The sky's the limit for what this island can achieve

Mark Twain once said, "You die and go to heaven, I'll stay here in Bermuda." Clearly, several money-makers from around the world must agree with him.

While it may have been the luscious green vegetation, the perfect blue waters and idyllic beaches that attracted the writer to the mid-Atlantic island, it is the zero-rate corporation tax and light touch when it comes to red tape that has made Bermuda the economic miracle it is today.

Since the 1960s, Bermuda has witnessed phenomenal growth in international business due to its insurance sector. It has transformed itself from a pretty tourist destination to a world-class, blue-chip financial centre.

Today, the island enjoys one of the highest per capita incomes in the world; is home to 75% of the world's Fortune 500 companies; and is now a global leader in reinsurance. There are more than 1200 insurance and reinsurance companies registered there, with combined assets of $170bn and an excess of $80bn in capital and surpluses. They generate a jaw-dropping $90bn in gross annual premiums.

Survival of the fittest

Bermuda has a way of defying its critics, who have said time after time that it cannot survive. Instead, it either reinvents itself or finds a niche that needs filling, and fills it.

As US and European reinsurers continue to deal with the lingering ramifications of legacy issues and past investment meltdowns, the financial capacity of Bermuda's reinsurers has soared. The so-called 'flight to quality' by reinsurance buyers is now more than ever necessitating a visit to Bermuda.

Supporters are sure that the growth of the Bermuda market will continue at the same phenomenal pace because every time there is a global disaster or there is a capacity crunch and other markets are paralysed, Bermuda steps up to the plate.

The island ranks as one of the top three premier insurance jurisdictions in the world. It advantages include no income taxes (but there is a growing employment tax payable by employers and employees, based on employment income) and few restrictions as to how Bermuda companies can invest their assets and deploy capital, not to mention the island's close proximity to the largest insurance market in the world, the US.

But it is in captives and reinsurance where Bermuda really stands head and shoulders above the rest. The mid-Atlantic island is home to some 1400 captive insurers, and, according to Standard & Poor's (S&P) Global Reinsurance Highlights Report of 2005, 13 of the world's top 40 reinsurers are based in Bermuda. Unsurprisingly, Bermuda is also the fourth-largest reinsurance market in the world after Germany, the US and Switzerland.

A haven for captives

Bermuda's first captive insurance company was set up by Ohio businessman Fred Reiss in the early 1960s. He is credited with inventing the concept of a captive, which was a new type of self-insurance vehicle that really put Bermuda on the world insurance map. He formed his captive-management company, International Risk Management, in Bermuda in 1963. Today, Bermuda is still the king of the captive hill, even though more off- and on-shore jurisdictions have been getting in on the act and there are over 4000 captives globally.

There has been talk that Bermuda has recently lost its advantage as a captive domicile because of its rivals opening onshore in the US.

"Logistically, it would probably be easier (to have a captive in South Carolina," said Kim Giowish, vice-president of the Bank of America Corporation, which has a large captive in Bermuda. "There is no tax difference to us by setting up in South Carolina, so one does have to question that."

She added: "The domestic domiciles have a potential to come on in a robust way for US-based buyers who want the convenience."

Most Fortune 500 companies have some kind of captive enterprise in Bermuda; while the numbers may not be increasing as steadily as in previous decades, the amount of money in captives assets in Bermuda is increasing and the use of rent-a-captives expanding, particularly in medical malpractice.

"We have a customer who, 25 years ago, had $120 000 invested in a captive, and it was a big move to increase that to $180 000. Now the company has over $1bn in assets," said David Ezekiel, head of International Advisory Services (IAS) (see box).

He continued, "Anyone who was going to have a captive in Bermuda already has one. The changes we are seeing are in size. Some of the captives we have under management swamp the start-ups we have seen, but nobody reads about them in the papers."

