Bermuda Takeovers Halt After Tax Scrutiny

The IRS discourages bidders from partaking in offshore takeovers to receive inappropriate tax breaks. This scrutiny has caused potential suitors looking to acquire foreign reinsurers to back out from merger deals. Bermuda-based reinsurer, Montpelier Re Holdings Ltd., has admitted that an anonymous suitor in regulatory filings withdrew from merger negotiations last year.

Government agencies began to crackdown on foreign takeovers last June when Senator Ron Wyden pushed for explicit regulations against hedge fund investors using reinsurers as tax shelters. In September, Treasury Secretary Jacob J. Lew issued rules to discourage insurance mergers through tax inversions.

Hedge fund investors look to small foreign firms as tax shelters where they can receive lower taxes due on gains while having the ability to secure investments prior to filing claims. Montpelier was ultimately purchased by a Bermuda-based insurer, Endurance Specialty Holdings Ltd. early last month when a deal with a private hedge fund investor was not carried out because of Lew’s proposed anti-inversion rules.

Lawmakers are working on including clear language in its rules to ensure companies are not holding more assets than they need to. Ryan Byrnes, an analyst at Janney Montgomery Scott, states that “until there become some clear guidelines as to what’s allowed […] we’re not going to see too many U.S. companies buying Bermuda companies.”

U.S. insurers are avoiding inversions due to the reputational risk and criticism from President Obama. Without finalized regulations, Bermuda companies are better off combining with one another.