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Later this summer, the Bermuda insurance market will shrink significantly. It will be the first time that this has happened in 60 years.

Few jobs will be lost, no business written from Bermuda will be written elsewhere, at least initially, but Bermuda will experience a dip of about 10 percent in the official size of its market.

The Bermuda market is made up of companies registered or headquartered in Bermuda. Based on Bermuda Monetary Authority statistics, ACE's worldwide business constituted 9 percent of the overall Bermuda market on Dec. 31, 2006.

Separately, Paris Re Holdings Ltd., a billion-dollar Bermuda insurer, announced in March that it would move its Bermuda operations to Switzerland in the second half of this year. Most of Paris Re's Bermuda business was run by local managers so few jobs will be lost in that move.

Here's what ACE had to say formally about its decision:

"Following the redomestication from the Cayman Islands (where it was formed 22 years ago) to Zurich, Switzerland," the company said in a press release, "the ACE Group of Companies will continue to operate as they do currently. ACE Ltd. will continue to maintain executive offices in Bermuda, and ACE Group Holdings will continue to maintain executive offices in New York. The company's Bermuda insurance and reinsurance operations will continue to operate without material changes."

ACE later said it would also move the headquarters of ACE Ltd., the group parent, from Bermuda to Zurich, where it plans to establish a corporate holding company. It is that move that will shrink the Bermuda market.

Why did ACE choose to relocate, and is this an isolated choice, or will other Bermuda companies follow suit? The answer seems to be in the ever-changing political winds.

On a conference call, ACE Chairman and CEO Evan Greenberg said Cayman was "incompatible with ACE as it stands today. The Cayman incorporation brings little to us, yet it exposes us from a reputational, financial and tax perspective. It creates unnecessary uncertainty."

Greenberg ruled out the United States as a domicile, he said, for tax reasons. The U.S. taxes the worldwide income of its citizens and corporations; Switzerland taxes only income arising in Switzerland.

"We did look at other jurisdictions ... but none ... would ... meet the test of reputation, stability, well established, recognized financial center and having the financial benefit at the same time," Greenberg said.

Speaking only on the basis of anonymity, a leading Bermuda insurance executive told Risk & Insurance®:

"Any corporate organization chart with the ultimate company as a Swiss corporation enjoys the benefits of various tax treaties, as well as some interesting Swiss tax rules."

He elaborated in language that only an accountant could love, or really understand for that matter:

"The tax treaties provide an exemption for U.S. Federal Excise Tax (FET), which ACE pays in its current structure," the executive said. "Under Swiss tax law, a branch of a Swiss company is taxed only at the local level, not at the Swiss level. A Bermuda branch of a Swiss company can accept U.S. business without paying federal excise tax because the IRS views it as a transaction with a Swiss company. Under Swiss tax law, the profits of said transaction flow tax-free up to the retained earnings of the company which established the branch in Bermuda, because Switzerland presumes that taxes are paid at the local level--which, for the moment, are zero in Bermuda."

Did you get all that?

His conclusion: "I suspect ACE will establish a Bermuda branch of its new Swiss operating company, transfer its current portfolio and immediately recognize a saving of FET."

Asked about "the target of offshore," Greenberg said: "There are these risks out there, growing in a global financial world ... and there are greater political currents that are at work."

The "political currents" include:

-- The Stop Tax Havens Abuse Act, legislation sponsored by Barack Obama and others in March 2007--the exact time that Greenberg said relocating ACE "first came to mind."

The legislation proposed tougher requirements on U.S. taxpayers using offshore jurisdictions, and would give the U.S. Treasury the authority to take action against foreign jurisdictions that impede tax enforcement, stiffen penalties against abusers and close offshore trust loopholes.

-- Congressional lobbying efforts started by W.R. Berkley and other American insurers in the fall of 2007 under the umbrella of "the Coalition for a Domestic Insurance Industry" to "close the offshore loophole" by forcing American-owned companies back to the United States. In March of this year, Berkley ranked as "50:50" the likelihood that his coalition would succeed.

-- Also in March, Hillary Clinton announced she would introduce a $7 billion "insourcing" program, were she elected president. The presidential candidate said she would "eliminate the unfair advantage that foreign insurers located in tax havens have against U.S. insurers competing for U.S. business."

-- The Organization for Economic Cooperation and Development is holding firm against the last three holdouts to its "unfair tax" initiative, which are Andorra, Monaco and Liechtenstein.

-- The governments of Britain and Germany this spring purchased copies of a hard drive stolen by a former employee of Liechtenstein's LGT Bank. Dozens of prosecutions for tax evasion have followed in Germany and more are expected in Britain.

June 1, 2008

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