A rush on reinsurance

Some of the world's biggest (re)insurers have made Bermuda their home - usually after capital crunches. ACE and XL Capital (then Excel) were the first large players when they were set up in 1986. Some 34 American companies formed ACE, contributing an initial capital of over $200m. In 2005 it had assets of over $32.4bn and gross written premiums of $16.8bn. In 2005, XL had assets of $41.6bn and gross written premiums of $9.2bn.

Then came the post-Hurricane Andrew period, then the costliest natural disaster in the world. Eleven US insurance companies went into run-off, and in the ensuing wreckage, eight new reinsurance companies were founded in Bermuda. Of this group, which had $4bn in capital, most were bought out or swallowed up. Renaissance Re and IPCRe are among the last standing.

Then, the attack on the World Trade Centre in New York on 11th September 2001 meant that there was another capital shortage as insurers struggled to count the costs of such a large-scale disaster. Nine companies set up in Bermuda.

By 2004, all of the post-9/11 start-ups, including Allied World Assurance, AXIS and Endurance Specialty, were earning a combined premium income of $9.5bn. And while some, such as Montpelier Re, took big hits following the 2005 storm season, none of this group has gone to the wall as a result. Investors have made a pretty penny and are still willing to invest in this market.

Continued growth for all

An indicator of the strength of the overall market is its growth. In 2001, net reinsurance premiums written stood at $7.5bn. By 2004, that figure had almost doubled to $14.2bn.

International business is the single most important sector of Bermuda's economy, responsible for three-quarters of Bermuda's gross national product. In total, about 4000 of the Island's jobs are with Bermuda-based insurers and reinsurers, and of those, more than half the spots are held by Bermudians.

Nearly 10 000 people on the island are dependent on international business in some form - international companies spent nearly $1bn in Bermuda, and their visitors a further $58m; a further $84m was paid in fees and taxes to the government by the sector. As a result, the government is keen to grow this sector and keep it healthy.

Bermuda's premier, Alex Scott, and his finance minister, Paula Cox, said at this year's Risk and Insurance Management Society (RIMS) conference in Honolulu that Bermuda's commitment to maintaining its stature as a leading insurance market has much to do with creating opportunities for future generations of Bermudians:"This is how we are really planting the seeds of the future," Ms Cox said. "This business trickles down in many ways to the kitchen table," Mr Scott commented about the importance of (re)insurance to Bermuda's growth.

The government is constantly pushing for Bermudians to be well trained so that they too can enjoy the benefits of the high-salaried posts generated by the financial services sector. However, international companies are loath to be pushed into token hiring of locals to appease the government.

"There is concern on the part of the government that Bermudians are not progressing sufficiently in international business," says the Association of Bermuda International Companies on its website. "Businesses have concerns that some affirmative action policies designed to protect the Bermudian workforce, and the high cost of living and doing business in Bermuda, could impede their competitiveness in the international arena."

Bermuda regulation

The Bermuda Monetary Authority screens insurance companies who wish to do business in or from the island, and because of this, Bermuda and its registered companies are highly regarded and are readily accepted by most of the world's major governments and regulatory organisations.

The regulatory environment is exceptionally favourable to businesses in Bermuda - so much so that many international businesses, including insurers, now have their Bermuda-incorporated and Bermuda-based companies as their registered offices and their companies beyond Bermuda as their subsidiaries.

Prominent examples of these so-called inversions include Tyco International (which merged into ADT, a UK security company that earlier re-domiciled into Bermuda) and Ingersoll-Rand. White Mountains also recently re-domiciled to Bermuda.

One of the main reasons is that, unlike the US (from where the vast majority of companies come for corporate inversions in Bermuda), there is no legal requirement in Bermuda for chief executives to certify their company's financial results personally if of the requisite size, but some of the better ones do so on a voluntary basis.

Bermuda is still attracting new international companies because of its sophisticated workforce and infrastructure, communications and ease of access, as well as its political and economic stability, and the uncomplicated legal framework. All this allows for a streamlined process when establishing a business on the island, which has a track record of being a facilitator.

