Bermuda's continued success as the jurisdiction of choice is really of little surprise. The international business industry enjoys unparalleled growth, attracting 75% of the Fortune 100 companies to the island.
Bermuda is now a global centre for insurance and reinsurance, ranking third in the world in size after New York and London. At the end of last year, Bermuda's re/insurance community reported a total of $117bn in assets, writing more than $27bn in annual gross premiums, and the industry is distinguished by impeccable financial security, a very high level of intellectual capital and a diversified range of quality insurance products.
Insurance has been an important part of the island's economic landscape since the late 1940s when American International Group (AIG) opened an office in Bermuda to oversee its worldwide operations. Not long afterward, a business visionary named Fred Reiss coined the term ‘captive' to describe the kind of insurance companies he was creating in Bermuda.
Today, there are more than 1,000 captive insurance companies headquartered in Bermuda, making the island the dominant player in captives with nearly a third of the market and 50% more captive business than its closest competitor. Bermuda has also been a leader in the development of ‘rent-a-captives', a flexible and cost effective risk management solution, which enables an insured to obtain the same benefits of a traditional captive without participating in the ownership or management of the ‘insurance company'.
More recently, as insurance and capital markets have converged, Bermuda's insurance industry has pioneered the development of a range of non-traditional insurance solutions. These so-called financial products have addressed the changing needs of commercial insurance buyers looking not just to protect themselves against events such as hurricanes or product recalls, but also against exposures to currency movements or commodity pricing volatility.
Infrastructure The Bermuda Government works closely with the island's international business community to develop laws and regulations that enhance the business environment in Bermuda while benefiting the local population. Bermuda provides specialised legal advice, auditing experience, custodian banking facilities and asset management capabilities for the private trust investor as well as the institutional client.
Sensible regulation While maintaining the highest business standards, Bermuda has a sound regulatory framework for the conduct of business on the island. The regulatory body, the Bermuda Monetary Authority (BMA), is accountable to, but separate from, the government so it can represent the interests of both the public and private industry.
Focus on business Bermuda has a highly skilled and well-educated workforce, including representatives of the top international accountancy, legal and professional management firms. Bermuda has always maintained an international outlook.
Tax neutral haven Bermuda has emerged as the ‘jurisdiction of choice' for public companies. There are approximately three times as many Bermudian companies listed on the New York Stock Exchange and NASDAQ than there are Cayman companies-listed on them. This is particularly attractive to companies with operations in, or significant income arising from, more than one country, because it is that much more difficult for a particular taxing authority to assert its right to tax all of the company's operations or profits. However, such tax advantages can also be found in other offshore jurisdictions, and it would appear that tax alone is not the deciding factor.
Location and infrastructure Bermuda's geographical location further contributes to its popularity. The island is 90 minutes by air from New York and there are regular flights to other major US cities, Toronto and the UK.
Banking Banking in Bermuda is conducted by three indigenous banks – The Bank of Bermuda Ltd, The Bank of NT Butterfield & Son Ltd and the Bermuda Commercial Bank Ltd. Bank of Bermuda is the largest bank on the island, although collectively these three banks have assets of over $14bn and asset ratios well above the 8% minimum required by the Basle Agreement on Capital Standards and the 10% guideline of the Bermuda Monetary Authority (BMA). The sector is divided into four basic categories; corporate banking, private banking, investment banking and asset management.
Stability Bermuda has a stable political and social environment reflecting its status as an internally self-governing British territory with a tradition of parliamentary government dating from 1620. Bermuda's legal system is based upon that of the UK, with a final appeal to the House of Lords in England. Bermuda's corporate law is flexible and, again, is largely based upon corporate law in the UK. The Companies Act of 1981 is amended regularly to keep pace with international commercial developments. There are no restrictions on the ability to transfer funds in and out of Bermuda or on paying dividends to non-resident shareholders.
Finally, Bermuda enjoys one of the highest standards of living in the world, and the island is recognised for outstanding economic growth. In fact, Bermuda's economy regularly grows at a rate higher than both the US and Britain.
As a result, there are certain ‘intangible' benefits of dealing in Bermuda. Generally, onshore investors seem to be more comfortable with Bermuda than other offshore jurisdictions. Similarly, organisations such as the SEC and the major US stock exchanges are now dealing with Bermuda companies on a regular basis and appear to be satisfied with the island's legal system and regulatory environment.
