM’s prior written approval.

The SAM may retain legal, financial, and examination services from outside the

Government to examine and investigate the application for a protected cell, the

reasonable cost of which may be charged against the applicant, or the SAM may use

internal resources to examine and investigate the application the reasonable cost of which

may be charged against the applicant up to a maximum of twelve thousand dollars, or

both.



(d) An SPFC utilizing protected cells initially shall possess minimum

capitalization separate and apart from the capitalization of its protected cell or cells in an

amount determined by the SAM after giving due consideration of the SPFC’s business

plan, feasibility study, and pro-formas, including the nature of the risks to be insured or

reinsured. For purposes of determining the capitalization of each protected cell, an SPFC

initially shall capitalize and after that time maintain capitalization in each protected cell

in the amount and manner required for an SPFC in section 1356.



(e) The establishment of one or more protected cells alone does not constitute,

and may not be deemed to be, a fraudulent conveyance, an intent by the SPFC to defraud

creditors, or the carrying out of business by the SPFC for any other fraudulent purpose.

42



§ 1359. Effect of creation of protected cell; naming; management of assets



(a) (1) The creation of a protected cell does not create, with respect to that

protected cell, a legal person separate from the SPFC.



(2) Notwithstanding the foregoing provision, a protected cell must

have its own distinct name or designation that includes the words “protected cell”.

The SPFC shall transfer all assets attributable to the protected cell to one or more

separately established and identified protected cell accounts bearing the name or

designation of that protected cell.



(3) Although it is not a separate legal person, the property of an SPFC

in a protected cell is subject to orders of a court by name as it would have been if

the protected cell were a separate legal person.



(4) The property of an SPFC in a protected cell must be served in its

own name with process in all civil actions or proceedings involving or relating to

the activities of that protected cell or a breach by the SPFC of a duty to the

protected cell or to a counterparty to a transaction linked or attributed to it by

serving the SPFC.



(5) A protected cell exists only at the pleasure of the SPFC. At the

cessation of business of a protected cell in accordance with the plan approved by

the SAM, the SPFC voluntarily shall close out the protected cell account.



(b) Nothing in this section may be construed to prohibit an SPFC from

contracting with, or arranging for, an investment advisor, commodity trading advisor, or

other third party to manage the assets of a protected cell, if all remuneration, expenses,

and other compensation of the third party advisor or manager are payable from the assets

of that protected cell and not from the assets of other protected cells or the assets of the

SPFC’s general account, unless approved by the SAM.



(c) Creditors of a protected cell are not entitled to have recourse against the

protected cell assets of other protected cells or the assets of the SPFC’s general account.

If an obligation of an SPFC relates only to the general account, the obligation of the

SPFC extends only to that creditor, with respect to that obligation, and is entitled to have

recourse only to the assets of the SPFC’s general account.



(d) The assets of the protected cell may not be used to pay expenses or claims

other than those attributable to the protected cell. Protected cell assets are available only

to the SPFC contract counterparty and other creditors of the SPFC that are creditors only

with respect to that protected cell and, accordingly, are entitled, in conformity with this

subchapter, to have recourse to the protected cell assets attributable to that protected cell

and absolutely are protected from the creditors of the SPFC that are not creditors with

respect to that protected cell and who, accordingly, are not entitled to have recourse to the

protected cell assets attributable to that protected cell. If an obligation of an SPFC to a

43



person or counterparty arises from an SPFC contract or related insurance securitization

transaction, or is otherwise incurred, with respect to a protected cell:



(1) _ that obligation of the SPFC extends only to the protected cell

assets attributable to that protected cell, and the person or counterparty, with

respect to that obligation, is entitled to have recourse only to the protected cell

assets attributable to that protected cell; and



(2) that obligation of the SPFC does not extend to the protected cell

assets of another protected cell or the assets of the SPFC’s general account, and

that person, with respect to that obligation, is not entitled to have recourse to the

protected cell assets of another protected cell or the assets of the SPFC’s general

account. The SPFC’s capitalization held separate and apart from the

capitalization of its protected cell or cells as required by section 1359 must be

available at all times to pay expenses of or claims against the SPFC and may not

be used to pay expenses or claims attributable to any protected cell.



(e) Notwithstanding another provision of law, an SPFC may allow for a

security interest in accordance with applicable law to attach to protected cell assets or a

protected cell account when in favor of a creditor of the protected cell or to facilitate the

insurance securitization, including, without limitation, the issuance of the SPFC contract,

to the extent those protected cell assets are not required at all times to support the risk,

but without otherwise affecting the discharge of liabilities under the SPFC contract, or as

otherwise approved by the SAM.



(f) An SPFC shall establish administrative and accounting procedures

necessary to properly identify the one or more protected cells of the SPFC and the

protected cell assets and protected cell liabilities to each protected cell. The directors of

an SPFC shall keep protected cell assets and protected cell liabilities:



(1) separate and separately identifiable from the assets and liabilities

of the SPFC’s general account; and



(2) attributable to one protected cell separate and separately

identifiable from protected cell assets and protected cell liabilities attributable to

other protected cells.



(g) All contracts or other documentation reflecting protected cell liabilities

clearly must indicate that only the protected cell assets are available for the satisfaction of

those protected cell liabilities. In all SPFC insurance securitizations involving a

protected cell, the contracts or other documentation effecting the transaction must contain

provisions identifying the protected cell to which the transaction is attributed. In

addition, the contracts or other documentation clearly must disclose that the assets of that

protected cell, and only those assets, are available to pay the obligations of that protected

cell. Notwithstanding the provisions of this subsection and subject to the provisions of

this subchapter and another applicable law or regulation, the failure to include this

language in the contracts or other documentation may not be used as the sole basis by

Se ey



44



creditors, insureds or reinsureds, insurers or international reinsurers, or other claimants to

circumvent the provisions of this section.



(h) An SPFC with protected cells annually shall file with the SAM accounting

statements and financial reports required by this subchapter which, among other things,

must:



(1) detail the financial experience of each protected cell and the SPFC

separately; and



(2) provide the combined financial experience of the SPFC and all

protected cells.



(i) An SPFC with protected cells shall notify the SAM in writing within ten

business days of a protected cell becoming insolvent.



§ 1360. Issuance of securities



(a) An SPFC may issue securities, including surplus notes and other forms of

financial instruments, subject to and in accordance with applicable law, its approved plan

of operation, and its organizational documents.



(b) An SPFC, in connection with the issuance of securities, may enter into and

perform all of its obligations under any required contracts to facilitate the issuance of

these securities.



(c) Subject to the approval of the SAM, an SPFC may lawfully:



(1) account for the proceeds of surplus notes as surplus and not as debt

for purposes of statutory accounting;



(2) submit for prior approval of the SAM periodic written requests for

payments of interest on and repayments of principal of surplus notes.



(d) The SAM, without otherwise prejudicing the SAM’s authority, may

approve formulas for an ongoing plan of interest payments or principal repayments, or

both, to provide guidance in connection with his ongoing reviews of requests to approve

the payments on and principal repayments of the surplus notes.



(e) The obligation to repay principal or interest, or both, on the securities

issued by the SPFC must reflect the risk associated with the obligations of the SPFC to

the counterparty under the SPFC contract.



§ 1361. Swap agreements and other forms of asset management agreements



An SPFC may enter into swap agreements, or other forms of asset management

agreements, including guaranteed investment contracts, or other transactions that have the



a a

a |



45



| objective of leveling timing differences in funding of up-front or ongoing transaction



expenses or managing asset, credit, or interest rate risk of the investments in the trust to

ensure that the investments are sufficient to assure payment or repayment of the

securities, and related interest or principal payments, issued pursuant to an SPFC

insurance securitization transaction or the obligations of the SPFC under the SPFC

contract.



§ 1362. Authority to enter into contracts; contents



(a) An SPFC, at any given time, may enter into and effectuate an SPFC

contract with a counterparty, if the SPFC contract obligates the SPFC to indemnify the

counterparty for losses and that contingent obligations of the SPFC under the SPFC

contract are securitized through an SPFC insurance securitization and are funded and

secured with assets held in trust for the benefit of the counterparty pursuant to the

provisions of this subchapter pursuant to agreements contemplated by this subchapter and

invested in a manner that meet the criteria as provided in section 1365.



(b) An SPFC may enter into agreements with affiliated companies and third

parties and conduct business necessary to fulfill its obligations and administrative duties

incidental to the insurance securitization and the SPFC contract. The agreements may

include management and administrative services agreements and other allocation and cost

sharing agreements, or swap and asset management agreements, or both, or agreements

for other contemplated types of transactions provided in section 1361.



