The Bermuda market continues to grow as insurers and reinsurers look for a benign outcome to international tax discussions. Lee Coppack explains.
Larger diversified companies:
XL Capital Ltd.
Finite risk oriented companies
Centre Solutions (Bermuda) Ltd.
Commercial Risk Reinsurance Company Ltd.
Enterprise Reinsurance Ltd.
European International Reinsurance Company Ltd.
Inter-Ocean Holdings Ltd.
Richmond Insurance Company Ltd.
Scandinavian Reinsurance Company Ltd.
Stockton Reinsurance Ltd.
Property catastrophe oriented companies:
IPC Holdings, Ltd.
LaSalle Re Holdings Ltd.
RenaissanceRe Holdings Ltd.
Tempest Reinsurance Company Ltd.
Associated Electric & Gas Insurance Services Ltd. (AEGIS)
Oil Casualty Insurance, Ltd. (OCIL)
Oil Insurance Ltd. (OIL)
Other specialty companies:
Annuity & Life Re (Holdings), Ltd.
Chubb Atlantic Indemnity Ltd.
Delphi International Ltd.
Exporters Insurance Company Ltd. (EIC)
General International Ltd.
Harrington International Insurance Ltd.
Heddington Insurance Ltd.
Mutual Risk Management Ltd. (MRM)
Odyssey Re (Bermuda) Ltd.
Overseas Partners Ltd. (OPL)
Tate & Lyle Reinsurance Ltd.
Terra Nova (Bermuda) Holdings Ltd.
Western General Insurance Ltd.
The Bermuda market continues to broaden and deepen, partly as its two Titans scoop up acquisitions, but also with the attraction of new ventures. Four or five years ago, it was not difficult to break down the major sectors of the market: excess liability insurers, property-catastrophe reinsurers, finite risk (re)insurers and, by a broad definition, captives.
Since then, the market and in particular a few of its major players have so transformed themselves that when PricewaterhouseCoopers in Bermuda did a fourth study of the financial results of the market for the 1999 Bermuda edition of Global Reinsurance, the companies were completely reclassified. The categories chosen were larger diversified companies and speciality companies, neither of which is homogenous.
Three companies compose the group of larger diversified companies: ACE, XL Capital and PartnerRe, two international multi-line insurance and reinsurance groups and one of the largest reinsurers in the world. Within the latter category of speciality companies, come finite risk oriented companies, property-catastrophe oriented companies, industry captives and other speciality companies, another heterogenous group.
PartnerRe has been quiet on the acquisitions front since December 1998 when it acquired Winterthur Re, but there has been a stream of announcements during 1999 from ACE and XL Capital. In addition to acquisitions by existing companies, new company formations have continued at a significant rate. The registrar of companies lists a total of 43 new companies registered up to 31 July 1999. Last year, 96 new insurance and reinsurance companies were added to the register, which took the total number of insurers and reinsurers on the Bermuda register to 1,493. Bermuda has managed better than 90 new companies in each of the past five years.
The breakdown of registrations to 31 July 1999 is as follows:
Class 1 (single owner, pure captive): 4
Class 2 (multiple owner captives and/or writing limited third party business): 8
Class 2 and long term: 1
Class 3 (commercial companies and captives writing 20%+ third party business): 22
Class 3 and long term: 1
Class 4: (major commercial companies capitalised at $100 million or more): 1
Long term: 6
Many of the class 3 companies are larger captives or group facilities, which offsets the small growth in the number of pure captives. According to Tillinghast Captive Insurance Company Reports, among this group are a Japanese owned captive, Bluewell Reinsurance Company, managed by Zurich International and an Australian owned captive, Flagstaff Insurance Co, which has been registered as a class 1 company.
The new class 4 company is Intrepid Re Ltd, a joint venture between ACE Bermuda Insurance Ltd, the UK insurer Royal and SunAlliance Insurance Group and the broker Aon Corporation. The company has been capitalised at $300 million and will reinsure alternative risk transfer (ART) insurance underwritten by other companies.
More detailed figures for 1999 have not yet been published, but can be expected now that Bermuda has a new registrar of companies, Jeremy Cox, to succeed Kymn Astwood, who resigned earlier this year to take up a position in the insurance industry. Mr Cox is no stranger to the island's insurance industry. He has worked in the registrar's office since 1993, most recently as inspector of companies. He holds an undergraduate degree in finance and insurance and earned post-graduation qualification as a certified public accountant. Mr Cox has also served on the Insurance Advisory Committee (IAC), as well as that body's marketing, regulatory and private bills sub-committees. His father, Eugene Cox, is Bermuda's minister of finance and his older sister, Paula Cox, is the island's minister of labour and home affairs.
