Bermuda reinsurance mystery solved? (spoiler alert: involves tax and hedge fund managers)

A persistent puzzle when tracking the business news in Bermuda (FSI rank: 14) has been the number of mentions of reinsurance deals. The Bermuda Royal Gazette online even has a dedicated re-insurance page, which is updated almost daily.  Why would Bermuda (population 64 thousand) hold 14% of the global reinsurance market, the same as Switzerland and more than London?

This New York Times article on hedge funds has at least part of the answer: tax.

“Until recently, many fund managers would defer a portion of their fees in a Cayman Islands corporation, which would act as the equivalent of a titanic tax-deferred retirement account.”

However, after the US Congress closed the Cayman loophole “many top hedge fund managers have entered the business of reinsurance, using Bermuda-based reinsurance companies as a capital base for investment in their hedge funds.”

“By stapling a small reinsurance business onto billions of dollars of hedge fund capital, any profits can be indefinitely deferred from tax offshore. Better yet, when the fund manager sells an interest in the Bermuda company, the gain may be taxed at the lower long-term capital gains rates.”

The full article is here.

Bloomberg last year also covered the “little-known loophole”. According to the Bloomberg report, the difference in after-tax gains for a US hedge fund manager when using a Bermuda reinsurance vehicle can be substantial: an extra USD 27 million after 5 years on an initial investment of USD 100 million.

Hat tip: Tax Justice Network blog.

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