(c) An SPFC contract must contain provisions that:



(1) require the SPFC to enter into a trust agreement specifying what

recoverables or reserves, or both the agreement is to cover and to establish a trust

account for the benefit of the counterparty;



(2) stipulate that assets deposited in the trust account must be valued

according to their current fair value and must consist only of permitted

investments;



(3) require the SPFC, before depositing assets with the trustee, to

execute assignments, endorsements in blank, or to transfer legal title to the trustee

of all shares, obligations, or any other assets requiring assignments, in order that

the counterparty, or the trustee upon the direction of the counterparty, may

negotiate whenever necessary the assets without consent or signature from the

SPFC or another entity;



(4) require that all settlements of account between the counterparty

and the SPFC be made in cash or its equivalent; and



(5) stipulate that the SPFC and the counterparty agree that the assets in

the trust account, established pursuant to the provisions of the SPFC contract, may

be withdrawn by the counterparty at any time, notwithstanding any other



en

46



provisions in the SPFC contract, and must be utilized and applied by the

counterparty or any successor by operation of law of the counterparty, including,

subject to the provisions of section 1372, but without further limitation, any

liquidator, rehabilitator, receiver, or conservator of the counterparty, without

diminution because of insolvency on the part of the counterparty or the SPFC,

only for the following purposes:



(A) _ to transfer all of the assets into one or more trust accounts

for the benefit of the counterparty pursuant to and in accordance with the

terms of the SPFC contract and in compliance with the provisions of this

subchapter; and



(B) to pay any other incurred and paid amounts that the

counterparty claims are due pursuant to and under the terms of the SPFC

contract and in compliance with this subchapter.



(d) (1) The SPFC contract may contain provisions that give the SPFC the

right to seek approval from the counterparty to withdraw from the trust all or part of the

assets, or income from them, contained in the trust and to transfer the assets to the SPFC,

provided that:



(A) at the time of the withdrawal, the SPFC shall replace the

withdrawn assets, excluding any income withdrawn, with other qualified

assets having a fair value equal to the fair value of the assets withdrawn

and that meet the provisions of section 1365; and



(B) after the withdrawals and transfer, the fair value of the

assets in trust securing the obligations of the SPFC under the SPFC

contract is no less than an amount needed to satisfy the funded

requirement of the SPFC contract.



(2) The counterparty must be the sole judge as to the application of

these provisions but may not unreasonably nor arbitrarily withhold its approval.



§ 1363. Securities issued by SPFC as insurance contract; underwriters or

selling agents as insurance producers



Securities issued by an SPFC pursuant to an insurance securitization may not be

considered to be insurance or reinsurance contracts. An investor in these securities or a

holder of these securities, by sole means of this investment or holding, may not be

considered to be transacting the business of insurance in this Territory. The underwriter’s

placement or selling agents and their partners, directors, officers, members, managers,

employees, agents, representatives, and advisors involved in an insurance securitization

pursuant to this subchapter may not be considered to be insurance producers or brokers or

conducting business as an insurance or reinsurance company or agency, brokerage,

intermediary, advisory, or consulting business only by virtue of their activities in

connection with them.

i Se



47



§ 1364. Requirements and guidelines for asset management



In fulfilling its function, the SPFC must adhere to the following requirements and,

to the extent of its powers, must ensure that contracts obligating other parties to perform

certain functions incident to its operations are substantively and materially consistent

with the following requirements and guidelines:



(a) The assets of an SPFC must be preserved and administered by or on behalf

of the SPFC to satisfy the liabilities and obligations of the SPFC incident to the insurance

securitization and other related agreements.



(b) Assets held by an SPFC in trust must be valued at their fair value.



(c) The proceeds from the sale of securities pursuant to the insurance

securitization must be deposited with the trustee to the extent required to secure its

obligations under the SPFC contract as provided by this subchapter and must be held or

invested by the trustee pursuant to the provisions of section 1365 and the asset

management agreement, if any, filed with the SAM. {



(d) Assets of the SPFC, other than those held in trust for the counterparty, and

income on trust assets received by the SPFC may be used to pay interest or other

consideration on any securities or outstanding debt or other obligation of the SPFC, and

nothing in this subchapter may be construed or interpreted to prevent an SPFC from

entering into a swap agreement or other asset management transaction that has the effect

of hedging or guaranteeing the fixed or floating interest rate returns paid on the assets in

trust or required for the securities issued by the SPFC generated from or other

consideration or payment flows in the transaction.



(e) In the SPFC insurance securitization, the contracts or other relating

documentation must contain provisions identifying the SPFC. |



(f) Unless otherwise approved by the SAM, an SPFC may not:

(1) issue or otherwise administer primary insurance policies;



(2) enter into an SPFC contract with a person that is not licensed or

otherwise authorized to transact the business of insurance or reinsurance in at

least its state, territory or country of domicile;



(3) assume or retain exposure to insurance or reinsurance losses for its

own account that is not funded by proceeds from an SPFC securitization that

meets the provisions of this subchapter. However, the SPFC may wholly or

partially reinsure or retrocede the risks assumed to a third party international

reinsurer on terms approved by the SAM.



(g) An SPFC may not:



Sen ae ae Se ee ee ee

48



(1) have any direct obligation to the policyholders or reinsureds of the

counterparty;



(2) lend or otherwise invest, or place in custody, trust, or under

management any of its assets with, or to borrow money or receive a loan from,

other than by issuance of the securities pursuant to an insurance securitization, or

advance from, anyone convicted of a felony, anyone who is untrustworthy or of

known bad character, or anyone convicted of a criminal offense involving the

conversion or misappropriation of fiduciary funds or insurance accounts, theft,

deceit, fraud, misrepresentation, or corruption.



§ 1365. Trust agreements for assets held in trust or pledged to secure

obligations



(a) Assets of the SPFC held in trust to secure obligations under the SPFC

contract must at all times be held in:



(1) cash and cash equivalents;



(2) securities listed by the Securities Valuation Office of the NAIC

and qualifying as admitted assets under statutory accounting convention in its

state, territory of domicile; or



(3) another form of security acceptable to the SAM.



(b) Assets of the SPFC that are pledged to secure obligations of the SPFC to a

counterparty under an SPFC contract must be held in trust and administered by a

qualified United States financial institution. The qualified United States financial

institution does not control, is not controlled by, or is not under common control with, the

SPFC or the counterparty.



(c) The agreement governing this trust must create one or more trust accounts

into which all pledged assets must be deposited and held until distributed in accordance

with the trust agreement. The pledged assets must be held by the trustee at one of the

trustee’s offices or branch offices in the United States or the Virgin Islands and may be

held in certificated or electronic form.



(d) The provisions for withdrawal by the counterparty of assets from the trust

must be clear and unconditional, subject only to the following requirements:



(1) the counterparty has the right to withdraw assets from the trust

account at any time, without notice to the SPFC, subject only to written notice to

the trustee from the counterparty that funds in the amount requested are due and

payable by the SPFC, pursuant to the terms of the SPFC contract.

49



(2) a statement or document does not need to be presented in order to

withdraw assets, but the counterparty may be required to acknowledge receipt of

withdrawn assets;



(3) the trust agreement must indicate that it is not subject to any

conditions or qualifications outside of the trust agreement;



(4) the trust agreement must not contain references to any other

agreements or documents.



(e) The trust agreement must be established for the sole use and benefit of the

counterparty at least to the full extent of the obligations of the SPFC to the counterparty

under the SPFC contract. If there is more than one counterparty, or more than one SPFC

contract with the same counterparty, a separate trust agreement must be entered into with

the counterparty and a separate trust account must be maintained for each SPFC contract

with the counterparty, unless otherwise approved by the SAM.



(f) The trust agreement must provide for the trustee to:

(1) receive assets and hold all assets in a safe place;



(2) determine that all assets are in a form that the counterparty or the

trustee, upon direction by the counterparty, may negotiate, whenever necessary,

the assets, without consent or signature from the SPFC or another person or

entity;



(3) furnish to the SPFC, the SAM, and the counterparty a statement of

all assets in the trust account reported at fair value upon its inception and at

intervals no less frequent than the end of each calendar quarter;



(4) notify the SPFC and the counterparty, within ten days, of any

deposits to or withdrawals from the trust account;



(5) upon written demand of the counterparty, immediately take the

necessary steps to transfer absolutely and unequivocally all right, title, and

interest in the assets held in the trust account to the counterparty and deliver

physical custody of the assets to the counterparty; and



(6) allow no substitutions or withdrawals of assets from the trust

account, except pursuant to the trust agreement or SPFC contract, or as otherwise

permitted by the counterparty.



(g) The trust’: agreement must provide that at least thirty days, but not more

than forty five days, before termination of the trust account, written notification of

termination must be delivered by the trustee to the counterparty with a copy of the notice

provided to the SAM.

50



(h) In addition to the requirements for the trust as provided in this subchapter,

the trust agreement may be made subject to and governed by the laws of any state or

territory. The state or territory must be disclosed in the plan of operation filed with and

approved by the SAM.



