Warren Cabral explores the long relationship between Bermuda and London
The City first took an interest in the Somers Isles in 1613, when King James I granted his Royal Charter to the Bermuda Company. The first shareholders were nine aristocrats, including the Duke of Devonshire, and the nine parishes of Bermuda bear the names of those original investors to this day.
The Bermuda Company was set up as a commercial operation, distinctly different from the other British territories of that period and later, and Bermuda has always had a business relationship with the mother country.
Throughout the 17th and early 18th centuries, the Bermuda Company of British entrepreneurs struggled to produce a return from tobacco and other crop plantations in Bermuda. However, it was not until the mid 1700s that a Bermuda product was found to have a profitable use, namely Bermuda cedar trees, from which were crafted exceedingly fast sloops and schooners.
These ships were put in the service of the British monarch under private contracts to contain the threat from Spain. Bermudian 'privateers' intercepted Spanish galleons crossing the Atlantic en route from South America, taking the opportunity to relieve them of their gold and other valuables. Indeed, many objets d'art from that period continue to adorn Bermuda homes.
Throughout the 18th and 19th centuries, Bermuda was the North Atlantic outpost of the British Navy. This was the high point of Anglo-Bermudian correspondence, and many Bermudians are descended from the officers and sailors of that period. Indeed, the British authorities deliberately inculcated a London-oriented outlook in Bermudians; Bermudians were educated at English schools and called into the professions in England.
British commercial ties
In the 20th century, the British connection was strengthened and deepened through two world wars, with Bermuda as a major base for both the British and the Americans, who built the large airport which became Bermuda's gateway to the world. Regular flights soon brought tourists and businessmen flocking to Bermuda. The single most important visitor was CV Starr, the founder of American International. He first arrived in 1947, bringing with him the seeds of Bermuda's offshore business, and in particular the insurance industry, which now accounts for nearly a third of Bermuda's gross national product.
It was another American, Fred Reiss, who first directly linked Bermuda to the London insurance market. It was his genius which gave birth to the captive concept, following a visit to Lloyd's in the early 1960s trying to put together cover for a US client. Lloyd's would not deal with Mr Reiss directly, but said if he had his own insurance company, it could provide him with reinsurance protection. Fred discovered that it was no easy matter to set up a small insurer stateside for the specific use of its shareholder as its sole client. And so, taking a leaf from CV Starr, he went to Bermuda.
Throughout the 1970s and 1980s the captive industry grew. British lawyers, accountants and underwriters transferred to the island to set up captive management companies, accountancy practices and the law firms which together created the infrastructure that attracted and supported the explosive growth of the late 1980s and early 1990s with the advent of ACE, XL, Centre Re and the 'big cats'. Again, the British connection was part of the picture, in that the big cats in particular were set up to supplement cover which had ceased to be available - or was offered at too high a price - from Lloyd's and the London market following Hurricane Andrew and the Piper Alpha disaster.
Thus it can be seen that Bermuda worked alongside the London market to continue the availability of cover. Indeed, Bermuda was one of the few markets in the world with enough new capital to respond to the Lloyd's shortfalls. That relationship grew even closer with the acquisition by ACE and XL of various Lloyd's agencies, with the ultimate result that nearly one-third of Lloyd's capacity was at one time controlled by Bermuda companies. Included in that is UK groups which 'inverted' their Lloyd's structures out to Bermuda, such as Terra Nova Holdings (Bermuda) which operated eight syndicates, managed through Octavian. It is true that there was some adjustment to this capacity, when, for example, ACE reduced its participation.
But in saying that these new entrants to the London market were Bermudians is to forget that in fact they are all public companies, with large British shareholdings and senior British executives, such as Michael Butt, the first President of Mid-Ocean Re and previously with Eagle Star. Indeed, it must not be overlooked that much of the talent that has built Bermuda's insurance industry has come from the London market, including a few who were tempted but did not stay. Thus, British-Bermudian cross-pollination occurs at the shareholder level, the executive level and the underwriting level.
Indeed, of the top 20 investors and managers at Lloyd's today, eight have strong Bermuda connections: ACE, Catlin, Liberty Mutual, Wellington, XL Capital, Trenwick, AIG and Markel. But the starting point for the City is the London Stock Exchange, and there are numerous Bermuda companies listed on the LSE, particularly those with British origins and operating companies. For example, the Benfield Group structured itself so as to put its holding company in Bermuda whilst continuing its London listing.
Likewise, Willis also introduced a Bermuda structure for its group holdings, and Westgen-sponsored Catlin has completed its initial public offering as an Anglo-Bermudian hybrid.
Apart from the public companies, there are numerous Bermuda private groups with a committed presence in the London market, such as Castlewood Risk Management, formerly known as Powerscourt. But lest it be thought that Bermuda is encroaching too far into the London market, one should note that the mirror looks both ways. For example, Rosemont Re, previously known as Goshawk Re, in Bermuda is owned by Goshawk Holdings plc, which owns and manages syndicate 102 at Lloyd's (now in run-off). Or Miller Bermuda Ltd, which is owned by London-based broker Miller Insurance Services Ltd. A major Bermuda acquisition by a British group is the recent purchase of the Bank of Bermuda by HSBC, which in any event has long had insurance operations in Bermuda through HSBC Insurance Solutions.
So, it may be that the Bermuda market has a strong presence in London, but the London market has a counterpresence in Bermuda. According to the Association of British Insurers, nearly a quarter of the net premium received by UK insurance companies is derived from their overseas operations including overseas subsidiaries. A substantial portion of that one-quarter will therefore have been filtered through the Bermuda operations of UK insurers and reinsurers. Looked at another way, in terms of capacity, the total reinsurance capacity of Lloyd's is $23.2bn, which is just over half of Bermuda's $41.6bn. Thus it is inevitable that Lloyd's and the rest of the London market should work together with Bermuda in layering the world's insurance and reinsurance requirements.
Notwithstanding this close affinity and co-operation, there is still a perception that Bermuda is somehow a threat to the London market. That could not be further from the truth, given that in many respects it was new Bermuda capital which is said by some to have saved the world reinsurance market, and, by extension, London, whose insurers were able to bolt on additional layers from Bermuda. Indeed, the London insurance market appears to thrive, if the erection of the Swiss Re 'erotic gherkin' is anything to go by. But it is perhaps an irony that the Swiss Re subsidiary which owns the building is a Bermuda company.