International Business in Bermuda
by Roger Crombie

Spotlight on International Business

Although Bermuda originally made its name as a travel destination, and remains one of the world’s premier holiday spots, since 1950 the Island has become the world’s leading centre for international business and, lately, insurance.

More than 10,000 international companies and partnerships are registered in Bermuda, including subsidiary operations of more than three-quarters of the Fortune 100 largest companies in the United States. Bermuda’s commercial insurance and reinsurance market is now as important as any other in the world, surpassing that of London to stand on a par with New York. Annual premiums in the Bermuda market exceed $90 billion, and its assets are in excess of $250 billion.

“International business” is a Bermuda-specific term, used to define the combination of insurance, reinsurance, banking, trust and other financial disciplines that it provides to the world. The Island’s political and economic stability and first-class legal, banking and accounting support services are the hallmarks of its international business industry.

With a world-class business and telecommunications infrastructure, Bermuda provides less complex, less bureaucratic operating conditions for its international business clients. A unique partnership of government and private sector interests works together to foster an environment attractive to corporate investment, continually broadening the appeal of the jurisdiction for businesses in many fields.

Insurance and reinsurance

Boasting more than 1,500 companies and a local workforce of more than 3,500, Bermuda’s insurance market is the most economically important sector of the Island’s international business industry.

The market traces its origins back more than half a century. In the late 1940s, the large multi-national financial services company now known as the American International Group opened an office on the Island to assist and serve its worldwide operations. Other large companies followed suit. In the 1960s, American businessman Fred Reiss coined the term ‘captive’ to describe the kind of managed insurance companies he was setting up in Bermuda.

A captive insurer covers the risks of its parent companies or related groups of companies. Their establishment in Bermuda was the first of a series of waves of insurance capacity to land on Bermuda’s shores. Today, more than 4,500 captives are in operation around the world. Bermuda maintains the lead in the market it created and remains the undisputed captive insurance capital of the world.

Many others followed the captive insurers into Bermuda. The Island’s commercial insurance and reinsurance market now offers more than twice as much coverage as Lloyd’s of London.

Often accessed through placing brokers, Bermuda’s commercial or open insurance market was born out of a capacity crisis in liability insurance in the United States in the mid-1980s and was started by pioneering excess liability companies ACE and XL Capital.

Other companies were formed in Bermuda sporadically in the six years that followed. In 1992, Hurricane Andrew caused a serious disruption in the supply of catastrophe reinsurance worldwide. Early in 1993, Bermuda attracted its first property catastrophe reinsurer. Seven others soon followed, resulting in a $4 billion inflow of new capital to the Bermuda market.

Following the events of September 11, 2001, the global insurance industry was recapitalised to the tune of $27 billion of new money, more than half of which came to Bermuda. Seven new major insurance and reinsurance companies were formed and most existing Bermuda insurance and reinsurance companies took the opportunity to add to their capital. As a result, Bermuda’s pre-eminence in the reinsurance market grew even stronger.

In the three years following, several other new major companies joined the Bermuda market, offering specialty insurance products in lines of business that were not well served elsewhere.

Bermuda’s insurers faced their biggest challenge in 2005, after Hurricane Katrina, and then Hurricanes Rita and Wilma, pounded the Gulf Coast, destroying much of New Orleans and causing great damage in Florida. Insured losses from these three hurricanes, plus Hurricane Dennis, which hit earlier in the year, will probably amount to $100 billion by the time all the bills are in.

As had become the tradition, when the insurance world looked for a location in which to site companies forming in response to this economic damage, it found Bermuda. A number of new companies were started in Bermuda late in the year, to take advantage of the likelihood that premium rates would soar in the wake of the market disruption. The arrival of the new companies took to about 25 the number of Bermuda insurers and reinsurers with capital in excess of $1 billion.

Buyers of commercial insurance and reinsurance coverages are increasingly shopping in the Bermuda market, which offers up to $500 million in excess liability insurance limits per programme and over $150 million in property catastrophe reinsurance protection per programme. Other leading products include directors’ and officers’ liability insurance, employment practices’ liability cover, marine and aviation reinsurance, excess property, aviation products, satellite insurance and professional liability programmes.

Corporate and personal trust

As long ago as the 1930s, Bermuda first began to offer corporate and personal trust services, which have represented a core business service for more than 60 years. The inherent flexibility of trusts enables investors to accommodate and meet a broad range of financial planning objectives.

Bermuda trusts provide an effective mechanism for ensuring the security of global assets and their efficient transmission to future generations, avoiding disruption on the death of the head of a family and the delay and publicity which can be brought about by administration.

