the economic effects of territorial taxation, with remarks by jason
TRANSCRIPT
The economic effects of
territorial taxation, with remarks by Jason Furman
March 31, 2014
Please take this time to silence any mobile devices.
Mergers/Inversions Date Company 1 Company 2 Tax Domicile Value Quotes
Sep 2011 Jazz Pharmaceuticals
(Ireland)
Azur Pharma
(U.S.) Ireland all-stock deal
"Because the stock deal transferred more than 20 percent ownership of the combined company to foreign
holders, Jazz was able to enact an “inversion” — relocating its corporate headquarters to Ireland and
escaping the U.S. tax regime." -NYT
Mar 2012 Tyco International
(Switzerland)
Pentair
(U.S.) Switzerland $4.5 billion
"Citing Pentair and Tyco, the Star Tribune reported that being domiciled in Switzerland will give the
merged company tax advantages: The new Pentair's estimated annualized tax rate globally will reportedly
fall to 24 to 26 percent from the 29 percent Pentair is now paying." -TwinCities Business Magazine
May 2012 Eaton Corp
(U.S.)
Cooper Industries
(Ireland) Ireland $11.8 billion
"The deal brings tax and cash management benefits to the combined company of $160 million annually.
On a conference call, Eaton management declined to be more specific, but the new Eaton PLC will be
subject to the 12.5% corporate tax rate in Ireland, rather than the 35% rate in the U.S." -WSJ
Feb 2013 Liberty Global
(U.S.)
Virgin Media
(U.K.) U.K. $16 billion
"Liberty Global has said it is incorporating in the UK because it “more closely aligns our corporate function
with our operations” – as most of its employees and operations will be in Europe, and the UK is its biggest
market. Its tax rate will fall to 21 per cent. Analysts at Macquarie also note that Virgin Media has roughly
13bn pounds in unused capitalised allowances and expect the company will not have to pay cash taxes for
several years." -FT
May 2013 Actavis
(U.S.)
Warner Chilcott
(Ireland) Ireland $5 billion
"Drugmaker Actavis (ACT) announced yesterday that it will buy rival Warner Chilcott PLC for $5 billion in
stock and that, as part of the deal, it plans to reincorporate itself in tax-friendly Ireland, where Warner
Chilcott (WCRX) is based. This despite the fact that the company's top executives, including CEO Paul
Bisaro, will continue to live and work in New Jersey." -Fortune
Jul 2013 Omnicom
(U.S.)
Publicis Groupe
(France) Netherlands $35 billion
"In July, Omnicom, the large New York advertising group, agreed to merge with Publicis Groupe, its
French rival, in a $35 billion deal. The new company will be based in the Netherlands, resulting in savings
of about $80 million a year." -NYT
Jul 2013 Perrigo
(U.S.)
Elan
(Ireland) Ireland $8.6 billion
"The purchase allows Perrigo, based in Allegan, Michigan, to move its domicile to Ireland, where the
corporate income-tax rate is 12.5 percent. […] The acquisition will result in more than $150 million of
recurring after-tax annual operating expense and tax savings, the company said." -Bloomberg
Sep 2013 Applied Materials
(U.S.)
Tokyo Electron
(Japan) Netherlands $9.39.billion
"The merged company will save millions of dollars a year by moving — not to one side of the Pacific or the
other, but by reincorporating in the Netherlands.[…]When Applied Materials announced its deal for Tokyo
Electron, it said that its effective tax rate would drop to 17 percent from 22 percent as a result. For a
company that had nearly $2 billion in profit in 2011, that amounts to savings of about $100 million a year."
-NYT
Nov 2013 Endo Health Solutions
(U.S.)