(1) The trust agreement must prohibit invasion of the trust corpus for the

purpose of paying compensation to, or reimbursing the expenses of, the trustee.



(j) The trust agreement must provide that the trustee must be liable for its

own negligence, willful misconduct, or lack of good faith.



(k) (1) Notwithstanding the provisions of subsection (d)(3) and (4), when a

trust agreement is established in conjunction with an SPFC contract, then the trust

agreement or SPFC contract, or both, may provide that the counterparty shall undertake

to use and apply any amounts drawn upon the trust account, without diminution because

of the insolvency of the counterparty or the SPFC, only for one or more of the following

purposes:



(A) — to pay or reimburse the counterparty for payment of the

SPFC’s share of premiums to be returned to owners of counterparty’s

policies covered under the SPFC contract on account of cancellations of

the policies under the counterparties policies;



(B) to pay or reimburse the counterparty for payment of the

SPFC’s share of surrenders, benefits, losses, or other benefits covered and

payable pursuant to the provisions of the SPFC contract;



(C) — to fund an account with the counterparty in an amount to

secure the credit or reduction from liability for reinsurance coverage

provided under the SPFC contract; or



(D) to pay any other amounts the counterparty claims are

legally and properly due under the SPFC contract.



(2) Any assets deposited into an account of the counterparty pursuant

to subparagraph (C) of paragraph (1) or withdrawn by the counterparty pursuant

to subparagraph (D) of this paragraph (1) and any interest or other earnings on

them, must be held by the counterparty in trust and separate and apart from any

general assets of the counterparty, for the sole purpose of funding the payments

and reimbursements of the SPFC contract described in subparagraphs (A) through

(D) of paragraph (1).



(3) The counterparty shall return to the SPFC amounts withdrawn

under subparagraphs (A) through (D) of paragraph (1) in excess of actual amounts

required under subparagraphs (A) through (C) of paragraph (1), and in excess of

the amounts subsequently determined to be due under subparagraph (D) of

paragraph (1), plus interest at a rate not in excess of the prime rate for the

Ds |



51



amounts held pursuant to subparagraph (C) of paragraph (1) unless a higher rate

of interest has been awarded by a court, and any net costs or expenses, including

attorneys’ fees, awarded by a court.



(4) If the counterparty has received notification of termination of the

trust account, and where the SPFC’s entire obligations secured under the specific

SPFC contract remain unliquidated and undischarged ten days before the

termination date, to withdraw amounts equal to the obligations and deposit the

amounts in a separate account, in the name of the counterparty, in a qualified

United States financial institution, separate and apart from the counterparty’s

general assets, to the extent the obligations or liabilities have not been funded by

the SPFC, in trust only for those uses and purposes specified in subparagraph (A)

of paragraph (1) as may remain executory after the withdrawal and for any period

after the termination date until discharged.



§ 1366. Payment of dividends



(a) An SPFC may not declare or pay dividends in any form to its owners other

than in accordance with the insurance securitization transaction agreements, and in no

extent may the dividends decrease the capital of the SPFC below two hundred fifty

thousand dollars, and, after giving effect to the dividends, the assets of the SPFC,

including assets held in trust pursuant to the terms of the insurance securitization, must be

sufficient to satisfy the SAM that it can meet its obligations. Approval by the SAM of an

ongoing plan for the payment of dividends or other distribution by an SPFC must be

conditioned upon the retention, at the time of each payment, of capital or surplus equal to

or in excess of amounts specified by, or determined in accordance with formulas

approved for the SPFC by the SAM.



(b) The dividends may be declared by the management of the SPFC if the

dividends do not violate the provisions of this subchapter or jeopardize the fulfillment of

the obligations of the SPFC or the trustee pursuant to the SPFC insurance securitization

agreements, the SPFC contract, or any related transaction and other provisions of this

subchapter.



§ 1367. Material changes of SPFC’S plan; filing of audit and statement of

operations; examination of records



(a) Any material change of the SPFC’s plan of operation pursuant to the

section 1354, whether or not through an SPFC protected cell, requires prior approval of

the SAM, provided however:



(1) if initially approved in the plan of operation, securities

subsequently issued to continue the securitization activities of the SPFC either

during or after expiration, redemption, or satisfaction, of all of these, of part or all

of the securities issued pursuant to initial insurance securitization transactions

may not be considered a material change; or



EEE

52



(2) a change and substitution in a counterparty to a swap transaction

for an existing insurance securitization as allowed pursuant to the provisions of

this subchapter may not be considered a material change if the replacement swap

counterparty carries a similar or higher rating to its predecessor with two or more

nationally recognized rating agencies, or both.



(b) No later than five months after the fiscal year end of the SPFC, the SPFC

shall file with the SAM an audit by a licensed certified public accounting firm of the

financial statements of the SPFC and the trust accounts.



(c) Each SPFC shall file by March first, a statement of operations, using either

generally accepted accounting principles or, if approved or required by the SAM,

statutory accounting principles with useful or necessary modifications or adaptations

required or approved or accepted by the SAM for the type of insurance and kinds of

insurers to be reported upon, and as supplemented by additional information required by

the SAM. The statement of operations must include a statement of income, a balance

sheet, and may include a detailed listing of invested assets, including identification of

assets held in trust to secure the obligations of the SPFC under the SPFC contract. The

SPFC also may include with the filing risk based capital calculations and other adjusted

capital calculations to assist the SAM with evaluating the levels of the surplus of the

SPFC for the year ending on December thirty first of the previous year. The statements

must be prepared on forms required by the SAM. In addition the SAM may require the

filing of performance assessments of the SPFC contract.



(d) An SPFC shall maintain its records in this Territory and shall make its

records available for examination by the SAM at any time. The SPFC shall keep its

books and records in such manner that its financial condition, affairs, and operations can

be ascertained and so that the SAM may readily verify its financial statements and

determine its compliance with this subchapter.



(e) All original books, records, documents, accounts, and vouchers must be

preserved and kept available in this Territory for the purpose of examination and until

authority to destroy or otherwise dispose of the records is secured from the SAM. The

original records, however, may be kept and maintained outside this Territory if,

according to a plan adopted by the management of the SPFC and approved by the SAM,

it maintains suitable records instead of it. The books or records may be photographed,

reproduced on film, or stored and reproduced electronically.



(f) Nothing contained in this section with respect to an SPFC shall abrogate,

limit, or rescind in any way the authority of the Lieutenant Governor.



§ 1368. Examinations by the SAM; confidentiality of examination reports



(a) At least once every three years, and if the SAM determines it to be

prudent, the SAM, or his designee, shall visit each SPFC and thoroughly inspect and

examine its affairs to ascertain its financial condition, its ability to fulfill its obligations,

————————Vo_—_—_—TTTLTL!LLllU



53



and whether it has complied with this subchapter. The SAM upon application, in his

discretion, may enlarge the three year period to five years, if an SPFC is subject to a

comprehensive annual audit during that period of a scope satisfactory to the SAM by

licensed independent auditors approved by the SAM. The expenses and charges of the

examination must be paid to the Territory by the company or companies examined, and

the department shall issue its warrants for the proper charges incurred in all examinations.



(b) All examination reports, preliminary examination reports or results, |

working papers, recorded information, documents, and copies of documents produced by,

obtained by, or disclosed to the SAM or any other person in the course of an examination

made pursuant to the provisions of this section are confidential and are not subject to

subpoena and may not be made public by the SAM or an employee or agent of the SAM

without the written consent of the company, except to the extent provided in this

subsection. Nothing in this subsection prevents the SAM from using this information in

furtherance of the SAM’s regulatory authority as provided by the provisions of this title.

The SAM may grant access to this information to public officers having jurisdiction over

the regulation of insurance in another Territory or country, or to law enforcement officers

of this Territory, including the Attorney General or Lieutenant Governor or another

Territory or agency of the federal government at any time, if the officers receiving the

information agree in writing to hold it in a manner consistent with this section.



§ 1369. Expiration of authority granted by the SAM on cessation of

business; suspension or revocation of license; penalties; administrative hearing



(a) At the cessation of business of an SPFC following termination or

cancellation of an SPFC contract and the redemption of any related securities issued in

connection with them, the authority granted by the SAM expires or, in the case of retiring

and surviving protected cells, be modified, and the SPFC is no longer authorized to

conduct activities unless and until a new or modified license is issued pursuant to a new

filing pursuant to the provisions of section 1354 or as agreed by the SAM.



(b) | The SAM may suspend or revoke the license of an SPFC for:

(1) insolvency;

(2) failure to meet the provisions of section 1356, 1358 or 1370;



(3) use of methods that, although not otherwise specifically prohibited

by law, nevertheless render its operation detrimental or its condition unsound with

respect to the public, the holders of the securities, or policyholders of the SPFC;

or



(4) failure to otherwise comply in any material respect with applicable

laws of this Territory.