Accommodating flexibility and confidentiality, Bermuda trusts enable settlers to ensure the retention of family wealth, the continuation of family business and protection of assets from arbitrary seizure, nationalisation or other potential threats such as attack by future unknown or unanticipated creditors.

In many jurisdictions, opportunities for tax planning remain through the use of trusts, along with protection against exchange controls. A traditional favourite for making provisions for charity, trusts settled in Bermuda are also frequently used in employee stock option plans and in the establishment and holding of pension funds.

Traditional English trust principles have been augmented in Bermuda by legislation tailored to meet the needs of the international commercial community. Increased flexibility and certainty resulted from the enactment of the Trusts (Special Provisions) Act 1989 and the Conveyancing Amendment Act 1994. The continually updated laws of Bermuda provide scope for fair and balanced protection against potential future creditors, along with enhanced planning opportunities for individuals governed by legislation that dictates how assets are to pass to relatives at death.

Significantly, the 1989 Act provides for purpose trusts, which can serve to benefit benevolent objects falling short of the definition of charity and in a commercial context, project financing and securitisations. Trusts can be created, inter alia, for the purpose of acquiring and retaining specific shares of a particular company. Such trusts can assist in achieving specific planning goals: corporations are commonly utilised to provide greatly enhanced lender protection in corporate financing transactions.

Segregated cell companies

Introduced in Bermuda in 2001, segregated cell companies allow allied interests to exist under a single corporate umbrella, the performance of assets in any one cell not affecting the interests of the others.

The idea of cell segregation was introduced for the insurance industry, which was quick to understand its advantages and extend them to clients. One survey showed that growth in the segeregated cell area in Bermuda was stronger than in any other sector of the insurance industry.

Segregated cell companies have proved useful in the mutual fund arena, which was not one of the original intentions of those who introduced the concept, but is a welcome addition to Bermuda’s product offerings in the fund area.

Banking

Bermuda’s indigenous banking industry comprises four conservative and risk-averse licensed financial institutions, which voluntarily maintain risk-asset ratios well above both the 8% minimum required in the Basle Agreement on Capital Standards and the 10% Bermuda guideline.

The Bank of Bermuda (now a subsidiary of HSBC), The Bank of Butterfield, Bermuda Commercial Bank and Capital G, with combined assets approaching $20 billion, provide high quality banking, trust and investment management services. Each also acts as custodian of assets worldwide on behalf of private and corporate clients, with more than $100 billion under global custody arrangements. The banks have established or are part of international networks connecting Bermuda around the clock with the rest of the financial world.

Deposits are accepted in all major currencies. Comprehensive banking services include international money transfer, cash management, letters of credit, corporate finance and sophisticated Treasury services to assist in the management of foreign exchange and interest rate risk. Global investment management and brokerage services round out the complete range of financial management services.

Collective investment schemes

More than 1,400 mutual funds and unit trusts, with assets in excess of $140 billion, are registered in Bermuda, a premier domicile for such funds. Those who value security above all other criteria recognise that a Bermuda-based collective investment scheme provides the highest degree of investor protection. Since 1986, Bermuda has enjoyed Designated Territory Status for mutual funds under the U.K. Financial Services Act, which acknowledges the quality and security of the Island’s regulatory framework and high level of investor protection.

Bermuda offers distinct advantages to mutual funds, including a Code of Conduct for Collective Investment Scheme managers and a wider range of investment opportunities than is permitted in many other jurisdictions. Funds and their members are free from exchange controls and stamp duties. Flexibility has now been introduced in the requirement for a Bermudian custodian or manager where investor protection interests are not compromised.

Administration of collective investment schemes has proved to be a growth area for Bermuda in recent years. Funds domiciled in other leading jurisdictions base their administration in Bermuda to take advantage of the professional services atmosphere and more relaxed investment guidelines than apply in many other markets.

Trusts

Fixed, protective or special purpose trusts are an increasingly important aspect of financial planning for individuals, corporations and charities.

With over 60 years’ experience in the establishment and administration of international trusts and related services, Bermuda has acquired an exemplary reputation as a discreet and secure jurisdiction for asset preservation and wealth management. The Island’s political stability, responsible and responsive regulations and tax neutrality attract a broad range of clients, to whom Bermuda’s trust service providers offer unrivalled expertise in international portfolio diversification and prudent, stable trust management.

Bermuda trust law offers many advantages: choice of governing law and the ability to change it; time limits up to a maximum of 100 years, or no such limits; no “forced heirship” exclusion; the concept of the private trust company; “purpose trusts”; and a stringent confidentiality condition shielding the details of Bermuda trusts.

