The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

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By Topic: Reinsurance

  • From Vol. 8 No.23 (Jun. 11, 2015)

    IRS Proposes Rules to Limit Reinsurance by Hedge Funds

    The IRS recently issued a notice of proposed rulemaking that, if approved, could make it more onerous for hedge fund managers to establish or operate offshore reinsurance companies.  Although hedge fund managers have taken advantage of a carve-out in the rules regarding Passive Foreign Investment Companies and set up reinsurance structures in no-tax and low-tax offshore jurisdictions, the proposed regulations seek to limit that practice by drawing a distinction between companies engaged in “active” reinsurance and those that are merely vehicles used to defer or reduce the tax that would otherwise be due with respect to investment income.  This article summarizes the proposed regulations.  For more on the intersection of hedge fund management and reinsurance, see “Considerations for Hedge Fund Managers Evaluating Forming Reinsurance Vehicles in the Cayman Islands,” The Hedge Fund Law Report, Vol. 7, No. 33 (Sep. 4, 2014); and “How Can Hedge Fund Managers Use Reinsurance Businesses to Raise and Retain Assets and Achieve Uncorrelated Returns? (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 3 (Jan. 17, 2013).

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  • From Vol. 7 No.33 (Sep. 4, 2014)

    Considerations for Hedge Fund Managers Evaluating Forming Reinsurance Vehicles in the Cayman Islands

    There has been much talk recently about the formation of reinsurance companies by hedge fund managers.  Indeed, in the Cayman Islands (Cayman), there has been significant increase of interest in the establishment of reinsurance vehicles.  The first open market reinsurance vehicle with a physical presence was established in Cayman in 2004, and now, several years later, conditions are such that others are following suit.  Anecdotal evidence shows that many service providers across the financial services community in Cayman have been advising or otherwise speaking with fund manager clients about setting up reinsurers in Cayman.  This article highlights some key reasons driving interest in Cayman as a domicile for the establishment of reinsurance vehicles.  The authors of this article are Tim Frawley, a partner in the Cayman Islands office of Maples and Calder, and Karey B. Dearden, an Executive Director in Ernst & Young LLP’s Financial Services Office, International Tax Services practice in New York City.  For background on the opportunities and risks associated with hedge fund managers establishing reinsurance vehicles, see “How Can Hedge Fund Managers Use Reinsurance Businesses to Raise and Retain Assets and Achieve Uncorrelated Returns? (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 3 (Jan. 17, 2013).

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  • From Vol. 6 No.3 (Jan. 17, 2013)

    How Can Hedge Fund Managers Use Reinsurance Businesses to Raise and Retain Assets and Achieve Uncorrelated Returns? (Part Two of Two)

    Some well-known hedge fund managers have launched reinsurance businesses to address the twin challenges of raising capital and obtaining uncorrelated returns.  If properly structured and operated, reinsurance businesses offer hedge fund managers a steady stream of investable capital in the form of reinsurance premiums, which in turn can be invested in the manager’s other strategies.  However, few hedge fund managers start with the expertise or infrastructure necessary to launch and operate a reinsurance business effectively, and reinsurance businesses present unique challenges relating to people, risk management, structuring and regulation.  Moreover, running a reinsurance business alongside a hedge fund management business raises various compliance issues.  In short, launching a reinsurance business can help tackle some of the more elusive challenges facing hedge fund managers, but such launches entail risks to which managers typically are not accustomed.  To assist managers in capturing some of that upside while mitigating the risks, we are publishing this second article in a two-part series on the primary legal, business and risk considerations for hedge fund managers in launching reinsurance businesses.  In particular, this article discusses how hedge fund managers generally approach starting a reinsurance business; the best domiciles for reinsurers; a checklist of steps required to launch a reinsurance business; how hedge fund managers invest the “float” generated by such a business; conflicts of interest raised by a hedge fund manager’s side-by-side management of a reinsurance business and an investment management business, and how managers should address such conflicts; and policies and procedures that hedge fund managers should implement to accommodate the operation of a reinsurance business.  The first article in this series provided background on the reinsurance business; explained how reinsurers generate revenue; discussed how hedge fund managers can participate in the reinsurance business; and described some principal benefits and drawbacks of launching a reinsurance business.  See “How Can Hedge Fund Managers Use Reinsurance Businesses to Raise and Retain Assets and Achieve Uncorrelated Returns? (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 2 (Jan. 10, 2013).

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  • From Vol. 6 No.2 (Jan. 10, 2013)

    How Can Hedge Fund Managers Use Reinsurance Businesses to Raise and Retain Assets and Achieve Uncorrelated Returns?  (Part One of Two)

    Among the many challenges facing hedge fund managers, two loom particularly large: raising and retaining assets, and achieving uncorrelated returns.  A growing number of brand-name hedge fund managers are addressing these twin challenges through an innovative solution – launching reinsurance businesses, typically in offshore jurisdictions.  If properly managed, the premiums collected by a reinsurance business can offer a stream of income – in effect, a return on investment in the business – that is uncorrelated with returns on other assets; and those premiums provide capital that can be deployed in a manager’s other investment strategies.  But reinsurance businesses are not without challenges, notably including the specialized skill set required to manage such businesses effectively and the possibility of large claims following catastrophes.  This article is the first in a two-part series designed to highlight the primary legal, business and risk considerations for hedge fund managers contemplating the launch of a reinsurance business.  In particular, this article provides background on the reinsurance business; explains how reinsurers generate revenue; discusses how hedge fund managers can participate in the reinsurance business; and describes some principal benefits and drawbacks for hedge fund managers considering launching a reinsurance business.  The second installment will discuss how hedge fund managers generally approach starting a reinsurance business; the best domiciles for reinsurers; a checklist of steps required to launch a reinsurance business; how hedge fund managers invest the “float” generated by such a business; conflicts of interest raised by a hedge fund manager’s side-by-side management of a reinsurance business and an investment management business, and how managers should address such conflicts; and policies and procedures that hedge fund managers should implement to accommodate the operation of a reinsurance business.

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