Tax Management
Those involved in establishing reinsurers defend the strategy. “Given the world we’re in, it’s just good tax management,” said Robert Cooney, who served as chief executive officer of one of the first hedge-fund-backed reinsurers from 1999 to 2006.
Tax avoidance isn’t the only advantage to establishing a Bermuda reinsurer, insurance executives said. It means creating a large, fee-paying client that is unlikely to take its money out of a hedge fund after a bad year. Moreover, insurance companies get to invest customers’ premiums for months or years before they pay out claims.
Cohen’s, Loeb’s and Einhorn’s reinsurance firms are better designed to reap those non-tax benefits than Paulson’s company, Pacre, which has just one outside investor. The white, steel- and-glass complex overlooking Bermuda’s capital of Hamilton, which is listed as its legal address, is the office of another reinsurer to which it outsources its underwriting.
Insurance Sales
Pacre sold about $8 million of reinsurance coverage from April to December, or 1.6 percent of its $500 million in initial shareholders’ equity. That’s far below the average of 47 percent for 15 publicly traded Bermuda insurers during their most recent nine months.
Cohen’s and Loeb’s reinsurers employ underwriting staff and have set targets of insurance sales equivalent to 30 percent and 19 percent, respectively, of their equity in their first full year, according to disclosures to reinsurance brokers.
Paulson, 57, declined to say whether he plans to get a tax benefit from Pacre.
“That’s never been a portion of the business we’ve ever commented on,” said Armel Leslie, a spokesman for Paulson’s hedge fund.
The companies set up by Paulson, Cohen and Loeb are located within a half-mile of each other in the narrow streets ringing Hamilton. The pastel-hued business district overlooks a harbor where Russian billionaire Roman Abramovich docked the world’s largest luxury yacht last month.