Paladin
(Canada) Ireland $1.6 billion
"In Endo’s case, moving to Ireland will lower the company’s effective tax rate to 20 percent, from its
current rate of 28 percent, leading to at least $50 million in annual tax savings. With time, those savings
could grow, according to analysts." -NYT
Jan 2014 Fiat
(Italy)
Chrysler
(U.S.) UK $4.35 billion
"Fiat Chrysler Automobiles NV, the new holding company that will control the operations of Italy's Fiat and
No. 3 U.S. auto maker Chrysler, will be based in the Netherlands, with a U.K. tax domicile and a New York
stock listing." -WSJ
Mar 2014 Chiquita
(U.S.)
Fyffes
(Ireland) Ireland $1.07 billion
"By joining forces, the combined ChiquitaFyffes claims it will knock down operating costs by about $40
million a year. But the move also knocks down Chiquita’s taxes, since it’s hitching itself to a company
domiciled in Dublin. Ireland isn’t exactly a tax shelter, but it’s close. Companies based there pay a 12.5%
corporate tax rate compared with the (official) rate of up to 35% in the United States." - WSJ
The economic effects of
territorial taxation, with remarks by Jason Furman
March 31, 2014
Please take this time to silence any mobile devices.
Beijing
Boston
Brussels
Chicago
Frankfurt
Hong Kong
Houston
London
Los Angeles
Moscow
Munich
New York
Palo Alto
Paris
São Paulo
Shanghai
Singapore
Sydney
Tokyo
Toronto
Vienna
Washington, D.C.
Wilmington
Current Trends and Issues in Redomiciliation Transactions
Section 7874 – Background • Section 7874 imposes limitations on the ability of domestic corporations to
become owned by a foreign parent with the same or largely the same shareholder base.
• Three cumulative statutory tests trigger section 7874’s adverse consequences: – “Substantially All” – A foreign corporation acquires substantially all the
properties of a domestic corporation;
– “Ownership Test” – Shareholders of the US corporation receive at least 60% (or 80%) of the stock of the foreign acquiring corporation by reason of their ownership interest in the domestic target; and • At the >60% level, certain adverse tax consequences are imposed on the acquired
U.S. company. • At the >80% level, the foreign acquiring corporation is treated as a U.S. corporation
for U.S. tax purposes.
– “Substantial Business Activities” – The group of which the foreign acquiring
corporation is a member does not conduct substantial business activities in the foreign acquiring corporation’s jurisdiction of incorporation.
2
Section 7874 – Self Inversion Transactions
U.S. Parent Redomiciles on a Stand-Alone Basis • U.S. Parent, or an agent acting on its behalf, forms a new foreign subsidiary (“New Foreign
Co.”) that will serve as the public parent of the post-redomiciliation group. • New Foreign Co. forms a new U.S. merger sub, which merges with and into U.S. Parent with
U.S. Parent surviving and the U.S. Parent shareholders exchange their U.S. Parent stock for New Foreign Co. stock.
3
New Foreign Co.
U.S. Parent
U.S. Parent
SHs
New Foreign Co.
Former U.S. Parent SHs
U.S. Subs Foreign Subs
U.S. Merger Sub
Reverse Subsidiary Merger
U.S. Parent
U.S. Subs Foreign Subs
Self-Inversion – Tax Consequences
• Section 7874 Considerations – The transaction can only succeed – i.e., New Foreign Co. will only be respected
as a foreign corporation for U.S. tax purposes – if the New Foreign Co. group has “substantial business activities” in New Foreign Co.’s country of incorporation.
– 2012 Temporary Regulations – substantial business activities is defined as 25% of each of (i) tangible assets, (ii) gross income (based on the destination of sales/services), and (iii) employees (measured by both headcount and compensation). • These regulations replaced the prior “facts and circumstances” test for determining
substantial business activities. • The 2012 regulations preclude self-inversion transactions for geographically-diversified
multinational companies.
– Since these regulations were put in place, most redomiciliation transactions have occurred in the context of business combination transactions.
• Shareholder Tax Considerations
– Shareholder Gain Recognition – Under section 367, U.S. persons who are shareholders of U.S. Parent would recognize gain (but not loss) in the transaction, even though the transaction otherwise qualifies as a tax-free reorganization under the subchapter C rules.
