The London versus Bermuda debate has been reignited by Hardy Group’s decision to follow fellow Lloyd’s insurers Hiscox, Omega and Kiln to the low tax domicile.

The London versus Bermuda debate has been reignited by Hardy Group’s decision to follow fellow Lloyd’s insurers Hiscox, Omega and Kiln to the low tax domicile.

Back in October’s edition of Global Reinsurance readers may recall that Hardy Group was the subject of our company analysis. Journalist Emma Jones considered whether Hardy might choose to relocate to a low tax jurisdiction like Bermuda.

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.”

Clearly, a real commercial advantage has now been found. The group intends to establish a new Class 3 reinsurer. Back in October Hardy CEO Barbara Merry had insisted: “We’re too British to do it just for tax reasons.” The timing is startling though, coming so soon after the UK Treasury’s refusal to budge on the corporate tax issue. Particularly with Merry revealing her disappointment at the Treasury’s decision in a recent interview with Insurance Times.

“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 insurance leaders were due to meet with the Treasury in November to discuss how London could remain competitive among fears that it could lose out to lower tax domiciles. In a major blow to the market, the UK Government concluded the 28% corporate tax rate would remain as it was just a day before the meeting was due to take place.

Tax, it seems, has spurred a number of other recent moves – not all of them to Bermuda. With the EU Reinsurance Directive coming in on 31 December 2007 many European reinsurers are now reconsidering their EU tax domicile. Through passporting, the new directive will allow European reinsurers to write business across Europe regardless of where they are based.

“The timing is startling, coming so soon after the UK Treasury’s refusal to budge on the corporate tax issue

Helen Yates, Editor Global Reinsurance

Given this freedom, reinsurers will be asking themselves why they should remain in high tax countries like the UK and Germany (which has an incredible 40% corporate tax rate) when they could save millions each year by relocating to one of the EU’s tax havens. Given their recent marketing efforts, Malta and Gibraltar are clearly hoping to reap the passporting benefits.

To date, the Bermuda players seem to favour Dublin as a low-tax home from home with both Partner Re and XL consolidating their European operations there (Ireland has a 10% corporate tax rate). Swiss Re has opted for Luxembourg.

In a globalised reinsurance industry are fears of a mass exodus from London to Bermuda overstated? After all, Hiscox, Omega and Kiln have all retained a very strong London-market presence.

Speaking to GR in October, Kiln underwriter Sharon Gallagher scoffed at the notion that the insurer had completely upped-sticks. There were only a few members of staff on the island, she explained. Everyone else was still firmly based in London.

Reinsurance groups like Catlin, Amlin, ACE, XL, Montpelier Re and even newcomers such as Flagstone and Validus, increasingly look to establish branches in Bermuda, London, Europe, the US and other markets. In fact, the traffic has been moving steadily in both directions between London and Bermuda. Many Bermuda players established a presence in the Lloyd’s market in 2007, including Validus, Montpelier Re and Ariel.

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. “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.