(c) If the SAM finds, upon examination or other evidence, that an SPFC has

committed any of the acts specified in subsection (b), the SAM may impose the penalties

| .



provided under this chapter, if the SAM considers it in the best interest of the public, the

holders of the securities, and the policyholders of the SPFC.



(d) Unless the grounds for suspension or revocation relate only to the

financial condition or soundness of the SPFC or to a deficiency in its assets, the SAM

shall notify the SPFC not less than thirty days before revoking its authority to do business

in this Territory and specify in the notice the particulars of the alleged violation of the

law or its organizational documents or grounds for revocation and a proper opportunity

must be offered the SPFC to be heard before the Superior Court, or an administrative law

court if and when established.



§ 1370. Tax rates and payment schedules



(a) An SPFC shall pay to the SAM by March 1 of each year, a tax at the rate

of four tenths of one percent on the first $20,000,000 and three tenths of one percent on

each dollar after the first $20,000,000, subject to a minimum annual tax of five thousand

dollars. Taxes are based upon the direct premiums written or contracted for on policies

or contracts of insurance, other than reinsurance policies or contracts written by the

SPFC, during the year ending December 31 next preceding, after deducting from the

direct premiums subject to the tax the amounts paid to insureds as returned premiums

which must include dividends on unabsorbed premiums or premium deposits returned or

credited to insureds.



(b) An SPFC shall pay to the SAM by March | of each year, a tax at the rate

of two hundred and twenty five thousandths of one percent on the first $20,000,000 of

assumed reinsurance premium, and one hundred fifty thousandths of one percent on the |

next $20,000,000, and fifty thousandths of one percent on the next, $20,000,000 and

twenty five thousandths of one percent of each dollar after that, subject to a minimum

annual tax of five thousand dollars. However, no reinsurance tax applies to premiums for

risks or portions of risks which are subject to taxation on a direct basis, pursuant to

subsection (a). A premium tax is not payable in connection with the receipt of assets in

exchange for the assumption of loss reserves and other liabilities of another insurer under

common ownership and control if the transaction is part of a plan to discontinue the

operations of the other insurer and if the intent of the parties to the transaction is to renew

or maintain business with the SPFC.



(c) Each protected cell of the SPFC must be taxed as if it is a separate and

distinct SPFC.



(d) The tax provided in this section is the only tax collectible pursuant to the

laws of this Territory from an SPFC and no other tax may be levied or collected from an

SPFC by the Territory, except taxes on real and personal property used in the production

of income.

55



§ 1371. Conditions for SPFC contract being granted credit for reinsurance

treatment or otherwise qualifying as asset or reduction from liability for benefit of

counterparty



An SPFC contract meeting the provisions of this subchapter must be granted

credit for reinsurance treatment or otherwise qualifies as an asset or a reduction from

liability for reinsurance ceded by a domestic insurer to an SPFC as an assuming insurer

for the benefit of the counterparty, provided and only to the extent:



(a) of the fair value of the assets held in trust for, or irrevocable letters of

credit issued by a bank chartered by this Territory or a member bank of the Federal

Reserve System or as approved by the SAM, for the benefit of the counterparty under the

SPFC contract;



(b) the assets are held in trust pursuant to the provisions of this subchapter;



(c) the assets are administered in the manner and pursuant to arrangements as

provided in this subchapter; and



(d) the assets are held or invested in one or more of the forms allowed in

section 1365.



§ 1372. Conservation, rehabilitation, or liquidation of SPFC



(a) Except as otherwise modified in this section, the terms and conditions set

forth in this chapter pertaining to administrative supervision of insurers and the

rehabilitation, receiverships, and liquidation of insurers apply in full to SPFCs or each of

the SPFC’s protected cells, independently, or both, without causing or otherwise effecting

a conservation, rehabilitation, receivership, or liquidation of the SPFC or another

protected cell.



(b) Notwithstanding any other provision of this chapter, and without causing

or otherwise affecting the conservation or rehabilitation of an otherwise solvent protected

cell of an SPFC and subject to the provisions of subsection (g)(5) of this section, the

SAM may apply by petition to the Superior Court for an order authorizing the SAM to

conserve, rehabilitate, or liquidate an SPFC domiciled in this Territory on one or more of

the following grounds:



(1) there has been embezzlement, wrongful sequestration, dissipation,

or diversion of the assets of the SPFC intended to be used to pay amounts owed to

the counterparty or the holders of SPFC securities; or



(2) the SPFC is insolvent and the holders of a majority in outstanding

principal amount of each class of SPFC securities request or consent to

conservation, rehabilitation, or liquidation pursuant to the provisions of this

subchapter.

56



(c) Notwithstanding the provisions of this chapter, the SAM may apply by

petition to the Superior Court for an order authorizing the SAM to conserve, rehabilitate,

or liquidate one or more of an SPFC’s protected cells, independently, without causing or

otherwise effecting a conservation, rehabilitation, receivership, or liquidation of the

SPFC generally or another of its protected cells, on one or more of the following grounds:



(1) there has been embezzlement, wrongful sequestration, dissipation,

or diversion of the assets of the SPFC attributable to the affected protected cell or

cells intended to be used to pay amounts owed to the counterparty or the holders

of SPFC securities of the affected protected cell or cells; or



(2) the affected protected cell is insolvent and the holders of a majority

in outstanding principal amount of each class of SPFC securities attributable to

that particular protected cell request or consent to conservation, rehabilitation, or

liquidation pursuant to the provisions of this subchapter.



(d) The court may not grant relief provided in subsection (b) or subsection (c)

unless, after notice and a hearing, the SAM, who has the burden of proof, establishes by

clear and convincing evidence that relief must be granted. The court’s order may be

made in respect of one or more protected cells by name, rather than the SPFC generally.



(e) Notwithstanding another provision in this chapter, regulations

promulgated under this chapter, or another applicable law or regulation, upon any order

of conservation, rehabilitation, or liquidation of an SPFC, or one or more of the SPFC’s

protected cells, the receiver shall manage the assets and liabilities of the SPFC pursuant

to the provisions of this subchapter. The receiver shall ensure that the assets linked to

one protected cell are not applied to the liabilities linked to another protected cell or to

the SPFC generally, unless an asset or liability is linked to more than one protected cell,

in which case the receiver shall deal with the asset or liability in accordance with the

terms of any relevant governing instrument or contract.



(f) With respect to amounts recoverable under an SPFC contract, the amount

recoverable by the receiver must not be reduced or diminished as a result of the entry of

an order of conservation, rehabilitation, or liquidation with respect to the counterparty,

notwithstanding another provision in the contracts or other documentation governing the

SPFC insurance securitization.



(g) Notwithstanding the provisions of this chapter or other laws of this

Territory:

(1) an application or petition, or a temporary restraining order or

injunction issued pursuant to the provisions of this chapter, with respect to a

counterparty does not prohibit the transaction of a business by an SPFC, including

any payment by an SPFC made pursuant to an SPFC security, or any action or

proceeding against an SPFC or its assets;



(2) the commencement of a summary proceeding or other interim

proceeding commenced before a formal delinquency proceeding with respect to

ae, |

57



an SPFC, and any order issued by the court does not prohibit the payment by an

SPFC made pursuant to an SPFC security or SPFC contract or the SPFC from

taking any action required to make the payment;



(3) a receiver of a counterparty may not void a non-fraudulent transfer

by a counterparty to an SPFC of money or other property made pursuant to an

SPFC contract;



(4) a receiver of an SPFC may not void a non-fraudulent transfer by

the SPFC of money or other property made to a counterparty pursuant to an SPFC

contract or made to or for the benefit of any holder of an SPFC security on

account of the SPFC security; and



(5) the SAM may not seek to have an SPFC with protected cells

declared insolvent as long as at least one of the SPFC’s protected cells remains

solvent, and in the case of such an insolvency, the receiver shall handle SPFC’s

assets in compliance with subsection (e) and other laws of this Territory.



(h) Subsection (g) does not prohibit the SAM from taking any action

permitted under this chapter with respect only to the conservation or rehabilitation of an

SPFC with protected cell or cells, provided the SAM would have had sufficient grounds

to seek to declare the SPFC insolvent; subject to and without otherwise affecting the

provisions of paragraph (5) of subsection (g). In this case, with respect to the solvent

protected cell or cells, the SAM may not prohibit payments made by the SPFC pursuant

to the SPFC security, SPFC contract, or otherwise made under the insurance

securitization transaction that are attributable to these protected cell or cells or prohibit

the SPFC from taking any action required to make these payments.