4
Section 7874 – Cross-Border Combination Transactions U.S. Target and Foreign Target Combine Under a Newly-Formed Foreign Company
• U.S. Target, or an agent acting on its behalf, forms a new foreign subsidiary (“New Foreign Co.”) that will serve as the public parent of the combined group.
• New Foreign Co. forms a new U.S. merger sub, which merges with and into U.S. Parent with U.S. Parent surviving, and the U.S. Parent shareholders exchange their U.S. Parent stock for New Foreign Co. stock.
• Foreign Target shareholders exchange their Foreign Target stock for New Foreign Co. stock in a share exchange or merger effected under the relevant local law (e.g., scheme of arrangement).
5
New Foreign Co.
U.S. Target
U.S. Target SHs
FMV = 79X
Foreign Target SHs
21X Cash
New Foreign Co.
U.S. Target SHs
Foreign Target SHs
FMV = 100X
79% 21%
U.S. Target
Foreign Target
FMV = 21X
Foreign Target
U.S. Merger Sub
Reverse Subsidiary Merger
Share Exchange or Merger
Cross-Border Combinations – Tax Consequences
• Section 7874 Considerations – The transaction must satisfy the Ownership Test (assuming the combined group does not
satisfy the “substantial business activities test”). – U.S. Target shareholders must therefore receive <80% of the stock of New Foreign Co. in the
transaction – i.e., Foreign Target must be >1/4 the value of U.S. Target. • If that test is satisfied, New Foreign Co. can be incorporated/domiciled wherever the parties
choose.
– If U.S. Target shareholders receive >60% but <80% of the stock of New Foreign Co. (a “60% Inversion”), certain adverse tax consequences are imposed on U.S. Target limiting its ability to offset certain post-transaction income (“Inversion Gain”) with tax attributes (NOLs or FTCs).
• Shareholder Tax Considerations
– Shareholder Gain Recognition – If U.S. persons who are shareholders of U.S. Target receive more than 50% of the stock of New Foreign Co. , then those shareholders would recognize gain (but not loss) in the transaction. • Strategies have been developed to avoid imposition of this shareholder-level tax, though their
successful execution is highly dependent on the facts of the particular transaction.
– Officer/Director Excise Tax – If the transaction constitutes a 60% Inversion, and shareholders recognize gain under section 367, then under Section 4985, officers and directors of U.S. Target must pay a 15% excise tax on the value of any stock-based compensation held by such persons on or around (six months before and six months after) the transaction.
6
Benefits of Redomiciliation Transactions
• Platform for Foreign Growth and Acquisitions
• Intercompany Leverage
• Migration of Intellectual Property
• Repatriation Flexibility
7
Practical Consequences of Cross-Border Transactions
• Management can generally remain U.S.-based. – Given the “place of incorporation” test for tax residence under U.S. law, the location of
management or board meetings is irrelevant to the foreign parent’s tax domicile.
– Several legislative proposals have proposed adopting a “managed and controlled test” for corporate tax residence.
– The 7874 proposals in the Obama Administration’s FY 2015 budget would impose a “managed and controlled test” in the context of cross-border migration transactions.
• Board meetings may have to be in the desired tax domicile to achieve tax residence under the relevant foreign law. – E.g., Ireland requires at least some board meetings to be held in Ireland.
– Foreign countries’ use of “managed and controlled” or “place of effective management” tests, rather than place of incorporation tests, can permit the new foreign parent company to be incorporated in one country and tax resident in another – e.g., Dutch-incorporated but U.K. tax resident.
• The combined group would be expected to increase its non-U.S. operating presence over time due to foreign growth and acquisitions.
8
The economic effects of
territorial taxation, with remarks by Jason Furman
March 31, 2014
Please take this time to silence any mobile devices.
Johannes Voget
ITPF/AEI Conference on the Economic Effects of
Territorial Taxation
Home Country Tax Effects on Mergers,
Inversions, and Headquarters Location
Empirical Evidence
Outline
3 Papers
Slides 3+4: Direction of M&As Huizinga, H.P. and J. Voget (2009), International taxation and the direction and volume of cross-
border M&As, Journal of Finance 64, p. 1217 - 1249.