Investment management and administration

Bermuda’s experience in the field of investment management dates back more than 100 years. For the corporate or individual investor, the Island provides the opportunity to diversify portfolios internationally from a secure and stable base.

Advantages of Bermudian investment management include the diversification and preservation of assets, tax efficiency and confidentiality in a stable and investor-friendly environment with sensible regulation and few restrictions.

State-of-the-art telecommunications allow investment managers instant access to global markets. The network of Bermudian service providers — banks, accounting and legal firms and management companies — supply all necessary subsidiary services to allow the investor to focus on opportunities in the global market.

Aircraft registration and financing

The Bermuda Aircraft Register, in existence since 1931, is regarded as highly reputable and flexible, without being over-regulated. The Register offers the sense of security that a stable political system affords. The neutral registration mark — VR-B, followed by two other letters — is seen as advantageous due to its apolitical designation.

Almost three-quarters of the more than 150 aircraft on the Bermuda Register are privately owned or corporate jet aircraft used to transport beneficial owners or corporate executives.

A number of factors have influenced the growth and desirability of the Register and the use of Bermuda for aircraft financing. These include the use of a Bermuda company in an aircraft financing transaction which requires the aircraft to be held in a tax neutral jurisdiction; the use of purpose trusts to divorce aircraft ownership from lenders, lessors or lessees; the use of Foreign Sales Corporations in structured lease financing; and turnover of older or stored aircraft.

The Bermuda Stock Exchange

The Bermuda Stock Exchange (BSX) was established in 1971, primarily as a domestic equities market. As the Island’s international financial sector grew, so did the Exchange. In 1992, the company was restructured into a demutalised, for-profit entity.

Today, the BSX is the world’s largest offshore, fully electronic securities market offering a full range of listing and trading opportunities for international and domestic issuers of equity, debt, depository receipts, insurance securitisation and derivative warrants.

The BSX supports an active domestic market that trades daily, Monday through Friday and a robust after-hours crossing market for large institutional block trades. It is one of the world’s leading listing facilities for offshore funds and alternative investment vehicles and supports niche markets for specialised insurance and debt products.

Trading on the BSX is executed through the Exchange’s customised trading system, BEST (Bermuda Electronic Securities Trading), a fully automated system based on a central limit order book which allows trading members to trade both equity and fixed income securities on an equal, real-time ‘first come, first served’ basis. Once executed, trade information is disseminated electronically to key financial information providers Bloomberg and Reuters for worldwide distribution. The Bermuda market is transparent, liquid and global.

International arbitration

Long noted as a distinctly neutral jurisdiction, in 1993, Bermuda signalled its ongoing commitment to providing a neutral location for international arbitration by enacting legislation based on the UNICTRAL Model Law on International Commercial Arbitration. The UNICTRAL system of conciliation allows for settlement of a matter before it crystallises into a dispute.

The new legislation paved the way for the expansion of arbitration services on the Island; among its advantages are that foreign counsel need no longer master laws peculiar to Bermuda to participate in an arbitration hearing in Bermuda. Parties are free to use the services of lawyers or arbitrators of their choice without restriction. Among those who take advantage of the Island’s arbitration services are those involved in sales agreements, reinsurance agreements or treaties, licensing agreements, commodity contracts or technology transfers, banking, financial, shipping and maritime disputes, whether or not under Bermuda law.

Shipping registration and leasing

First formed as part of the British Register in 1789, the Category 1 Bermuda Register is one of the world’s oldest for vessels of every type, including tankers, gas carriers and yachts. Bermuda is also a leading jurisdiction of choice for the incorporation of shipping companies owning or operating vessels registered worldwide. Ships registered in Bermuda fly the Red Ensign. Nationality restrictions for the ship’s master are retained for certain vessels, including passenger ships, product tankers and ro-ros (classified as strategic shipping). Senior officers of non-strategic ships must meet the Bermuda Officer qualification standards. Ratings may be of any nationality.

The Bermuda Demise Charter Registry (BDCR) offers flexibility, competitive fees and tax advantages. Established in 1994, the BDCR allows the transfer to it for operational purposes of vessels registered on another Administration’s principal register. Further, vessels registered under the Bermuda Flag enjoy “Equivalent Exemption Status” under the 1986 US Tax Code, where a company may apply for exemption from the 4% freight tax levied on goods imported to the United States.

Roger Crombie is a British Chartered Accountant who works as a writer in Bermuda. He gratefully acknowledges the assistance of the Bermuda International Business Association in the preparation of the foregoing.