Should Hardy’s decision to up sticks to Bermuda come as a warning to the UK Treasury?
Back in October 2008 Global Reinsurance published an article on Hardy Group. Journalist Emma Jones considered then whether Hardy might choose to gain the advantages of relocating to a low tax jurisdiction like Bermuda.
After all, Hiscox, Kiln and Omega had already paved the way for such a move.
She wrote: “The company, which until now has been faithful to Lloyd’s, underwriting exclusively in the market since its origins, may choose to stretch its wings to more tax-friendly jurisdictions, such as Bermuda, which has been so favoured by its peers.
"But, that will only be if the business case becomes strong enough. So far Hardy has been unable to identify real commercial advantages, and as [Barbara] Merry [Hardy CEO] admits they cannot bring themselves to do it. ‘We’re too British to do it just for tax reasons’.”
Clearly, a real commercial advantage has now been found. Although it is timely that this latest move of a major Lloyd’s player comes directly after the UK Treasury’s refusal to budge on the corporate tax issue.
On 5 December the Board of Hardy announced its proposal to move the domicile of the group to Bermuda “in order to improve its strategic positioning in the global insurance and reinsurance market”.
It also announced it would establish a Class 3 reinsurer, Hardy Re.
Commenting on the proposed move, David Mann, chairman of Hardy Underwriting Group plc, said: “This reorganisation is a key development for the Group and represents a measured step towards delivering our longer term strategic plan.
“The redomiciliation and establishment of a Class 3 reinsurer is only being undertaken on the basis that there will be a second phase to develop third party business. We believe that, market conditions permitting, we will be underwriting new business in approximately 18 months time.”
“The Treasury says the London market is competitive enough, but this will make the situation worse
When CEO Barbara Merry told Insurance Times she had visited Bermuda in November, she spoke frankly about her disappointment that the Treasury had refused to lower the UK corporate tax rate (currently at 28%).
“The Treasury says the London market is competitive enough, but this will make the situation worse”, she said. “I think that they have pretty much closed the door on any type of help.”
Lloyd’s chairman Lord Levene and other senior market leaders were due to meet with the Treasury in November to discuss how London could remain competitive among fears that London would lose out to lower tax domiciles.
In a major blow to the industry leaders, the UK Government concluded the 28% corporate tax rate would not be lowered the day before the meeting was due to take place.
Tax, it seems, has been behind other recent moves – not all of them to Bermuda. With the EU Reinsurance Directive coming in on 31 December 2007 many European reinsurers are reconsidering their EU tax domicile.
The new directive will allow European reinsurers to write business across Europe regardless of where they are based. This is called passporting.
Given this new freedom, reinsurers will be asking themselves why they should remain in high tax domiciles like the UK and Germany (which has a 40% corporate tax rate) when they could save millions each year by relocating to one of Europe’s tax havens.
Given their recent marketing efforts, Malta and Gibraltar are clearly anticipating an influx.
So far, Partner Re and XL have both consolidated their European operations in Dublin (which has 10% tax), while Swiss Re has opted for Luxembourg. Brit recently established a new venture in Gibraltar.
“The redomiciliation and establishment of a Class 3 reinsurer is only being undertaken on the basis that there will be a second phase to develop third party business
Hardy is the latest Lloyd’s insurer to choose Bermuda over expensive London. Hiscox, Omega and Kiln have already made the move.
All have retained a very strong London-market presence.
Speaking to Global Reinsurance in October, Kiln underwriter Sharon Gallagher scoffed at the notion that the insurer had completely upped sticks and moved on. There were only a couple of members of staff on the island, she explained. Everyone else was still firmly based in the London market.
With groups like Catlin, Amlin, ACE, XL and more recently, Montpelier Re, having branches in Bermuda, Lloyd’s, London and other markets, such as the US, are fears of a mass exodus overstated?
In fact, the traffic has been moving steadily in both directions. Many Bermuda players established a presence in the Lloyd’s market in 2007, including Validus, Montpelier Re and Ariel.
As the industry becomes increasingly globalised surely it makes good business sense to keep the tax bills down while you increase your international presence. By establishing a new reinsurer in Bermuda, Hardy will gain access to a new lucrative market: US property catastrophe.
With the rating agencies continuing to favour a diversified business model surely this can only be considered a good thing.
Analysts at Numis Securities certainly think it is. "We think establishing a presence in Bermuda is a sensible step, which in time should enhance Hardy’s long-term growth options and fits well with its recently acquired property reinsurance expertise, notwithstanding the tax benefits," they said in a statement. "We estimate that moving from a tax rate of 30% to 15% would enhance 2008 earnings per share by 18% to 53.5p."