Slides 5+6: Relocation of Headquarters Voget, J. (2011), Relocation of headquarters and international taxation, Journal of Public
Economics 95, p. 1067 – 11081
Remainder: Effects of Territorial and Worldwide Corporation Tax Systems
on Outbound M&As Feld, L.P., M. Ruf, U. Scheuering, U. Schreiber, and J. Voget (2013), Effects of Territorial and
Worldwide Corporation Tax Systems on Outbound M&As, Centre for European Economic
Research Discussion Paper No. 13-088
1st Paper: Direction of M&As
Firm a(“Chiquita”)
Firm b(“Fyffes”)
Country I
Country J
Withholding tax 5%
Foreign Income Tax 10% 0% Withholding Tax
0% Foreign Income Tax
Direction of M&As: Findings
Relative size is important
Example: Volkwagen acquires Porsche, not the other way around
Increasing repatriation tax by 1 percentage point decreases the chance of
being the acquirer from 50% to 41%
(for merger of equals with a 50/50 chance in absence of taxes)
Example: Chiquita / Fyffes
Older example: Daimler / Chrysler (Remark: Fiat / Chrysler has HQs in the
Netherlands now)
Suppose U.S. from now on exempts foreign-source dividends. What is
the effect on all U.S. related M&As?
U.S. party acquires in 57.6% of cases (instead of 53.1% as before)
Irish party acquires in 3.6% of cases (instead of 38.2% as before)
Hence: By means of cross-border M&As, multinational HQs are attracted
to locations without repatriation taxes (Skipped: Volume of M&As: acquisitions decrease by 1.7% per repatriation tax percentage point.)
2nd paper: Relocating Headquarters
Criticism of the previous paper:
Geographical spread/ subsidiaries of firms are not observed
Only looks at merging firms
Representative sample of multinationals from several countries
Over a 10 year period, 6.4% relocate their HQs as they are acquired by a
foreign firm
Inversions are just a special case of a general phenomenon: HQs relocate with every
cross-border acquisition
Effect of taxes is found by comparing four groups of multinationals:
Multis from foreign tax credit countries:
Foreign subsidiaries subject to low taxes tend to relocate HQs
Foreign subsidiaries subject to high taxes tend not to relocate HQs
Multis from exemption countries:
Foreign subsidiaries subject to low taxes no difference in behavior
Foreign subsidiaries subject to high taxes no difference in behavior
Relocating Headquarters: Findings
Increasing the repatriation tax of a multinational by 10 percentage points
raises the probability of HQ relocation by 1/3.
More than 8% chance of HQ relocation instead of 6.4%.
Controlled foreign corporation rules also appear to increase the rate of
relocation
Especially if they are tough/ not easy to game
For example, blacklists do not appear to constitute effective CFC rules
Some musings: What is lost when HQs relocate abroad?
1. HQs spill-overs: Collocation of R&D functions? Executive pay?
2. Loss of agglomeration effects? (Silicon Valley…)
3. Tax authority related:
a) Erosion of tax base in worldwide tax systems
b) Tax enforcement by means of CFC rules becomes ineffective
c) Loss of easy access to information relevant to transfer pricing / interest stripping
issues
3rd paper: Credit vs Exemption and Outbound M&As
Recent opportunity for research:
Japan and the U.K. both switched from a foreign tax credit system to exempting
foreign source dividends in 2009
First time that we observe an actual switch in international taxation regimes in major
capital exporting countries.
So, is there an effect of repatriation taxes on M&As? Direct identification!
In particular: Is there a competitive disadvantage in the market for
corporate control due to repatriation taxes?
Competitive Disadvantage in M&As due to International Taxation?
Target
Acquirer 2
Acquirer 1
U.K.Credit
Tax rate: 28%
NetherlandsExemption
Tax rate: 25%
IrelandTax rate: 12.5%
15.5% repatriation tax 0% repatriation tax
• Acquirer 2 is willing to pay more for the same target firm.
