Photo courtesy: Bloomberg via Getty Images
By Stephen Gandel
December 11, 2014

Critics of Airbnb, Uber, and other companies in the so-called sharing economy argue that these companies are structured to avoid paying taxes. It appears that even companies on the fringes of the sharing economy are looking to dodge Uncle Sam.

James River Group, Uber’s insurer, paid a tax rate of just 12.6% last year. That’s less than half the average rate paid by companies in the S&P 500 last year, which was 27%. The effective U.S. corporate tax rate is 35%.

How did James River Group manage to avoid the tax man? A few years ago, it moved to an island. James River Group was formed in 2002 and was originally based in Chapel Hill, N.C. The company’s website still lists its mailing address as Raleigh, N.C. But in 2007, the company was acquired by New York-based hedge fund D. E. Shaw. The deal sparked two shareholder lawsuits and huge payouts for James River’s founders, including $60 million for Matthew Bronfman, a scion of the family that once owned liquor giant Seagrams.

Shaw merged James River with a Bermuda-based shell company, and moved the combined firm’s headquarters to the island. The company has been private since 2007, but it is expected to sell shares to the public in an IPO on Thursday. James River aims to raise about $250 million and sell 11 million shares. In addition to Shaw, James River’s other major shareholder is Goldman Sachs. That gives Uber yet another tie to Goldman, which was recently tapped to lead a convertible-bond offering for the ride-sharing company and is angling to do Uber’s IPO.

James River specializes in offering corporations so-called excess insurance, policies that cover damages not covered by traditional insurance. Uber accounts for a small piece of James River’s business, but it is one of its fastest growing accounts. James River collected $18.7 million in premiums from so-called transportation network companies in the first nine months of 2014, up from just $1.7 million in 2013. The company has brought in $415 million in revenue this year.

It’s not clear if all of that growing business comes from Uber. The ride-sharing company has said that it buys its liability insurance from James River. The question is whether James River is getting a good deal for covering that risk.

Earlier this year, Uber published a blog post saying its corporate insurance policy “provides back up cover when/if a driver’s personal auto insurance denies the claim.” But many auto insurance policies do not cover drivers when they use their cars commercially. So James River could be on the hook for the whole tab when an Uber driver causes an accident or hurts a passenger or runs someone over. So, $19 million to cover all of that doesn’t seem like much, even if James River is only covering Uber in the U.S. One of the complaints about Uber is that it doesn’t have enough insurance to cover its growing fleet of drivers.

On top of that, there’s James River’s investment portfolio. In the prospectus for its IPO, James River says it does not operate like a hedge fund, but it’s willing to invest in some things that traditional insurance companies deem too risky. For example, James River has about 20% of its portfolio in bank loans. The company says the loans it invests in have an average credit rating of B. The cutoff for junk bonds is BBB+, which is a few notches above what James River’s average banks loans are graded. James River’s IPO documents say the loans are safe because they tend to be some of the first obligations that the companies it lends to have to pay back. But if the first obligation loans those companies hold are given a B rating, those company’s overall credit rating is probably even junkier. The bonds in James River’s bank loan portfolio pay an average yield of nearly 5.5%, suggesting the company’s investments are far riskier than typical corporate bonds.

James River has had some investing missteps. In the past year, for instance, it lost $2.1 million on a stake in Puerto Rico municipal bonds.

Still, on their own, the bank loans aren’t likely to do much damage to the company. James River holds a lot of cash, and it has a large portfolio of traditional, lower-risk corporate bonds and other debt. But combine James River’s risky investment portfolio with the fact that it has a growing business with a fairly new company where the true risk of the insurance it is selling is likely unknown and then you have something to be nervous about.

Of course, it’s probably not that much of a surprise that the company that chooses to insure Uber is also comfortable with more risk than usual in its investment portfolio. But the fact that Uber went with James River and decided not to pay up to get insurance elsewhere may tell you a little bit more about the ride-sharing company, not to mention the sizable risks sharing economy companies are willing to take.

Editors note: James River’s revenue from policies sold to transportation network companies like Uber was $18.7 million in the first nine months of 2014. An earlier version of this incorrectly said that was for 2013.

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