(i) With the exception of the fulfillment of the obligations under an SPFC

contract, and notwithstanding another provision of this subchapter or other laws of this

Territory, the assets of an SPFC, including assets held in trust, must not be consolidated

with or included in the Territory of a counterparty in any delinquency proceeding against

the counterparty pursuant to the provisions of this subchapter for any purpose including,

without limitation, distribution to creditors of the counterparty.



§ 1373. Disclosure of information by the SAM



Information submitted pursuant to this subchapter is confidential and may not be

made public by the SAM or an agent or employee of the SAM without the prior written

consent of the SPFC, except that:



(a) information submitted pursuant to this subchapter is discoverable by a

party in a civil action or contested case to which the submitting SPFC is a party, upon a

specific finding by the court that:



(1) the SPFC is a necessary party to the action and not joined only for

the purposes of evading the confidentiality provisions of this subchapter;

58



(2) the party seeking the information demonstrates by a clear and

convincing standard that the information sought is relevant, material to, and

necessary for the prosecution or defense of the claim asserted in the action; and



(3) the information sought is unavailable from other non-confidential

sources.



(b) The SAM may disclose the information to the public officer having

jurisdiction over the regulation of insurance in another territory or state if:



(1) the public official agrees in writing to maintain the confidentiality

| of the information; and



(2) the laws of the territory or state in which the public official serves

require the information to be confidential.



§ 1374. Standards and criteria applicable in contested case brought by third

party and certain actions by the SAM; asset protection



(a) A contested case brought by a third party based on a decision of the SAM

pursuant to this subchapter is governed by applicable law of the Territory except that the

third party shall:



(1) prove its case by a clear and convincing evidence standard;



(2) demonstrate irreparable harm to the SPFC or its counterparty, or

both;



(3) show that there is no other adequate remedy at law; and



(4) post a bond of sufficient surety to protect the interests of the

holders of the SPFC securities and policyholders, but it may not be less than

fifteen percent of the total amount of the securitized transaction.



(b) If the SAM reverses, amends, or modifies a license previously issued to an

SPFC or an order made in connection with a license previously issued to an SPFC, the

action must comply with the standards and criteria provided in subsection (a), unless the

action in reversing, amending, or modifying the license is in conformance with the

provisions of section 1369.



(c) A creditor of a policyholder or a participant of a captive insurance

company or segregated account, and a creditor of an affiliated person of any such |

insurance company or segregated account, may not set aside a transfer of funds by a

policyholder or participant to the insurance company in payment of one or more

premiums charged on a contract of insurance or participant contract issued by such



company or segregated account, unless: |

TT en ama

| a RR



59



(1) It is determined, in a final order of the Superior Court, that the

payment of the premiums constitutes a fraudulent transfer with respect to such

creditor under the laws of the Territory; and



(2) Except in cases in which actual fraudulent intent is shown in a

hearing before the Superior Court, only to the extent, if any, the amount of such

payment is determined by the Superior Court to exceed the market value of the

insurance protection afforded to the policyholder or participant under such

contract, as at the time of its issuance.



(d) A policy of insurance or participant contract issued by a captive insurance

company or segregated account, which policy or contract is expressly stated to be non-

assignable:



(1) is void in the event of an attempted assignment; and



(2) is unenforceable by any person other than the original policyholder

or contract participant and his, her or its transferees by operation of the law of the

Territory and legal representatives.



(e) For the purposes of this section, transferees by operation of the law of the

Territory and legal representatives do not include successors by merger or consolidation,

successors to a policyholder or participant following a change in control of the

policyholder or participant, or trustees in bankruptcy, receivers, liquidators, creditors or

committees of creditors.



(f) For purposes of this section, creditor includes a person to whom an

obligation is owed and any person who alleges or pursues a claim or cause of action on

behalf of or in the name of a creditor.



(g) Where a captive insurance company has purchased reinsurance on any of

its obligations under a contract of insurance, the proceeds of the reinsurance must be held

or applied to provide the benefits to the insured as specified in the policy issued by the

captive insurance company.



§ 1375. Promulgation of regulations

The SAM may promulgate regulations necessary to effectuate the purposes of this



subchapter. Regulations promulgated pursuant to this section do not affect an SPFC

insurance securitization in effect at the time of the promulgation.

|



60

Subchapter Three: Tax Incentive Benefits

§ 1376. Tax Incentive Benefits



Any Captive Insurance Company licensed and regulated by SAM pursuant to

Section 1321, is eligible to any tax exemption, tax credit, or tax privilege pursuant to this

chapter. Pursuant to the provisions of this chapter, the SAM shall have the power to:



(a) review all applications for tax incentive benefits, and subject to the

Governor’s approval, issue a Certificate of Eligibility for Tax Incentive Benefits to:



(1) captive insurance and captive reinsurance companies, international

reinsurance companies, reinsurance companies, alternative market entities,

SPFCs, homeowner’s associations and condominium owners associations;



(2) insurance managers, based upon a demonstration of their |

competence and experience to do so as individuals or firms;



(3) intermediaries and auditors, actuaries, or brokers;



(4) business entities, but not individuals, which provide support for

Virgin Islands licensed reinsurers, international reinsurers, alternative market

companies, captive insurance companies, and to non- Virgin Islands insurance

companies if the services are provided from the Virgin Islands.



(b) Determine compliance of the beneficiary with the provisions of this

chapter and the regulations issued under this chapter. The expenses of any investigation

by the SAM to determine compliance by any beneficiary must be borne by the

beneficiary. The SAM may hold a hearing in which the beneficiary shall show cause

why its certificate of tax incentive benefits should not be modified, suspended or

revoked.



(c) modify, suspend or revoke a certificate of tax incentive benefits.



(d) In connection with any investigation or hearing required by this chapter or

rules and regulations issued this chapter, to subpoena witnesses, records, books, and

administer oaths, and inspect properties and facilities with respect to which tax incentive i

benefits have been granted or applied for;



(e) request and obtain from the Commissioner of Finance and the Director of

the Bureau of Audit and Control such auditing services as the SAM considers necessary

to the proper administration of this chapter.



(f) prepare and promulgate, in accordance with Title 3, chapter 35 of the

Virgin Islands Code, such rules and regulations as may be necessary to implement the

provisions of this chapter.

61



(g) prepare and submit annual reports to the Governor and the Legislature

containing data regarding all tax incentive benefits outstanding and the beneficiaries of

same;



(h) in addition to the application fee and annual compliance fees, the SAM

may also assess against an applicant or beneficiary any extraordinary costs and expenses

to process the application or monitor the beneficiary’s performance of the conditions in

the certificate. The costs and expenses may include, but are not limited to, the services of

outside consultants necessitated by the application or compliance investigation.



(i) notify the office of the Lieutenant Governor of any corporation, joint

venture, limited liability company, partnership of any other entity which have been

approved for tax incentive benefits within sixty days of such approval; as well as prepare

and submit an annual listing of all entities which are approved for tax incentive benefits

whether they are currently operational or not.



(j) conduct investigations with respect to all applications for tax incentive

benefits;



(k) promote the tax incentive program;



(1) prepare an annual budget for consideration and approval by the Lieutenant

Governor;



(m) hire and remove employees of the alternative market and international

reinsurance section, subject to the approval of the Lieutenant Governor; and



(n) perform such other acts or functions within its area of responsibility as the

SAM may considers necessary in furtherance of the purposes of this chapter.



§ 1377. Contract



Each certificate granting tax incentive benefits issued under this chapter is a

contact between the Government of the Virgin Islands and the beneficiary, and the

Government may not adopt any legislation impairing or limiting the obligation of such

contract.



§ 1378. Qualification



The SAM may not require an applicant to meet qualifications or requirements in

excess of those representations made by the applicant to the SAM during the application

process as a condition of granting an initial certificate. In order to qualify and remain

eligible for tax incentive benefits under this chapter, an applicant must fulfill the

following qualifications or requirements:



(a) Invest at least $10,000, exclusive of inventory in the business related to

servicing the insurance industry.

———_—_—_—m i iom cK



62



(b) In the case of a_ partnership, limited liability company, trust or other

entity, be a partnership, limited liability company, trust or other entity under the laws of

the Virgin Islands with its principal place of business in the Virgin Islands; in the case of

a corporation, be either incorporated under the laws of the Virgin Islands with its

principal place of business in the Virgin Islands, or under the laws of a state, territory or

commonwealth of the United States, and be registered, licensed and qualified to conduct

business in the Virgin Islands.



(c) (1) In the case of a Virgin Islands corporation, receive income that is

covered by section 934 of the Internal Revenue Code of 1986, as amended, as applicable

in the Virgin Islands, and meet the requirement of any other applicable federal or local

law, any implementation agreement, as amended from time to time required under federal

law, the provisions of this chapter, and any rules and regulations promulgated under such

laws of this chapter;



(2) In the case of a partnership, limited liability company, trust or

other entity, meet the requirements of any applicable federal or local law, the

provisions of this chapter, and any rules and regulations adopted pursuant thereto.



