The issue isn't whether Bermuda is stealing business from London, it's whether both parties have taken their eye off the ball when it comes to innovative underwriting. Lindsey Rogerson reports.

Kiln's announcement that it is moving its holding company from London to Bermuda means that the exodus of traditional Lloyd's players is fast becoming a veritable stampede. Hiscox and Omega have already relocated to the tax haven, all of which rather begs the question, "Is it now inevitable that Lloyd's groups will beat a path to Bermuda in order to survive?" And critically, will a move to Bermuda be enough to ensure success for a group of reinsurers which have just been massively upstaged by Swiss Re?

Announcing its move, Kiln said that Bermuda offered a "favourable environment in which to develop". Indeed, all the right noises for shareholders are being made. In its statement announcing its Bermuda move, Kiln said that not only would such a move be "earnings enhancing in the short term" but also that it would lead to the company being able to pay higher dividends. Phrases which, of course, will be music to investors' ears.

Recent boastings from Omega Underwriting and Catlin suggests Kiln is not exaggerating the benefits of being based in Bermuda. Announcing a 92% leap in profits, Omega's chairman Walter Fiederowicz said: "The Omega Group now has a corporate structure that is optimal from a strategic, operational and financial perspective. It is hard to overestimate the importance and value of this to the Omega Group in the coming years." For its part, Catlin said its 2006 dividend was up 48% on the previous year - an uplift for previous Wellington shareholders.

So why isn't everyone upping sticks to Bermuda? Nick Martin, an analyst on the Hiscox Insurance Portfolio, believes Lloyd's groups have two distinct decisions to make. The first is whether or not they want a presence in Bermuda and the second is whether they wish to move their holding company to the island.

Reinsurers who want a slice of the property casualty business increasingly have little choice but to open an office, as post-Hurricane Andrew much of this business has been written out of Bermuda. Martin thinks Bermuda is also helping certain Lloyd's groups build a name for themselves outside the Lloyd's brand. He explains: "I think part of it is that it also gives groups like Hiscox and Amlin a chance to be a part of the international insurance community in their own right. Sometimes (of course) with Lloyd's you are just a Lloyd's syndicate, whereas I think Amlin and Hiscox would like their brand to be more well known."

Turning to the second issue of where a holding company is based, Martin thinks there are a number of factors involved in the decision but that shrinking a tax rate to around 15% is unquestionably a key one. The role of taxation in the mass-decampment to Bermuda is now firmly on the political agenda. Since GR first raised the issue of taxation and the flight to Bermuda last month, two things have happened - firstly Gordon Brown knocked two pence off UK corporation tax (bringing it down to 28% from 30%) in this year's budget and the UK Treasury is about to consult on the possibility of letting British-based multinationals repatriate overseas profits back into the UK tax-free. It's too early to know what exactly these proposals will mean for reinsurance groups but business organisations were quick to welcome the idea saying that it would attract corporate headquarters to the UK.

Lloyd's chairman Lord Levene has however called for further tax cuts and has made it clear he sees the UK's high tax rate as a competitive disadvantage. Speaking at last year's World Insurance Forum in Bermuda, he said: "We are well aware that the Bermuda tax regime offers a significant financial advantage compared to many other centres. We have, along with other insurers, drawn the UK government's attention to the differences in taxation, and we would be disappointed if the UK changed its tax regime in any way that increased the disparity between it and Bermuda or other low-tax centres."

Looking deeper

Scratch beneath the surface however and the companies which have relocated to Bermuda still seem pretty committed to the London market. Edward Creasy, Kiln chief executive, laboured the commitment point in the group's move announcement. He said: "Lloyd's remains, in our view, a commercially advantageous platform which will continue to form an important part of our insurance activities in the future."

And companies staying behind - including the staunchly pro-Lloyd's Brit Insurance - have not exactly been missing out. Brit has also just produced a stellar set of results, which ticks all the boxes for investors. Profits up almost 200%, a special dividend on top of its regular dividend and a share buyback programme. And Brit is not adverse to some Bermuda exposure either, in that it has a 19.5% stake in Bermuda-based retrocession reinsurance group Norton Re.

So if most players have feet in both camps - is there any point in getting hung up about domicile? Are there in fact bigger threats to worry about?

Innovation

Lloyd's players, whether Bermudian or UK-domiciled, need to stay aware of the threat from outside. It has been suggested that all participants, wherever domiciled, were caught napping when Swiss Re announced last month it had placed an innovative $150m catastrophe bond on behalf of Allianz, covering UK flood. For a market such as Lloyd's, which has always prided - and marketed - itself on its ability to be creative when writing risk no one else will touch, Swiss Re's announcement is not only embarrassing - it's potentially damaging to have such a major competitor steal its thunder.

If as expected, the Swiss Re bond is the first of many such issues, Lloyd's reinsurers have a lot of ground to make up. Nick Martin believes that the Swiss Re deal is the start of what will be a significant shift in the way reinsurance risks are handled as the reinsurance and capital markets converge. What began with catastrophe bonds and securitisations is now a business experiencing serious evolution on the back of the post-Katrina launch of sidecars (see table 1). However Martin thinks Lloyd's is holding its own in this arena for the moment. Last year it launched its own Cayman-based sidecar, Thunderbird Re - although the vehicle has not been as popular as had been anticipated, according to reports and CEO Richard Ward's own admission (see page 19).

Said Martin: "You have seen people like Catlin issue cat bonds and Hiscox's participation in the Panther Re sidecar, so a lot of the Lloyd's entities are active in this area. And Lloyd's itself has put out a number of proposals to try and encourage third party capital to come into the market. It has effectively replicated the Bermuda sidecar structure whereby third parties can reinsure either on a quota share basis, or for the entire syndicate. So Lloyd's is definitely up-to-speed."