Bermuda based PacRe to shut down

Billionaire John Paulson’s New York hedge fund firm has shut an operation in Bermuda that had been targeted by a Democratic lawmaker as a tax shelter.

Paulson’s venture, a reinsurer named PaCRe Ltd., has stopped writing new coverage, and its insurance policies have expired, according to two people familiar with the venture who asked not to be identified discussing private contracts. The insurance company that partnered with the money manager, Validus Holdings Ltd., will provide an update on the wind-down its fourth-quarter conference call, one of the people said.

PaCRe was started in 2012 with $500 million in capital, to be invested in three of Paulson’s funds, Validus said at the time. Paulson, a major donor to Republican candidates, has a net worth estimated at $9.8 billion, according to the Bloomberg Billionaires Index. 

Investment Losses

Validus said third-quarter investment results included $40.7 million in realized losses relating to PacRe. Paulson’s venture also stood out for how little insurance it sold.

“PaCRe was set up in an environment when returns on high-level catastrophe risks were more attractive, and today they are not,” Ed Noonan, Validus’s chief executive officer, said in an October conference call. “Having a business with no premium coming into it isn’t a business.”

Reinsurers sell backup coverage to insurance companies, protecting them against big risks such as natural catastrophes. Paulson, David Einhorn, Dan Loeb and Steven Cohen are among hedge fund managers who have set up reinsurers in tax-friendly Bermuda or the Cayman Islands. Cohen has exited his reinsurer, and companies tied to Loeb and Einhorn are each trading below the prices from their initial public offerings.
Preferential Rate

While the ventures provide a stable pool of capital that the money managers can use to buy securities, they also offer a tax-advantaged way to invest in a U.S. hedge fund, potentially transforming any short-term capital gains generated by the fund into long-term capital gains, which are taxed at a preferential lower rate. Insurance and reinsurance companies enjoy an exception to U.S. rules meant to prevent tax avoidance through offshore investing vehicles, but the Internal Revenue Service has never clearly defined how much insurance a company must sell to qualify.

PaCRe had no insurance employees, instead depending on minority investor Validus to handle underwriting. Under pressure from Wyden, the IRS agreed last year to establish rules for the first time that would define which companies can qualify for the favorable tax treatment offered to insurers. In proposed rules issued in April, it said companies like PaCRe that outsource their insurance underwriting wouldn’t qualify for the tax break.