(d) Be the actual investor in the enterprise for which tax incentive benefits are

sought, and not a contractor, subcontractor, or other person or corporation acting as an

agent or a similar capacity to the investor, provided that corporate affiliates who are

actual investors may qualify for benefits.



(e) Employ at least two fulltime persons on a fulltime basis in such enterprise; |

and all employees in such enterprise must be residents of the Virgin Islands;



(f) Comply with all federal and local laws;



(g) Agree in writing to employ or contract, and to require all contractors

retained by it to employ or subcontract for services and purchase goods, materials, and

supplies with and from those persons, firms and corporations who are residents of the

Virgin Islands, or incorporated under the laws of the Virgin Islands, and who are duly

licensed to do business in the Virgin Island and have been so duly licensed for one year

or more prior to the initial date of any such employment, contract, subcontract, or

purchase. A beneficiary may employ persons who are not Virgin Islands residents at the

time of hire provided they relocate to the Virgin Islands at the commencement of

employment, and become bona fide residents pursuant to section 932(c) of the Internal

Revenue Code of 1986, as amended. Each applicant shall agree in writing to invite

competitive bidding, and require all contractors retained by it to invite competitive

bidding for all such services, good and materials pursuant to the publications requirement

of Title 31, section 236 of the Virgin Islands Code, and to notify each bidder in writing of

the name of the successful bidder and amount of its bid. Each applicant shall advise the

SAM, in writing, with a copy to the Commissioner of the Department of Licensing and

Consumer Affairs when goods and materials are not available under the above-defined

Virgin islands sources and demonstrate in writing efforts to obtain such services, good

———————



63



and materials, and to require contractors or subcontractors retained by the applicant to

likewise comply with this requirement;



(h) Meet any time restraints or deadlines imposed by the SAM with respect to

the initiation of operations or activity, provided that the SAM may extend any such time

restraints or deadlines upon good cause shown by the beneficiary;



(1) Agree in writing to notify the Virgin Islands Employment Service as to the

availability of employment by it or its subcontractors, the number of employees required,

the occupational classification of such workers, and the applicable wage rate;



GQ) Provide educational assistance to residents of the Virgin Islands in an

amount and form which is acceptable to the SAM or provide a financial contribution to a

fund established by the SAM, except that fifty percent of any such financial contribution

must be designated for public school programs and initiatives. As used in this subsection,

educational assistance includes all types of educational assistance including but not

limited to vocational and other job training programs;



(k) Agree in writing to submit plans for a management-training program for

approval by the SAM. The plan must establish a program through which the beneficiary

shall have as managers and officers, residents of the Virgin Islands, as defined in this

chapter or section 703(e) of title 29. The SAM shall use the beneficiary’s organizational

chart and job descriptions as the sole guide as to whether a beneficiary’s employee is

management or non-management. The SAM shall establish, by regulation, the

requirements for management training programs as guidance for all beneficiaries and the

reasonable number of Virgin Islands residents to be employed by each beneficiary in

accordance with the specify normal requirements of the business involved. The SAM

shall report annually to the Governor the titles and compensation of all trainees who are

placed in management positions by beneficiaries.



(1) The SAM may impose a monetary penalty for delinquent reports as

prescribed by law. Any monetary penalty imposed by the SAM pursuant to this section

must be deposited into the Territorial Scholarship Fund established pursuant to title 17,

section 171, Virgin Islands Code.



(m) provide its employees additional leave from work, other than time applied

to their annual leave, to participate and represent the Virgin Islands in athletic and

sporting events.



(n) establish and maintain an employee pension benefit plan, as provided

under the Employee Retirement Income Security Act, 29 U.S. c. 1001 et seg.; and



(0) agree in writing and require all contractors retained by it to purchase all

insurance from resident insurance companies, agents, or brokers licensed to operate in the

Virgin Islands. If a particular type of insurance is not available in the Virgin Islands, the

applicant shall submit to the SAM written certification from the Office of Banking and

Insurance that the insurance 1s unavailable.

64



§ 1379. Fees; application, compliance



(a) The following fees must be assessed against each applicant or beneficiary

pursuant to subchapter two SPFC’s for applications submitted: initial application fee is

five thousand dollars; the annual compliance fee is five thousand dollars.



(b) All application fees and annual compliance fees collected pursuant to the

provisions of this chapter must be deposited into the alternative market and international

insurance revolving fund established pursuant to this chapter. Any fee adjustments may

be made by the SAM on an annual basis, with the approval of the Governor, and such fee

adjustments may not exceed the Consumer Price Index for that year.



§ 1380. Discrimination, hearing, certificate revocation



If after notice and hearing the Commissioner of Labor finds that the beneficiary or

any contractor or any other agent of the beneficiary has willfully practiced discrimination

in employment based on age, sex, race, national origin or religion, the Commissioner

shall certify the finding to the SAM, who shall revoke the beneficiary’s certificate

without need for further proceedings.



§ 1381. Employment of residents by Service Providers; temporary permits



(a) If a Service Provider for a beneficiary has four or more employees, eighty

percent of all persons employed by the Service Provider under this chapter must be

residents of the Virgin Islands; but after the third year of operation, a Service Provider

shall be required to have at least twenty percent of its management, supervisory or

technical positions filled by residents of the Virgin Islands unless granted a waiver by the

SAM.



(b) A waiver may be granted only when:

(1) the Commissioner of Labor has certified that:



(A) he has not been able to recruit individuals to fill the

positions; or



(B) — he has not been able to train individuals to fill the positions;

or



(C) — the beneficiary has demonstrated to the Commissioner of

Labor that the beneficiary’s training program has failed to provide the

individuals capable of filling the positions and that the beneficiary has

made a public effort to recruit personnel for the positions; or

—SEE———————————————————_—_—_—_eeee



65



(2) when the SAM has made a finding that the economic position of

the beneficiary is such that the beneficiary cannot comply with the requirement

without further erosion of its financial position or that the beneficiary cannot

comply for such other practical reasons that the SAM has established by its rules

and regulations.



§ 1382. Powers and duties of the Commissioner of Labor



(a) The Commissioner of Labor shall appoint a qualified and responsible

employee of the Department of Labor to administer, supervise and enforce or cause to be

enforced the provisions of sections 1381 and 1383, and in this connection may

promulgate necessary rules and regulations, conduct such investigations and institute

such remedial action as may be required.



(b) Any beneficiary applying for permission to hire nonresidents in

accordance with subsection (c)(2) shall submit a specification of the number nonresident

workers required and their occupational classifications and wage rates to the

Commissioner of Labor for review prior to any grant of permission to hire a nonresident.

Upon receiving the information and material, the Commissioner shall:



(1) promptly supply the information and material to all labor unions

operating in the Virgin Islands;



(2) at the expense of the beneficiary, give public notice of such

employment opportunity; and |



(3) assist the beneficiary in the recruitment of residents.



(c) The Commissioner of Labor shall provide an evaluation of those residents

available in the labor market with the necessary skills suitable for employment by the

beneficiary. All beneficiaries employing nonresidents shall annually prepare and file

with the Commissioner of Labor a complete roster of all nonresidents and a detailed

description of the positions held by such nonresidents. The Commissioner of Labor shall

promulgate specific rules and regulations governing compliance with these requirements.



(d) A beneficiary may not employ a person who is not a resident of the Virgin

Islands unless:



(1) after hiring the nonresident, at least eighty percent (80%) of the

beneficiary’s employees are residents of the Virgin Islands; or



(2) the Department of Labor has certified that:



(A) the beneficiary requested the Department of Labor’s

assistance in filling the vacancy; and

Leen ee ——T



66



(B) the Department of Labor was unable, within ten working

days after the beneficiary’s request, to refer any qualified applicants to the

beneficiary for employment.



(e) The Commissioner of Labor shall report all violations of the resident

employment provisions of this chapter to the SAM.



1382a. Advisory Board



The advisory board shall perform the duties specified by regulation promulgated

pursuant to section 1341 and as directed by the SAM as it relates to the review of

applications pursuant to section 1316(a)(9).



§ 1383. Training of employees



(a) Any applicant for tax incentive benefits, pursuant to section 1381,

proposing to employ persons who are not residents of the Virgin Islands shall, at the time

of filing his application for benefits, submit to the SAM a comprehensive plan for the

establishment and conduct of an occupational training program for the purpose of

adequately training resident employees in the skills necessary for employment by the

applicant. The training program must be approved and monitored pursuant to rules and

regulations promulgated by the SAM.



(b) An employee who is engaged in training pursuant to this chapter shall

receive at least the minimum wage prescribed by law for trainees or apprentices.



