Tax Advantage
As for the tax benefits, Berger said in an interview, “Anybody in Bermuda has a tax advantage.”
Hedge fund-backed reinsurers turn the traditional business model on its head. Reinsurers help insurance companies cushion big risks, such as a California earthquake or a wave of lawsuits against asbestos makers.
A typical reinsurer invests its capital conservatively, in investments that are unlikely to decline in value and are available to pay claims on short notice. It might invest in Treasuries and investment-grade corporate bonds, and focus on making money through selling as much profitable coverage as possible.
By contrast, the hedge fund-backed reinsurers seek big returns from investing and more stable results from underwriting.
Fewer Policies
A.M. Best, which gauges insurers’ financial strength, has given “A-” ratings to the companies set up by Paulson, Cohen, Loeb and Einhorn with the understanding that they compensate for volatile investments by selling fewer policies than their competitors.
Paulson’s firm, Pacre, takes that approach the farthest. Pacre helps protect insurers against natural catastrophes such as Florida hurricanes. While traditional reinsurers have far more exposure, Pacre won’t risk more than $170 million, or about one-third of its capital, according to Edward Noonan, chief executive of Bermuda reinsurer Validus Holdings Ltd., which handles Pacre’s underwriting.
That loss would happen only if it had to pay out every single policy in full at the same time -- “in the event the end of the world happened,” Noonan said on an April conference call.
Pacre’s Capital