August 05, 2014

WTbutton2012Letters of Credit are not authorized asset/equity under either GAAP or Statutory Accounting. However, most captive domiciles use a variation of GAAP or, if you prefer, GAAP except for the allowance of recognition of letters of credit as an asset/equity.

This is why most audit opinions issued for captives using letters of credit as equity are on an exception basis (i.e. states that except for the LOC the financial statements are in accordance with GAAP and the LOC treatment is authorized by the regulators).

The domicile captive laws state whether or not the use of a letter of credit to meet the capital/surplus requirements is authorized (as long as the form of the letter of credit used is in accordance with the form prescribed by the domicile).