Shifting Domiciles

Bermuda’s sunny shores may have lost their lustre as domiciles for (re)insurers.

An emerging trend has seen (re)insurers turning their eye away from the Caribbean nation and setting up shop in Europe instead. For the better part of two decades, Bermuda has served as a destination of choice for new entrants to the insurance marketplace, or for companies seeking tax advantages. Some experts suggest the move eastward is a sign of changing times. For example, proposed changes to the U.S. tax regime may eliminate some of the advantages of doing business in Bermuda. Others suggest the United States can’t compete with the pace of growth in emerging economies; moving headquarters east locates operations closer to these new market hot spots. Still another theory says the new migration pattern has nothing to do with the creation of new (re)insurance epicentres; in fact, the past five years have seen developments in insurance-linked securities and technology that have eliminated the need for epicentres altogether.

MIGRATORY PATTERNS

XL Capital Ltd. announced its plans to move its parent holding company from the Caymen Islands to Dublin, Ireland, in January 2010. The parent company would ultimately be re-branded XL Group plc.

XL was not the first to make this kind of move. The company appears to be riding an eastbound wave that has been rolling for awhile now. Two years ago, in March 2008, ACE Limited announced its intention to move its place of domicile from the Caymen Islands to Switzerland. Not to be outdone, Willis Group Holdings Ltd.’s board of directors approved the decision to move that organization’s headquarters from Bermuda to Ireland in September 2009. And Flagstone Re announced in March 2010 its intention to move its shop from Bermuda to Luxembourg.

So what has changed?

From the mid-1990s through to 2007, Bermuda was the location of choice for reinsur- ers to establish new business. However, the number of reinsurers moving to set up business in Europe has increased in the past few years, Standard &Poor’s said in a report, Choosing a Domicile Remains a Hot Topic for Global Reinsurance. The report notes Europe accounted for 60% of global net reinsurance last year.

“The prospect of taxation for U.S.-sourced business written either directly by a Bermuda-based subsidiary or indirectly by a U.S.-based operating subsidiary with significant quote-share arrangements back to Bermuda could jeopardize Bermuda’s position as the domicile of choice,” S&P’s report says. “In contrast, some European countries, such as Switzerland and Ireland, offer relatively stable tax arrangements, including long-held tax treaties with the U.S.”

Andrew Barile, CEO of Andrew Barile Consulting Company, agrees the proposed changes to the U.S. tax system, in addition to incentives being offered by countries such as Ireland and Switzerland, are definitely forcing companies to re-think Bermuda. But he also finds the new migratory pattern is linked to the fact that premium income in the United States is not growing as fast as it is in the rest of the world.

“The basic concept is that the world is shifting to a global platform,” Barile says. “The volume of business is growing faster outside of the U.S., so your company is going to go where the growth is fastest. Bermuda was never a growth place. Bermuda’s success was access to capital: a company could do a public offering or access to stock offering quite easily, because there are very few regulations and there were some tax incentives. You could raise $1.5 billion by passing the hat; all of a sudden, you had a Bermuda reinsurance company. Now places like Switzerland and Ireland are matching those incentives. So companies are saying: ‘We have to move globally anyways, so we’ll leave Bermuda and move to Switzerland.'”

HERE TODAY, GONE TOMORROW?

Stephen Hitchcock, managing director at Lockton Re, says he’s seen a definite uptick in the number of reinsurers establishing themselves in Switzerland. But he is not necessarily convinced it will stay that way. “It begs the question, if we have a class of 2011, 12 or 13, where will that be set up?” he says. “The rise of regional insurance — in Dubai or Singapore, for example — are also proving to have attractive tax regimes.” They also offer an insurer closer physical proximity to emerging markets in China and India, he added. “Where will the epicentre — or second epicentre, because London, I think, will always be the first epicentre — be? I have a feeling it’s not going to be in Bermuda.”

Christopher Klein is director of reinsurance market management for Guy Carpenter and appeared with Hitchcock in a recent A.M. Best Webinar on reinsurance. Klein echoes Hitchcock’s questions above — assuming, of course, a class of 2012 even emerges. Although events on the order of magnitude of the global financial crisis have caused shifts in the marketplace — Bermuda became attractive following the recession in the early 1990s, for example — Klein is not sure that will be the case this time around. In 2005, the most recent ‘market-changing year’ prior to the financial crisis, the market saw the emergence of access to capital through insurance-linked securities following Katrina.

“I think we’ve got excellent experience with sidecars and other vehicles, which provide all sorts of advantages for investors, especially those with short-term horizons,” Klein says. “These [insurance linked securities] eliminate all the issues of exit, which summarizes the class of 2005.”

Robert Derose of A.M. Best’s analytical rating unit agrees. “Someone coined the term ‘disposable reinsurance’ when sidecars started forming after Katrina,” he says. “They really served a valuable purpose. It gave investors a very good return on their investment and they were able to take advantage of a market opportunity. So I agree, I don’t think we’re going to see start-ups to the degree we saw in the past. I think capital is going to come in a more temporary way.”

TECHNOLOGY AND MOBILITY

Technological advances, as well as the advances in access to capital, are contributing to the mobility of companies, causing them to shift from one domicile to the next and potentially removing the necessity of epicentres altogether, says Barile.

When a company moves its headquarters from one side of the ocean to the other, it doesn’t really affect the operating side of the organization, based on the technological capabilities of the company, he says. “In other words, it’s a lot easier for companies to move because their operating platforms operate the same way, regardless of where they are in the world. It’s not like in the old days, when you would close up a building and put people on a plane and move them.”

When an insurer moves its headquarters, it typically affects only those workers in the upper echelons of the organization. “ACE moved to Switzerland and 15 people were affected,” he says. “It’s not going to change ACE’s platform in Toronto because they moved from Bermuda to Switzerland. The people in Canada are still doing the same work as they were doing already.”

Barile predicts that in the future, the market will consist of “a select hundred or so global insurers that have tentacles all over the world. I see the world changing completely, so that you’ll be operating across boundaries and you’re not going to know where people are operating their laptops. That seems to be the way the world is moving.”