Meanwhile, there is a sense of noises off stage as Bermuda negotiates over moves from the Organisation for Economic Development and Co-operation (OECD) on “harmful tax regimes”. The government under Premier Jennifer Smith is naturally anxious to avoid international penalties which could result in Bermuda being categorised as a tax haven, but it wants to do so without having to change Bermuda's tax regime in a way that will be unpopular domestically.
Little is being said overtly, but behind the scenes strenuous diplomatic negotiation is taking place between Bermuda, the UK government, and the OECD, with the European Union waiting in the wings. The government has also been bringing in new legislation aimed at strengthening Bermuda's financial regulations in relation to the international community. In August 1999, parliament passed three such laws, the Proceeds of Crime Amendment Act, the Taxes Management Amendment Act and the USA-Bermuda Tax Convention Amendment Act.
Under the Proceeds of Crime Act, tax evasion is now an offence and people charged or convicted with tax evasion offences elsewhere may find their Bermuda financial interests are open to investigation. The amendment to the USA-Bermuda Tax Convention Act deals primarily with the provision of information between the two countries relating to the tax liability of individuals.
Developed countries with high tax regimes usually look suspiciously at domiciles that might be the means of depriving them of revenue. The OECD has taken up the issue because of new elements which could exacerbate the situation. It says that globalisation and new electronic technologies can permit a proliferation of tax regimes designed to attract geographically mobile activities, such as financial and other service activities. The implication is clearly that they will be attracted away from higher tax areas, and the OECD believes that governments must take measures, in particular intensifying international co-operation, to avoid tax-induced distortions in capital and financial flows undermining their fiscal policies.
In May 1998, the OECD issued a report on harmful tax competition to provide co-ordinated action for the elimination of what it calls “harmful tax practices”. The report created a forum on harmful tax practices, set out guidelines for dealing with harmful preferential regimes in member countries and adopted a series of recommendations for combating harmful tax practices.
The forum is undertaking an evaluation of existing and proposed preferential tax regimes in member and non-member countries, analysing the effectiveness of counter measures, including non-tax measures, and examining whether particular jurisdictions constitute tax havens. It is taking into account primarily whether the jurisdiction:
a) has no or only nominal effective tax rates;
b) lacks effective exchange of information;
c) lacks transparency; and
d) does not require substantial activities.
To start, the forum wrote to 47 jurisdictions, including Bermuda, for further information. About two thirds of these jurisdictions have responded, again including Bermuda, and further discussions have been taking place with them in small groups.
Territories judged as tax havens and member states with unacceptable tax provisions after this exercise will appear on a blacklist which the forum should produce by the end of this November. The list, however, is not expected to be made public, at least until it has been considered by the council of the OECD in May 2000 at the earliest.
Jurisdictions on the final list are likely to find that the OECD and its member countries try to hamper their ability to operate as financial centres by means of penalties and restrictions, but the OECD says the general attitude from those who responded to the questions is one of co-operation.
The decision in July by Connecticut based PXRE Corporation to move its corporate headquarters to Bermuda seems to express the confidence of the insurance industry in a benign outcome of the discussions, as far as it is concerned. Certain issues which might arise are virtually irrelevant for many of the larger (re)insurance companies in Bermuda, such as greater disclosure. Those who are publicly quoted companies in the United States are already subject to the rigorous disclosure requirements of the Securities Exchange Commission (SEC).
Nor would companies be able to transfer easily from Bermuda to another territory with no tax because those domiciles, too, are coming under the scrutiny of the OECD and, where applicable, the European Union. The tax issues are actually leading to some verbal sparring between Bermuda and the Cayman Islands, which are its nearest rival in the insurance world. Bermuda also has the advantage that its banking sector is composed of three long established local banks.
There is, however, the question of perception, which may take more time to change. Both respectable and not-so-respectable financial advisers stress Bermuda's lack of income, corporation, capital gains, gift or inheritance tax or estate duty. However, with the new laws and earlier anti-money laundering legislation, the government has demonstrated that Bermuda should not be a haven for money generated illicitly. The issue of whether territories like Bermuda should be prevented from using tax to compete with higher tax onshore domiciles, which have many other advantages, to attract legitimate and desirable businesses is quite a different one.
Lee Coppack is co-editor of Global Reinsurance and editor of the publication's annual Bermuda edition. E-mail: firstname.lastname@example.org