The trend for redomiciliation by (re)insurers continues to grow as companies seek out less complex tax regimes. But which domicile should UK firms go for? The answer is no longer obvious
Insurance companies have been leaving the UK in their droves. In fact, half the companies in the non-life insurance section of the FTSE All-Share Index will be domiciled outside the UK by the end of this year. While Admiral, Amlin, Chaucer, Jardine Lloyd Thompson, Novae and RSA are still incorporated in the UK, another five – Beazley, Catlin, Hardy, Hiscox and Lancashire – have redomiciled over recent years. A sixth, Brit Insurance, will redomicile by the end of 2009.
Though other UK companies outside the insurance sector, including Shire Pharmaceuticals, publishing group United Business Media, and investment management company Henderson Group, have also redomiciled, the UK insurance sector has been especially interested because many of its competitors are already in low-tax regimes.
Lovells tax partner Philip Harle says the reason is “not entirely to pay less tax”. “The main reason is tax compliance costs and hassle.” He says the “dangly bits” of the UK tax code, such as its controlled foreign companies (CFC) rules, or the worldwide debt cap in this year’s Finance Act, are major reasons for leaving.
But where to go? Back in 2007, there was one answer for (re)insurance companies: Bermuda. Closer than London to US-based cedants, Bermuda’s insurance-friendly regulatory environment, and zero corporate tax on profits are strong draws.
Charles Dupplin, chief executive of Hiscox Bermuda, says: “The regulator here – the Bermuda Monetary Association – is superb. It understands the business and it answers your questions. The FSA [the UK’s Financial Services Authority] is more likely to say: ‘You read the rule book; we are not going to interpret it for you.’”
But this year Bermuda has been under fire as the G20 group of leading nations, perhaps looking for a scapegoat in the wake of the worst financial crisis in living memory, attacked tax havens. In reality, offshore financial centres like Bermuda had little to do with the financial crisis, which originated onshore in centres like New York and London; but facts seldom deter politicians in need of an easy target.
Worries about threats made by the G20, and legislation planned under the Obama administration, have meant that Bermuda has lost a lot of its siren-like allure. It is now seen as potentially risky, and not the pre-eminently attractive insurance domicile that it was just three years ago.
Though Bermuda still retains some power due to its critical mass as one of the world’s largest reinsurance markets, rival domiciles have been positioning themselves as alternatives. When selecting a domicile, companies face choices such as whether to stay within the EU (doing so incurs VAT), and whether to go for a place with an extensive double taxation treaty network.
Among the many possibilities, Switzerland and Ireland have recently been popular. Last year, both ACE and Paris Re (prior to its recent purchase by PartnerRe) redomiciled to Switzerland, as did United America Indemnity this year. Flagstone Re does not count as one such company, though it moved its balance sheet to Switzerland, as it remains incorporated in Bermuda.
Flagstone Re’s chief financial officer, Patrick Boisvert, describes the attractions of Switzerland: “Switzerland definitely has a more favourable tax regime than the UK; the tax rate is 8%. It is not a tax-exempt regime like Bermuda, but the rate we are paying is still low and there are benefits that offset it: there are various tax treaties and access to business that we would not be allowed to reach from Bermuda.”
Broker Willis is currently in the process of redomiciling from Bermuda to Ireland. In a statement, Willis says Ireland provides “a more stable environment, with the financial and legal infrastructure to meet Willis’s needs”.
Insurer Beazley, which manages four Lloyd’s syndicates, made use of a structure that has tax residency in Ireland but incorporation in Jersey; this structure is also used by a number of non-insurance companies, including Shire and Henderson Group.
RSA, the UK’s largest commercial insurer, was considering redomiciling from the UK to Ireland, but changed its mind after talks with British tax authorities. Instead, it is setting up a reinsurance company in Ireland in 2010, into which it will reinsure the group’s non-UK risks.
“The UK tax authorities are satisfied that there is no significant UK tax risk,” an RSA spokesperson says. “Moving the parent would be disruptive and is hard to do correctly. We already have a big Irish business. We know the infrastructure. But in Switzerland we have no presence and in Bermuda our presence is smaller.”
Switzerland and Ireland are not the only alternative destinations on offer. General insurance and reinsurance group Brit Insurance surprised many last March by announcing that it had selected the Netherlands as its domicile. The Dutch holding company is being set up under a court-sanctioned scheme of arrangement. Brit will remain listed in London, and the new shares are to be traded on the London Stock Exchange from 21 December.
“The group should be better able to align its corporate tax rate with those of its global peer group,” the company says in a statement.
And Bermuda, Switzerland, Ireland and the Netherlands still do not exhaust the possibilities. Privately held Lloyd’s insurer Barbican set up Barbican Reinsurance Company in Guernsey. “We can compete perfectly well for North American business from Guernsey,” says Barbican’s chief executive David Reeves. “I don’t believe that Bermuda’s proximity to the USA gives it any particular trading advantage.”
Currently, no single domicile seems to occupy pole position. Each company is coming up with its own solution. “There is not necessarily one reason that covers all companies,” PricewaterhouseCoopers partner Huw Jenkins says. “Each company needs to judge its own position. Each is affected by different factors.”
Meanwhile, some make a positive selling point of remaining in the UK. For example, Amlin proudly asserts on the front page of its website: “We are a UK-domiciled company.” But Amlin is keeping its options open. Its group chief executive Charles Philipps told Global Reinsurance: “Amlin keeps the question of domicile and related issues under regular review.
“While we do not currently consider that redomiciling abroad would on balance be advantageous for the group, we will continue to monitor tax and regulatory developments, in the context of the UK’s political and economic environment.”
And with a change of government expected at the next general election in the UK, (re)insurers will be watching developments closely.
David Sandham is editor of Global Reinsurance