Although Bermuda's experience in the field of asset management dates back more than 100 years, its ability to effectively deal with the demands of the large institutional client has strengthened considerably in the last 15 years. Bermuda now boasts seven or eight established, well-capitalised financial firms with money management capabilities, a few of which are affiliated with well-respected onshore investment houses. Intellectual capital, for the most part, has stemmed from the accounting firms as the clients of these accounting firms demand investment know-how.
This area of the industry continues to develop as a means for local banks and institutions to cater to the complete needs of the institutional investor, whether it be the fixed income assets of a captive or the assets of a defined contribution plan. Bermuda-based money managers provide an opportunity to invest internationally from a secure and stable base. The level of sophistication has not been compromised as the money management teams are run by qualified Chartered Financial Analysts (CFA) charterholders and are managing to complex performance benchmarks. The ability to measure local company management against onshore global managers has proven to be key.
Asset management has long been a challenging issue for reinsurers. Faced with the choice of managing in-house versus contracting a group of outside managers to manage certain aspects of the total book, the insurer until recently has opted for the appointment of leading investment specialists to manage their investment portfolios. In consultation with advisers, companies most frequently decided the overall asset allocation and appointed a manager to be responsible for a particular asset class. The company retained overall responsibility for investment results based on the asset allocation decision, choosing carefully screened benchmarks to evaluate the effectiveness of each manager's contribution and its own management strategy. This approach to the management of its balance sheet allows a company to concentrate on its core business, leaving the management of its financial assets to skilled investment professionals.
However, companies are increasingly experiencing is some difficulty in matching actual investment strategy with corporate investment objectives. Moderate mismatches in what the company wants to achieve and what is actually achieved by the investment manager can have an adverse impact on the surplus of the firm. For some companies, most recent investment performance has created significant surplus volatility and charges to equity.
As a result, insurers are increasingly taking direct responsibility for the asset management function by establishing their own asset management capability.
The positives? Those companies that have chosen to manage their own assets claim that the longer-term benefits significantly outweigh the costs. Companies have direct control over the investments of the firm to ensure that investment policy and strategy is in perfect step with the company's overall investment objectives. Moreover, in-house management allows the company to identify and accurately measure the risk inherent in its investment portfolio. The risk an outside manager takes in the pursuit of returns relative to a benchmark is at times difficult to define.
In-house management also provides flexibility for shifts in strategy. More often than not, third party managers are still included to some extent. Direct security investment is complemented by a multi-manager structure where different managers are used in perhaps more esoteric markets, such as emerging markets, where the company has not yet developed expertise.
In-house management of company assets also provides synergies because the total portfolio of the company can be viewed and considered when the company is making additional investment (merger/acquisition) decisions.
The downside? The establishment of in-house investment capability is an expensive proposition. Qualified and experienced money managers on the island are relatively scarce and may prove difficult to retain. Another issue is that of continuity; about half the professionals are non-Bermudian and are subject to Bermuda's strict immigration policies. Timing may also prove an issue as relationships with those houses that best suit the needs of the company have to be established.
What asset managers in Bermuda bring to the table is not only well-rounded expertise in the management of assets offshore, but an objective global approach to money management. We know that risk can be minimised if we are aware of our risk factors, can measure our risk factors and can manage these risk factors in a cost-effective manner.
Furthermore, as local managers have now garnered success in this market, they have developed products, such as large balance money market funds, to appeal to this sector. Innovative investment products focusing on gaining market exposure while preserving capital have been well received. Insurers are well aware of the costs of maintaining exposures where there is little experience.
Finally, the cost of doing business is generally lower for the company that chooses not to consolidate its investment responsibility in-house. The institutional approach to money management that the larger local houses offer provides efficiency in trading, custody and reporting.
State-of-the-art telecommunications allows instant access to global markets and the industry's global partners. At Bank of Bermuda, a network of global investment firms, accounting firms and management companies supply all the necessary services. Further, the banks offer all-inclusive relationships if the company demands other banking services such as corporate or private banking.
With the advent of global standards for investment management and its personnel, the market can expect continued growth and dominance of Bermuda's asset managers, just as Bermuda's insurers have dominated the reinsurance realm. The world-class investment expertise developing here on the island is becoming the most significant attribute that sets Bermuda apart from other offshore jurisdictions. Bermuda's mature and growing financial services sector offers a sophisticated environment for banking and investments.