Mr Ezekiel is certain that there will be many more waves of (re)insurers: "Maybe there will be a bad storm season this year, as predicted, or in a few years down the line, or finite will reinvent itself. Whatever it is, Bermuda will be there to fill that gap."

LIVING THE HIGH LIFE: BERMUDA'S FINANCIAL FACTS

In 2004, the average annual household income was $106 233 - a 62% increase over the $65 676 reported in 1993. The average Bermuda household spent $1538 a week on consumer goods and services, a 58% nominal increase over 1993, when households spent $973.

The average cost of housing grew by 90% between 1993 and 2004 to $512 per week from $269 per week. As a proportion of household incomes, residents now spend 33.3% of their incomes on housing, up from 27.7% in 1993.

Tenants in 2004 paid an average of $1433 per month for housing, up 57% over the $911 paid in 1993, but significantly less than the overall increase in housing costs, showing that owner-occupiers took on the bulk of the increase: their housing costs nearly doubled in the same period.

INTRODUCING THE MOST POWERFUL MAN IN BERMUDA

Need to get an office? Find someone to answer the phone? Get a BlackBerry? Then give this man a call...

From the big problems - like getting an experienced chief financial officer on board quickly - to the smaller ones, like finding someone to make the coffee, David Ezekiel has the answer.

As founder, managing director and president of the world's largest independent captive-management company, International Advisory Services (IAS), which is based in Bermuda, Mr Ezekiel is the man behind the scenes at most of the 'class of 2005' start-ups.

From its mini-incubator offices in Hamilton, the firm is providing various levels of back-office support, staff and senior management (and tea and biscuits) for eight of the 13 start-ups, including Amlin, Hiscox and Lancashire.

Then...

Mr Ezekiel and his teams are used to managing the needs of their captive clients, and so it seemed natural to move into offering management services for start-ups.

"It happened almost by accident," said Mr Ezekiel. "They came to me, I didn't go to them."

He recalled that back in 2001, post-9/11, a handful of start-ups came to him for some help in setting up their offices. He knew the work would be temporary and intense, but (not being shy of hard work and a challenge) he took on the role.

"I remember we talked to them in the morning, then they came back to us in the afternoon and said yes, and by the next day they were up and running," said Mr Ezekiel of his first start-up client. "We set up a war room with a computer and not much else. And it has sort of multiplied from there."

Among others, he signed up Axis, Goshawk and Quanta at the time, and still does some of the back-office work for clients that he expected to have only for a short while.

... and now

Now any start-up company without an existing infrastructure that is worth its salt stops at his Hamilton offices.

In 2002, IAS moved to a bigger building on Church Street, and found it had a spare floor of office space. So when companies came knocking on his door post-Katrina, Mr Ezekiel divided up the floor into four offices and put everything in for his new clients, made to order.

For instance, while Hiscox and Amlin have the whole service package, start-ups such as Validus Reinsurance had their own space from day one, but IAS is still their back-office provider.

Inside knowledge

Bermuda, like anywhere, has its problems for managers. Without inside knowledge, the start-up reinsurance businesses that the island is so famous for can get sidetracked and caught up in red tape.

"We provide everything to let the underwriters get on and underwrite," said Mr Ezekiel, "from getting them signed up with Belco (the local electricity provider) to getting them a cell phone. The companies may not have had time to get a CFO, so we take that in house until they have found one. We do cash collection - in fact, we did cash collection for one of the 2001 group for three years after it started."

But its biggest selling point is having staff that can take care of the processing of reinsurance. As IAS' core business is captive management, which means that any personnel seconded to work with the start-ups has in-depth knowledge of reinsurance and how it is processed.

"Our company has mirrored the growth of the Bermuda market," said Mr Ezekiel. Considering he started his company with a single captive to manage 25 years ago, he now manages captives that make some of the larger players in Bermuda look like small fry.