(c) Any beneficiary who employs one or more persons who are not residents

of the Virgin Islands, other than a beneficiary who contributes to the Territorial

Scholarship Fund in accordance with this chapter, shall establish or subsidize a training

program in conformity with the comprehensive plan required under subsection (a) of this

section, and shall maintain the program so long as any person who is not a resident of the

Virgin Islands is employed by the beneficiary.



§ 1384. Tax exemptions



(a) Each service provider applicant granted a tax incentive benefit certificate,

pursuant to section 1381, is exempt from payment of the following taxes:



(1) taxes on real property to the extent that property is used in the

business for which the tax incentive benefit certificate has been granted.



(2) gross receipt taxes, except that this exemption does not apply to the

gross receipts of businesses operated by a concession or rental agreement on the

premises of beneficiaries, for which businesses separate licenses are required or

which, as determined by the SAM, are not ordinarily related to, or do not

constitute an essential part of, the operation of the beneficiary, and which

—_—————

67



businesses are not otherwise eligible for tax incentive benefits as a distinct

enterprise.



(3) all excise taxes on building materials, tools, pipes, pumps,

conveyor belts or other appliances materials and supplies necessary for the use in

the construction, alteration, reconstruction or extension of the physical plant or

facilities of the applicant.



(b) Each approved captive insurance or alternative market insurer or

international reinsurer eligible for tax incentive benefits provided under this chapter must

be granted one hundred percent benefits for a period of ten years if it remains in

compliance with all the requirements of this chapter. Applicants may receive a renewal

of benefits for ten years if they remain in compliance with all the requirements of this

chapter for their initial benefit period.



(c) Tax exemptions and benefits may granted under this section only if the

applicant granted a tax incentive benefit certificate can provide certification from the

Bureau of Internal Revenue and the Department of Finance that the applicant has filed

and paid all taxes, penalties and interest, and from the Office of the Lieutenant Governor

that the applicant has filed its required annual report or has satisfactorily made agreement

to pay the taxes or file the required reports.



§ 1385. Income tax reduction; benefit options



(a) Each applicant granted a tax incentive benefit certificate shall have its

income tax liability for income derived from the business for which the certificate is

granted, and income from investments described in this section reduced on a current

basis, as provided in this section.



(1) All exemptions granted under section 1384 must be made available

to the applicant .



(2) The option to choose the term and percentage of its tax exemptions

granted under section (b) below must be made available to the applicant.



(3) An applicant may obtain tax benefits only commencing with the

first day of the applicant’s taxable year for income tax purposes, or commencing

one day after the due date for the payment of an installment of estimated taxes by

the applicant. If no payment of an installment of estimated income taxes by the

applicant is due, then the date of commencement of the benefits under this section

shall be the due date of such a payment if one were due by the applicant.



(b) | A-service provider applicant is entitled to:



(1) reduce the amount of each payment of estimated income tax by

ninety percent if its principal place of business is located on St Thomas or St.

John, and ninety five percent if its principal place of business is located within the

68



town limits of Christiansted, St. Croix as defined by the Christiansted Town

Limits map recorded in the Cadastral Section of the Office of the Tax Assessor,

and by one hundred percent for a period of five years, at which time the

beneficiary must apply for renewal, if the principal place of business is located

within the town limits of Frederiksted, St. Croix as defined by the Frederiksted

Town Limits map recorded in the Cadastral section of the Office of the Tax

Assessor; and



(2) reduce its income tax liability shown on its income tax return for

the taxable year by ninety percent if its principal place of business is located on

St. Thomas or St. John, and ninety-five percent if its principal place of business is

located within the town limits of Christiansted, St. Croix as defined by the

Christiansted Town Limits map recorded in the Cadastral section of the Office of

the Tax Assessor, and by one hundred percent for a period of five years, at which

time the beneficiary must apply for renewal, if the principal place of business is

located within the town limits of Frederiksted, St. Croix as defined by the

Frederiksted Town Limits map recorded in the Cadastral section of the Office of

the Tax Assessor for each of the years specified in the tax incentive benefit

certificate or renewal thereof, and in the case of estimated income taxes, such

reduction must be prorated over the quarterly payments due, or constructively due

by the applicant, or in the case of the determination of its income tax liability, by

the entire amount of the subsidy thus constructively calculated.



(c) The reduction of income tax liability on a current basis of, or the reduction

of income taxes otherwise payable by, applicants entitled to such reduction is applicable

with respect to all of the computations, assessments, and collection of such income taxes,

as provided by the 1954 Internal Revenue Code, as amended, and with respect to the

payment of estimated income taxes as provided by sections 6105, 6153, 6154 and 6201 of

the 1954 Internal Revenue Code, as amended.



(d) A corporation that is organized under the laws of the Virgin Islands, a

corporation that is organized under the laws of the United States, or one of the states,

territories or commonwealths, whose principal office is located in the Virgin Islands is

presumed to be continually domiciled in the Virgin Islands for purposes of this section,

unless it is established that such domicile has been superseded by a new domicile.



(e) This section applies only to corporations, and explicitly does not apply to

limited liability corporations, shareholders, members, partners, trusts, individuals or other



direct or indirect owners of corporations or other entities.



§ 1386. Special provisions or limitations



(a) Applicants for benefits under section 1385 must be granted an additional

five years of tax exemption on the initial term of benefits and subsidy at one hundred

percent of benefits if the principal place of business of the applicant is located within the

town limits of Frederiksted, St. Croix as defined on the Frederiksted Town Limits map

recorded in the Office of the Tax Assessor.

69



(b) An applicant granted benefits under this chapter must be allowed the

option, to be exercised prior to the issuance of the tax incentive benefit certificate, of

determining when any or all of the benefits commence, if all of the benefits commence at

some point during the first five years of operation of the beneficiary’s enterprise.



(c) If the beneficiary owns and operates more than one enterprise in the

Virgin Islands, benefits granted under this chapter apply only to those specified in the tax

incentive benefit certificate.



(d) With respect to a corporation, the SAM shall review the ownership

structure, or the proposed ownership structure, and may, upon review of the applicant’s

business plan or amended business plan, and consistent with the basis purposes and

objectives of this chapter, limit the number of shareholders. No individuals or entities

other than corporations, including entities which are disregarded for income tax purposes,

may claim benefits under this chapter.



§ 1387. Certificate modifications, extension or renewals



(a) Upon proper application or reapplication, and in compliance with all other

relevant provisions of this chapter pertaining to the grant of initial benefits, as determined

and required by the SAM, any recipient of tax incentive benefits granted pursuant to this

chapter may be granted an extension, modification or renewal of those benefits subject to

the conditions stated herein.



(1) benefits must be granted pursuant to the provision of this chapter

only, and not pursuant to the provisions of any previous law.



(2) the Commissioner of Labor shall certify the applicant’s compliance

with all labor laws, rules and regulations prior to any extension, modification or

renewal of benefits.



(3) all benefits granted under this section are subject to the approval of

the Governor.



(b) Certificate extensions, modifications or renewals are for a period approved

by the SAM, however, no extension, modification or renewal of any exemption or

subsidy benefit may exceed an aggregate duration of more than five years at ninety

percent of benefits, or ten years at forty percent of benefits, or proportionate gradations

thereof at the applicant’s option.



(c) The SAM may not grant any extension or modification of benefits under

an existing certificate or grant a new certificate unless it is determined at the time of the

application or reapplication for same that the industry or business of the applicant is

deserving of the benefits applied for and that it will or continues to promote economic

development of the Virgin Islands.) The SAM may not grant any extension or

modification under an existing certificate if that industry or business is expanded as a

70



result of a merger of a similar business or acquisition of an existing business. In making

the determination of whether the applicant is deserving of benefits and whether the

business promotes economic development, the SAM shall consider the following:



(1) the amount of additional investment utilized in improving or

expanding existing equipment or facilities;



(2) the increase in employment of Virgin Islands residents and the

progressive nature, or lack thereof, of the applicant’s employment practices in

general, including the scope and effectiveness of employee training programs

designed to qualify Virgin Islands residents for employment or promotion within

the applicant’s industry or business;



(3) whether the industry or business continues to be compatible with

the ecology of the Virgin Islands;



(4) such other criteria as are required to be applied in determining

qualification for the initial tax incentive benefit certificate under this chapter as

are appropriate, as determined by the SAM.



(d) Notwithstanding the other provisions of this section, it is specifically

contemplated that this section may be used to permit the granting of exemption and

subsidy benefits for the continuation or reopening of businesses or industries that have

previously enjoyed such benefits but which the SAM determines to be of particular

importance to the economy of the Virgin Islands and finds could not otherwise continue

or reopen.



§ 1388. Reserved

§ 1389. Action by the Governor and the SAM



(a) Upon receipt of a finding by the SAM that tax incentive benefits should be

granted, the Governor shall proceed with a determination of whether to approve or

disapprove the SAM’s finding.