• Acquirer 1 is at a disadvantage in the international market for corporate control
Empirical Approach: Exploit Reform in the U.K. and Japan
Target
Acquirer 2
Acquirer 1
U.K.Credit to
Exemption
Tax rate: 28%
NetherlandsExemption
Tax rate: 25%
IrelandTax rate: 12.5%
REFORM:
15.5% repatriation tax
Drops to 0%
0% repatriation tax
• Does the likelihood of a U.K. acquirer increase after the reform?
• (while controlling for other effects in a regression)
Empirical Approach: Control Group
Target
Acquirer 2
Acquirer 1
U.K.Credit
Tax rate: 28%
NetherlandsExemption
Tax rate: 25%
U.S.Tax rate: 39%
REFORM:
0% repatriation tax
Remains 0%
0% repatriation tax
• Control group should not be affected by the reform
Regressions Control For Other Effects
Trends in productivity
GDP/capita
GDP growth rate (+)
Trends in financing conditions
Financial depth: Stock market capitalization/ GDP
Different industry specializations
Number of past M&As in the relevant industry (+)
Share of the relevant industry sector in the acquirers GDP
General differences between acquirer countries (fixed / random)
Special bilateral ties capturing low transaction costs
Common language (+)
Colonial ties etc. (+)
Distance (-)
Target firm characteristics
Total assets
Profits
First Research Question and Findings
Is there a competitive disadvantage in M&As when dividend repatriations
are taxed? Yes.
U.K. exemption: 3.9% increase in acquisitions
Japan exemption: 31.9% increase in acquisitions
Simulation of U.S. exemption: 17.1% increase in acquisitions
(Interesting side result: More profitable target firms are less likely to be
taken over by a U.S. acquirer)
Should we care? Second research question:
How large are the inefficiencies due to suboptimal ownership structures?
Traditional Concern in FDI: Inefficient Distribution of Capital?
Parent firm
U.K.
28% tax
France
35% tax
Ireland
12.5% tax
0% or 15.5% repatriation tax 0% repatriation tax
• Too much capital in Ireland just because of taxes?
• One could produce more by relocating some capital from Ireland to the U.K.
• Capital export neutrality by repatriation tax
Concern with M&As: Inefficient Ownership Structures
Target
Acquirer 2
Acquirer 1
U.K.Credit
Tax rate: 28%
NetherlandsExemption
Tax rate: 25%
IrelandTax rate: 12.5%
15.5% repatriation tax 0% repatriation tax
• Relevant concern as M&As are the main form of FDI between developed countries
100 mil. $ in synergies 90 mil. $ in synergies
First and Second Research Questions + Findings
Is there a competitive disadvantage in M&As when dividend repatriations
are taxed? Yes.
U.K. exemption: 3.9% increase in acquisitions
Japan exemption: 31.9% increase in acquisitions
Simulation of U.S. exemption: 17.1% increase in acquisitions
How large are the inefficiencies due to suboptimal ownership structures?
(unrealized synergies per year)
U.K.: 14 million $
Japan: 525 million $
U.S.: 1,134 million $
See the following slides for the calculations
Loss in Efficiency: Calculation
If Japan went back from exemption to a foreign tax credit system
In 24% of cases, the acquirer would no longer be a Japanese firm
(based on the previous estimates)
Second-best owner prevails over first-best owner Loss in
efficiency due to inefficient ownership structure
How much would prices decrease because Japanese acquirers can no
longer afford to offer the winning bid?
