Greenlight Capital Re Ltd. on Wednesday responded to assertions about its business and potential tax consequences in a report from hedge fund Sunesis Capital L.L.C., which Greenlight Re said contains “inaccurate statements.”
On Monday, San Francisco-based Sunesis argued in a 29-page presentation that specialist reinsurer Greenlight Re should be classified as a passive foreign investment company, or PFIC.
Sunesis asserted in its report that Greenlight Re does not meet statutory requirements that it be “actively engaged” in the insurance business or otherwise be classified as PFIC.
Such a designation, Sunesis said in its presentation, would have catastrophic tax consequences for Greenlight Re.
A PFIC is a foreign-based corporation that derives at least 75% of its gross income from investments rather than from the company's regular business operations or has at least 50% of its assets producing income in the form of earned interest, dividends or capital gains.
In its response, Cayman Island-based Greenlight Re said “the company’s reinsurance activities and risk profile do not support the PFIC designation.”
Greenlight Re was established in 2004 and is “a standalone global property and casualty reinsurer regulated in the Cayman Islands and Ireland with 37 employees,” the company said in its statement.
It added that Greenlight Re is not invested in the Greenlight Capital investment funds and has a separately managed account subject to its own investment guidelines as overseen by its board of directors.
The Greenlight Re response also took issue with Sunesis’ math, saying “Greenlight Re comprises 18% of Greenlight Capital’s total assets under management, not 42% as erroneously calculated in the (Sunesis) Report.”
Among Sunesis’ arguments was the question as to whether the fact that more than 70% of Greenlight Re’s business comes via two brokers.
“Are these questionable transactions to maintain sufficient underwriting volume to keep exemption from PFIC status?” asked the Sunesis report.
“Greenlight Re flatly denies the claims in the report that the company is ‘defrauding policyholders’ and that it is ‘circumventing dividend restrictions from operating subsidiaries,’” Simon Burton, CEO of Greenlight Re, said in the company’s statement. “These inflammatory statements are false and misleading. The report provides no substantive facts or analysis to support them whatsoever.”
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Issue: Reinsurance, often referred to as “insurance for insurance companies,” is a contract between a reinsurer and an insurer. In this contract, the insurance company—the cedent—transfers risk to the reinsurance company, and the latter assumes all or part of one or more insurance policies issued by the cedent.
Unauthorized reinsurance can constitute a serious legal problem. For example, say a reinsurer in Maine only has legal permission to do business with insurance companies in Maine. If this reinsurer tries to do business with an insurance company from Louisiana, this would be illegal and could result in a lawsuit.
Retention - The net amount of risk which the ceding company or the reinsurer keeps for its own account. Retrocession - A reinsurance of reinsurance. The transaction whereby a reinsurer cedes to another reinsurer all or part of the reinsurance it has previously assumed.
Insurers purchase reinsurance for four reasons: To limit liability on a specific risk, to stabilize loss experience, to protect themselves and the insured against catastrophes, and to increase their capacity.
Examples include very aggressive agents or brokers who express an urgency to sign up for a product immediately, premiums that seem unrealistically low compared to comparable companies' coverage, and the lack of any listed phone number or other customer service mechanisms.
With non-proportional reinsurance, the reinsurer is liable if the insurer's losses exceed a specified amount, known as the priority or retention limit. In the case of non-proportional reinsurance, the reinsurer doesn't have a proportional share in the insurer's premiums and losses.
If a reinsurer does not have sufficient funding to cover reinsured claims, those claims come back to the cedant, typically through a “recapture” event. Once a reinsurer's insolvency or default triggers recapture, the insurer must: Cover any financial losses. Post risk capital to support the recaptured business.
It acts as the sole channel in the Caymans for the provision of tax-related information to other governments. In turn, the Cayman Islands Tax Information Authority relays the information to the IRS.
Although the United Kingdom is responsible for the Cayman Islands' defence and external affairs, important bilateral issues are often resolved by negotiations between the Cayman Government and foreign governments, including the United States.
The 9-month rule, which comes out of Part 23 of SSAP 62, requires that the reinsurance contract be finalized—reduced to written form and signed within 9 months after commencement of the policy period—but allows the contract to incept before the contract is finalized.
Doing business with a reinsurer allows an insurance company to do more business itself by being able to take on more risk than its balance sheet would otherwise allow. Insurance companies pay reinsurers premiums in the same manner that individuals pay insurance companies premiums.
A sunrise provision, also known as a sunrise clause, is a contract provision that extends coverage to events that occurred before the contract was signed. Insurance and reinsurance contracts use sunrise provisions.
Risk transfer refers to a risk management technique in which risk is transferred to a third party. In other words, risk transfer involves one party assuming the liabilities of another party. Purchasing insurance is a common example of transferring risk from an individual or entity to an insurance company.
Reinsurance is a strategic process that involves the transfer of risk from one insurance company, known as the ceding company, to another, known as the reinsurer, thus providing ceding companies with the ability to protect their financial stability and cover large losses.
Reinsurance is insurance for insurance companies. It's a way of transferring some of the financial risks that insurance companies assume when insuring cars, homes, people, and businesses to another company, the reinsurer.
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