(b) If the Governor approves the SAM’s finding, the Governor shall certify

the approval to the SAM, who shall then proceed to issue the appropriate certificate.



(c) If the Governor disapproves the SAM’s finding, the Governor shall certify

the disapproval to the SAM, accompanied by specific reasons for the disapproval, and at

the Governor’s discretion, specifying changes to the proposal which would likely lead to

his more favorable consideration of a future benefit application. The SAM shall then

forward a copy of the Governor’s disapproval and accompanying comments to the

applicant, which copy constitutes official notice of denial of benefits.



(d) If, after 60 calendar days, excluding Sundays and holidays, have elapsed

from the date of receipt of the SAM’s findings, the Governor has neither approved nor

2



71



disapproved the issuance of a tax incentive benefit certificate, the issuance of the

certificate must be deemed approved, and the SAM shall issue the appropriate certificate.



§ 1390. Contents of certificate

(a) A tax incentive benefit certificate must be issued by the SAM in the name



of the Government of the Virgin Islands and must bear the signature of the SAM. The

certificate must specify all of the following:



(1) in the case of a non-publicly owned corporation, the names and

addresses of all of the shareholders;



(2) the line or lines of businesses for which benefits have been

granted;



(3) the date by which the required financial investment was completed

by the beneficiary;



(4) the date or dates upon which benefits commence, which date may |

be retroactive to the first date of investment by the beneficiary in the industry or

business granted in the certificate, but such date may not be before the effective

date of this chapter.



(5) the specific commencement and termination dates for the benefits

granted under the certificate;



(6) such other conditions as the SAM considers appropriate, not

inconsistent with the provisions of this chapter or regulations promulgated

hereunder.



(b) In addition to the foregoing, the certificate must contain a recital that it is

conditioned upon the performance and observance of same by the beneficiary within a

period of time specified, and upon the final determination of the Secretary of the

Treasury of the United States or his delegate, of compliance with the requirement of

Internal Revenue Code sections 934 or 936. Upon failure of the beneficiary to perform or

observe the conditions as required by the SAM within the specified period or any

extension thereof granted for good cause shown to the SAM, the certificate is of no force

and effect, and the beneficiary shall pay or refund as the case may be to the Government

of the Virgin Islands the amount of any benefit actually received under the certificate.

Upon a final determination by the Secretary of the Treasury of the United States or his

delegate that the beneficiary has not complied with the requirements of Internal Revenue

Code section 934 or 936, the beneficiary shall pay or refund, as the case may be, to the

Government of the Virgin Islands, the amount of any subsidy benefits, based on income

tax liability, actually received, or the amount of the reduction of income tax liability on a

current basis for all the years of non-compliance.

ee eee



72

§ 1391. Transferability of certificates



A tax incentive benefit certificate granted under the provisions of this chapter may

be transferred, for the unexpired portion of the term of the certificate to another

corporation which succeeds the beneficiary in carrying on or in operating the industry or

business for which the certificate is granted, upon determination of the SAM that such

corporation is otherwise qualified to receive such benefits and provided the industry or

business activity with respect to which the certificate was granted is continued by the

corporation. Thereafter the transferor of the certificate loses all tax incentive benefits

under this chapter and is subject to the tax laws of the Virgin Islands.



§ 1392. Revocation, suspension or modification of certificate



Subject to the approval of the Governor, a tax incentive benefit certificate granted

in accordance with this chapter may be revoked, suspended or modified by the SAM,

after due notice, public hearing, and written findings by the SAM that:



(a) the beneficiary has failed to maintain compliance with the requirements of

this chapter or any regulation hereunder;



(b) upon finding submitted to the SAM by the Lieutenant Governor or the

Attorney General of the Virgin Islands that the corporation:



(1) has been dissolved;



(2) has filed, or there has been filed against the corporation, a petition |

in bankruptcy which has been approved; or



(c) the beneficiary has failed to file an annual report of ownership as required

by this chapter; or



(d) an officer, shareholder or director acting on behalf of the corporation has

been convicted of a felony connected with the operation of the beneficiary’s business or

industry; or



(e) an officer, shareholder or director acting on behalf of the corporation has

given or offered, or caused to be given or offered a bribe, or any money, property, or

value of any kind or any promise or agreement therefore to a public officer, or to a person

executing any of the functions of a public office, or to a person elected, appointed or

designated to thereafter execute the same, with intent to influence him with respect to any

act, decision, vote, opinion, or other proceeding in the exercise of the powers or functions

which he has or may have pertaining in any way to the tax incentive benefit program. In

addition to the fine and imprisonment provided in title 14, section 406 of the Virgin

Islands Code for this offense, any benefit granted or obtained as a result of such act,

decision, vote, opinion or other proceeding is void as to the briber and recoverable from

the briber as the circumstances of the particular case my dictate.



ee ee

73



§ 1393. Penalties for violations



(a) The SAM shall promulgate a schedule of fines for violation of any

provision of this chapter and the beneficiary’s certificate within ninety days of the

effective date of this chapter and submit the schedule of fines to the Governor for

approval.



(b) If any beneficiary violates any provision of this chapter, any rule or

regulation promulgated hereunder, or any provision of the tax incentive benefit

certificate, or fails or refuses to perform any duty, requirement or lawful order made by

the SAM, such beneficiary, after notice and an opportunity to be heard, must be fined in

accordance with the schedule of fines under subsection (a) of this section. These fines

must be deposited into the Alternative Market and International Insurance Revolving

Fund. In construing and enforcing the provisions of this section, the act, omission or

failure of any officer, agent or person acting for or employed by any beneficiary in every

case is deemed an act, omission or failure of such beneficiary.



(c) The Attorney General of the Virgin Islands shall, at the request of the

SAM, bring appropriate action to compel adherence to, or enjoin any violation of lawful

orders of the SAM issued pursuant to this chapter, and to recover in the name of the

Government of the Virgin Islands the penalties provided herein.



§ 1394. Appeals



Any applicant or beneficiary aggrieved by any action of the SAM or the Governor

under the provisions of this chapter is entitled to judicial review of the action by

appealing to the Superior Court under the applicable writ of review provisions within

thirty days after a final decision by the SAM or Governor.



§ 1395. False or fraudulent statements or representations



Any applicant or beneficiary who willfully makes any false or fraudulent

statement or representation as to any fact required or appropriate to the determination of

the qualifications of eligibility of such applicant or beneficiary for benefits under this

chapter, or for the continuation or extension of benefits or who willfully makes or

presents any claim for benefits under this chapter knowing such claim to be false,

fictitious or fraudulent, must be fine not more than $25,000 or imprisoned no more than

two years, or both fined and imprisoned. In addition to the foregoing, any benefits

previously granted under this chapter to such applicant or beneficiary are automatically

revoked, without necessity for the procedures established in this chapter; all taxes that

were otherwise due and payable by such applicant or beneficiary, but for the tax

exemption benefits granted, become due and payable, and such taxes must be assessed

and collected in accordance with the provisions of applicable tax laws in force for such \

date or dates.



SECTION 2. Title 22 Virgin Islands Code, chapter 55 is repealed.



Quen ss eeeeneesgnmemneseescnesemsisliesissliea

74



SECTION 3. (a) Captive insurance and reinsurance companies and

international insurance support businesses licensed under former chapter 55 of title 22

of the Virgin Islands Code on the effective date of this Act are exempt from the

payment of the annual captive reinsurance taxes established in title 22 Virgin Islands

Code section 1340, as added by this Act, for three years after the effective date of this

Act.



(b) For three years after the effective date of this Act, captive insurance and

reinsurance companies and international insurance support businesses licensed under

former chapter 55 of title 22 of the Virgin Islands Code on the effective date of this Act

may receive exemptions from income taxes pursuant to 13 V.I.C., § 855 and gross

receipt taxes pursuant to 13 V.ILC., §856.”



SECTION 4. All fees established in title 22 Virgin Islands Code, section 1320 as

added by this Act, are waived for three years for any company that was licensed under

title 22 Virgin Islands Code, chapter 55 and whose license is in effect on the effective

date of this Act.



SECTION 5. All fees established in title 22 Virgin Islands Code, section 1320.



SECTION 6. This Act becomes effective January 15, 2009.



Thus passed by the Legislature of the Virgin Islands on September 18, 2008.



Witnessed our Hands and Seal of the Legislature of the Virgin Islands this ott

Day of September, A.D., 2008.



c



Usie R. Richards



Presiden



Shawn-Michael Malone

Acting Legislative Secretary



Bill No. 27-0203 is hereby approved.



Witness my hand and the Seal of the

Government of the United States



Virgin Islands at Charlotte Amalie,

St. Thomas, this 11th day of October, |

A.D., 2008. p



Jo, P. J; Jr.

vernor