The price decreases for the cases where the second-best owner
prevails over the first-best owner capture the loss in efficiency /
synergies which are not realized
Second-best bids are generally not observable, so auxiliary
assumptions are required to arrive at an answer
Polar assumption: Second-best bidders are not willing to pay any
premium on the target firm’s market price
Prices would have to decrease by 12.8% to eradicate the premium
for 24% of acquisitions by Japanese firms (see graph on next slide)
Loss in Efficiency: Calculation
If Japan went back from exemption to a foreign tax credit system:
In 24% of cases, the acquirer would no longer be a Japanese firm
(based on the previous estimates)
Prices would have to decrease by 12.8% to eradicate the premium for
24% of acquisitions by Japanese firms
Total value of targets with inefficient ownership: 24%* 17 billion US $
Hence, efficiency loss is: 12.8%* 24%* 17 billion US $ = 0.5 billion US $
(per year)
This is an upper bound to the extent that second-best bidders may be
willing to pay a premium as well.
Conclusion / Further Questions
HQs gravitate to tax-favorable locations as industries are reorganized by
means of cross-border M&As
Increasing repatriation tax by 1 percentage point decreases the
chance of being the acquirer (in a merger of equals) from 50% to
41%
Increasing the repatriation tax of a multinational by 10 percentage
points raises the probability of HQs relocation by 1/3
What is actually lost? (Especially in countries which are very good at
fostering new multinationals organically – agglomeration effects etc.)
Conclusion / Further Questions
Repatriation taxes are a disadvantage when bidding for target firms
Switch to exemption in the U.S. may increase acquisitions by 17%
Repatriation taxes cause inefficient ownership
U.S. repatriation taxes may result in unrealized synergies of 0.5 billion US $ per year
(Note: losses are born by foreign target firm shareholders)
Trade-off between ownership neutrality and capital export neutrality?
Optimal policy may depend on the composition of a country’s FDI:
M&As versus Greenfield investment (change in capital stock)
Also depends on externalities of international acquisitions:
Substitute to domestic activity due to crowding out of scarce input
factors: management capacity, for example?
Complement to domestic activity?
THANK YOU FOR YOUR ATTENTION AND COMMENTS!
The economic effects of
territorial taxation, with remarks by Jason Furman
March 31, 2014
Please take this time to silence any mobile devices.
The economic effects of
territorial taxation, with remarks by Jason Furman
March 31, 2014
Please take this time to silence any mobile devices.
Initial incorporation decisions of U.S.-headquartered firms
Susan Morse
University of Texas School of Law
Presentation prepared for
ITPF/AEI Conference
Economic Effects of Territorial
Taxation
March 31, 2014
Ways to invert The hard way: an ex post transaction
The easy way: incorporate outside the U.S. initially
The puzzle
Presentation draws from Allen and Morse (National Tax Journal, 2013); Morse (Florida Tax Review, 2013)
47 U.S.-headquartered, tax-haven-incorporated IPO firms out of larger sample
of 2911
• 13 insurance carriers
• 4 marine transportation firms
• Several firms with non-U.S. organic growth
• 2 global services firms
• Several firms with private equity history
Data suggests tax haven-incorporated firms larger and more profitable
No significant
result for R&D
intensity.
Possible explanations 1. Insufficient tax advantage for tax haven parent
• Law changes could be adverse to either structure
• Current proposals target insurance, passenger cruise firms
2. Legal/regulatory advantages for U.S. parent • Regulatory reasons for some non-U.S. incorporation
choices
• Comparison differs depending on non-U.S. jurisdiction
3. Resource constraints
• Significant disruption necessary to prompt different equilibrium point?
Expanded screen for U.S.-headquartered, tax haven-incorporated firms
SDC “Nation” item = U.S.
Principal executive office listed = U.S.
More than 50% U.S. employees indicated in registration statement
More than 50% U.S. floor area indicated in registration statement
More than 50% U.S. revenue indicated in registration statement
Added for each screen
26 1 1 6 13
Running total
26 27 28 34 47
Corporate The Industry Our Fleet Our Team Investor Relations Contact Us
THE GENERAL MARITIME VISION
Our vision is to become the leading marine link in the international energy supply chain;
providing innovative and superior transportation services to a diverse client base while creating
value for shareholders.
THE GENERAL MARITIME COMMITMENT
General Maritime is dedicated to safely providing seaborne energy transportation services
utilizing an organization of qualified professionals to achieve unparalleled customer.
