The Bermuda angle

The Chinese character for crisis includes the character for opportunity. Certainly the crises, both natural and man-made, that have afflicted Bermuda in the past three years have nevertheless created opportunities both for its citizens and, in particular, for Bermuda’s law firms. It seems apt, therefore, that the national motto is “quo fata ferunt” (“whither the fates lead us”), with the unspoken part being that, come what may, Bermudians will survive and thrive.

11 September was a crisis that affected the entire world, and Bermuda was no exception. Two Bermudians lost their lives in the World Trade Center, which, proportionate to the island’s population of 60,000, was a palpable loss. Tourism dropped, business evaporated. The world economy slowed.

But the resulting world crisis required an immediate response from one business sector, and Bermuda was at the forefront of providing the necessary responsiveness. In consequence of the massive damage and insurance losses brought about by the fall of the twin towers, there was a worldwide shortage of insurance capacity. This needed to be filled quickly and many of the existing carriers were either laid low by losses or unwilling or unable to assume the risk.
New, and very large, insurers needed to be created quickly, and only Bermuda, with its well-established insurance industry but expeditious licensing system, was able to provide the environment for rapid start-up.

Since their arrival in the mid-1980s, the territory has seen two waves of capital formation in its insurance and reinsurance sector – the first after the capacity crunch that occurred after a string of heavy losses in the late 1980s and early 1990s, and the second after the terrorist attacks in New York in 2001.

The heavy insurance losses that resulted, coupled with the decline in stock prices and low levels of interest rates, have conversely produced excellent business conditions for the industry, with underwriters commanding relatively high premium rates in the past two years. The outcome is that Bermudian companies underwrote around $50bn (£27.32m) in net premium income in 2003, up from $23.8bn (£13bn) in 1999. Indeed, the territory is the biggest domicile in the world for captive insurance (insurers owned by the companies they insure) and is also the centre of international catastrophe reinsurance business, underwriting around a third of global premiums.

Since September 2001, several billion dollars in new capital have entered Bermuda, and shareholders’ funds (capital and surplus) are now estimated to have reached $75bn (£40.98bn). Bermuda’s law firms have been hard-pressed with the flow of public offerings, private placements, and mergers and acquisitions in the insurance industry, as the existing carriers and investment banks that promote the start-ups vie to carve out their positions in the market.

The growth of the Bermudian and offshore sectors have not,
however, escaped notice. Various international organisations, including the Organisation for Economic Cooperation and Development (OECD) and the EU Financial Action Task Force, have conducted inquiries into international financial centres. Bermuda withstood this scrutiny successfully, but in consequence there was a general tightening of regulation. This included a hiving-off of the insurance regulator from the general office of the Registrar of Companies within the Ministry of Finance and into the Bermuda Monetary Authority, which performs the functions of an independent central bank. Also, later this year, the government intends to license fund administrators and strengthen its powers to investigate companies.

Certainly, however, at the time, the heat from the onshore jurisdictions created a sense of potential crisis, particularly as the international business component of Bermuda’s economy now exceeds tourism, and much of the island depends on the international sector for its livelihood. Any attack could have had severe implications.

But no sooner had the OECD storm passed than two new storms blew up. The first was a very real storm, Hurricane Fabian, which devastated the island in September 2003; and the second was a revival of hostilities from onshore, this time from the US, including the presi-dential hopeful John Kerry. The likely Democratic Party challenger has criticised companies that have moved their headquarters offshore for tax reasons, such as Tyco, as “unpatriotic” and he has lambasted what he calls a “creed of greed”.
Even so, after a turbulent few months, the economy registered growth of 2.5 per cent in 2003.

Although Bermudians cannot ignore the creation of negative perceptions about their jurisdiction and economy, there is nevertheless a general sense that the financial industry is relatively well rooted and includes sizeable companies that have a substantial physical presence on the island. The latter companies provide a regular flow of corporate work to the local law firms, typically working in conjunction with magic circle firms in both London and New York.

Apart from insurance, steady growth in Bermuda’s fund management and administration, shipping brokerage and a string of other activities helps explain why the contribution of international business to gross domestic product has risen from 14.5 per cent in 2000 to 15.8 per cent last year.

The potential was one of the reasons HSBC chose to spend $1.3bn (£710.3m) in buying Bank of Bermuda in a deal approved by shareholders last month. Hitherto, insurers and reinsurers have been obliged to deposit funds or look for credit lines in New York or London. The local bank’s limited capital base had restricted its business opportunities, but with the backing of HSBC it may be able to do more in Bermuda. With the rule that limits foreign ownership of companies outside the offshore sector to 40 per cent breached, analysts say it also seems likely to trigger further foreign interest in the banking sector, with Bank of Bermuda’s historical rival, the Bank of Butterfield, a prime target. Given that these banking developments are in large measure local matters, the island’s lawyers have been closely involved in the sale process.

Obviously, though, the presence of HSBC introduces an international component. Indeed, these days, nearly all of the large-scale transactions in Bermuda involve an international component, and this applies to both non-contentious and contentious work. For example, the two most significant pieces of litigation recently have been the Thyssen Trust case and the BFM insolvency. The former involved a Bermuda trust, but related to the European Thyssen dynasty. The latter was a Bermudian local insurer caught up in the Lloyd’s and London market spirals of the late 1980s and early 1990s, which brought in a host of international insurers and reinsurers. Thus the resulting litigation in both cases involved the major London law firms and barristers acting with Bermudian attorneys.

Bermuda can be seen, therefore, to have reached a considerable degree of maturity as an economy and also as a jurisdiction for professional firms and banks, mirroring developments elsewhere in the world – hopefully without the hurricanes.

Warren Cabral is London office managing partner at Appleby Spurling Hunter