Hedge Fund-Backed Reinsurers A Tax Dodge?

Feb 20 2013 | 12:32pm ET

Reinsurance firms businesses have proven a popular way for hedge funds to raise permanent capital. They also can help hedge fund managers avoid paying U.S. taxes.

While the Internal Revenue Service penalizes companies who set up "passive foreign investment companies," it considers insurers to be active. And although it has said that insurers and reinsurers can't have a capital pool much greater than they need to back the insurance they sell, the IRS has never set thresholds, Bloomberg News reports.

Paulson & Co.'s PaCRE, for instance, sold reinsurance coverage amounting to just 1.6% of its initial $500 million in equity, $450 million of which came from Paulson executives. The average for a Bermuda-based reinsurer is 47%.

Other hedge fund-backed reinsurers, including those set up by SAC Capital Advisors and Third Point, aren't quite as penurious. The former has targeted sales equaling 30% of assets, and the latter 19%. Both also employ their own underwriters, while PaCRE outsources its underwriting, employs no one and uses another insurance's company's offices as its address.

Using a Bermudan reinsurer could save a hedge fund manager more than one-third in taxes, according to Bloomberg.


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Chicago-based independent futures brokerage and clearing firm R.J. O’Brien & Associates (RJO) has hired industry veteran Daniel Staniford as Executive Director, responsible for the firm’s institutional business development in New York and London.

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