GENERAL MARITIME’S CORE VALUES
Quality and professionalism
Safety and protection of the crews, cargo, and environment
Loyalty to stakeholders
Responsiveness to our customers
Continuous self-improvement
FEATURED NEWS
GENERAL MARITIME ANNOUNCES AMENDMENTS T OCREDIT FACILITIES
GENERAL MARITIME CORPORATION TO PRESENT ATTHE JEFFERIES 2011 GLOBAL SHIPPINGCONFERENCE
GENERAL MARITIME RECEIVES NOTICE OFNON-COMPLIANCE WITH NYSE MINIMUM SHAREPRICE LISTING RULE
© General Maritime Corp. All rights reserved.
General Maritime Corporation is a
leading provider of international
seaborne energy transportation
services, owning and operating one
of the largest tanker fleets in the
world.
This Week's IPOs: CastlePoint Holdings, Cheniere
Energy Partners, Glu Mobile, Haynes International
by: SA Editor Abbi Adest
March 18, 2007 | includes: CPHL, CQP, GLUU, HAYN
IPOs on deck for this week include: CastlePoint Holdings (CPHL), a property, casualty insurance and reinsurance
company; Cheniere Energy Partners (CQP), a natural gas development company; Glu Mobile (GLUU), a mobile
game publisher; and Haynes International (HAYN) a high-performance alloy manufacturing company.
All quotations are from the companies' most recent S-1 filings with links provided for each company.
CASTLEPOINT HOLDINGS, LTD. (CPHL)
Business Overview (from prospectus)
We are a Bermuda holding company organized to provide property and casualty insurance and
reinsurance business solutions, products and services primarily to small insurance companies and
program underwrit ing agents in the United States. We were incorporated in November 2005 to take
advantage of opportunities that we believe exist in the insurance and reinsurance industry for
traditional quota share reinsurance, insurance risk-sharing and program business as well as insurance
company services that can be purchased on a stand-alone, or unbundled basis, to small insurance
companies and program underwriting agents.
Offering: 6.1 million shares at $13.00-15.00 per share. Net proceeds of approximately $76.5 million will be used to
"further capitalize CastlePoint Re, and for general corporate purposes. We will not receive any of the proceeds from
the sale of common shares by the selling shareholders."
Lead Underwriters: Friedman Billings, Cochran Caronia
Financial Highlights:
Total revenues were $92.5 million in 2006, which consisted of net premiums earned (85.4% of the total
revenues), commission income (2.5% of the total revenues) and net investment income (12.1% of the
total revenues)... Our net income was $10.5 million in 2006. The net income increased each quarter
throughout 2006 primarily as a result of increasing underwriting and investment leverage throughout
the year. Our average return on equity was 5.1% for the year ended December 31, 2006. The return
was calculated by dividing net income of $10.5 million by weighted average shareholders' equity of
$207.3 million. Our return on equity increased by quarter in line with our increase in net income and
was 9.8% for the three months ended December 31, 2006... Gross and net written premiums were
$165.2 million in 2006. Included in the gross and net written premiums of $165.2 million was $40.9
million of written premiums from Tower representing 30% of Tower's unearned premiums for the
brokerage business as of March 31, 2006. The total amount of written premiums assumed from Tower
Countries classified as tax havens Andorra Anguilla Antigua and Barbuda Aruba Bahamas Bahrain Barbados Bermuda British Virgin Islands Cayman Islands Channel Islands Cook Islands Cyprus Dominica Gibraltar Hong Kong
Ireland Isle of Man Jordan Lebanon Liberia Lichtenstein Luxembourg Macao Maldives Malta Marshall Islands Mauritius Monaco Montserrat Nauru Netherland Antilles
Niue Panama Saint Kitts and Nevis Saint Lucia Saint Vincent and the
Grenadines Samoa San Marino Seychelles Singapore Switzerland Tonga Turks and Caicos Vanuatu Virgin Islands
Following Dharmapala and Hines (2009)