Executives of Lloyd's operations now look to Bermuda for a lot more than shorts and onions, setting their sights on the island to pursue new business opportunities and get some relief from the tax man.

Last month, Kiln said it will soon operate under a Bermuda holding company known as Kiln Ltd., and establish a newly incorporated Class 3 Bermudian insurer–Kiln Re–joining other London entities in making the move.

“We believe Bermuda offers considerable opportunities that will help us continue the international expansion that began to gather momentum in 2006,” Edward Creasy, Kiln's chief executive officer, said in a statement.

Mr. Creasy said the island's proximity to the United States provides another motive as Kiln explores options for an onshore presence in this country.

Christopher Hitchings, London-based analyst for Keefe Bruyette Woods, sees three factors at play.

“There are a lot of reinsurance companies in Bermuda, and brokers in America with reinsurance business tend to stop off in Bermuda on their way to London. If they can place it in Bermuda, they don't bother to come to London,” he said.

Therefore, any specialist London business writer such as Kiln “will have a slight fear that you are seeing only business that is being turned down in Bermuda.”

Mr. Creasy said as much when he noted that Bermuda now represents the third-largest reinsurance market in the world–after the United States and Germany–with 12 of the world's top-40 global reinsurance companies based there.

“While the group will continue to have a significant presence in the Lloyd's market, we believe our medium-term growth prospects will be enhanced by having an alternative underwriting platform in Bermuda,” he said.

In addition, Mr. Creasy said that many institutional investors now prefer Bermuda-based groups to target their dollars, as evidenced by capital moves following the 2001 terrorist attacks and the 2005 hurricane losses–adding that the move should help Kiln attract that investment.

Mr. Hitchings said the unique relationship of Lloyd's franchises to the Lloyd's market itself can make for sleepless nights. “There is a fear largely in the back of your mind that you might wake up one day and discover one of your competitors has done something so mind-bogglingly stupid that they have blown up not only themselves, but also the Lloyd's Central Fund itself,” he said.

The fact that Lloyd's almost did “blow up over 9/11″ makes the move to Bermuda a wise Plan B move for a business such as Kiln, Mr. Hitchings explained.

Another key consideration is taxation, where Bermuda has a distinct advantage over the United Kingdom. The ability, therefore, to do a lot of business in London and have all your profits arise in Bermuda is “obviously a jolly good thing,” according to Mr. Hitchings.

Catlin has led the way in this effort, in that it is domiciled in Bermuda, but the majority of its business–its Lloyd's business, which represents around three-quarters of Catlin's total premiums–is written in Lloyd's and then reinsured into the Bermuda operation, Mr. Hitchings noted.

Since that time, Hiscox has announced the move to set up headquarters in Bermuda.

Kiln's setting up of its new domicile and Bermuda reinsurance operation simultaneously has taken the process a step forward, in that most companies have found it politic to first set up the subsidiary and then to redomicile the company. “So it is quite interesting that Kiln is doing the whole hog in one go,” Mr. Hitchings said.

Lloyd's will not suffer since Kiln–like Catlin and others–will continue to write the vast bulk of its business through Lloyd's.

The only people who might have objections, of course, are members of the British government, and while there is some effort to remedy the tax-loss scenario, complexities abound.

“It is quite difficult to do, as your [U.S.] legislature has discovered. You just can't say I am going to tax insurance that is directed to Bermuda as though it were domiciled here,” Mr. Hitchings said.

Unhappy Brits have their counterparts in the United States, who do not like seeing competitors enjoy a tax advantage just by locating a few miles off the shore of North Carolina. One top U.S. insurance executive active in the movement to level the tax-paying field with Bermudian companies, William Berkley, has been severely criticized for his efforts.

Bermudians, on the other hand, respond that it is the tax advantage that allows island companies to write the kind of catastrophe reinsurance that stateside companies are now shying away from.

But in some twist of irony, a subsidiary of W.R. Berkley Inc. became a significant shareholder in Kiln five years ago, holding at least 20 percent of its voting rights and the right to appoint two directors.

Kiln has stressed in a statement, however, that neither Mr. Berkley, nor his son Robert, have had any part in the decision to move to Bermuda, nor will vote on the issue as directors.

Kiln's move to Bermuda could put it in play in any possible consolidation, according to Mr. Hitchings.

Softening pricing following an almost catastrophe-free 2006 will make it difficult for some carriers to achieve organic growth, while the post-2005 sharp price rises put a lot of capital in player's hands, who may not find enough business to deploy it profitably.

Mr. Hitchings said that besides tax savings, reinsuring Lloyd's business into a Bermuda reinsurer provides a diversity of risk that is appealing to ratings agencies in the post-Katrina era.

“If you are a Max Re or whoever, and you have Standard & Poor's breathing down your neck saying 'Look guys, diversification–can you do something?' then what you would like to do is go and obtain a more diversified book of business without having to go out and find it,” he said.

As a result, newly domiciled Lloyd's operations may prove tempting acquisition targets, but you could face resistance telling all those investors “who have been told by people in colorful shorts that Bermuda is the future and London is the past that we are now going to buy a Lloyd's company.”

William Wilt, a property-casualty analyst for Morgan Stanley in New York, wrote in a report following a recent visit to the island that merger and acquisition activity is coming. Among the factors he cited were the challenge to create organic growth at a time when the developing countries, such as India and China, are not providing the numbers once expected, and softening prices are taking a further toll on top-line growth.

Moves involving Bermuda to London, London to Bermuda, and Bermuda to the United States all have their rationales in the coming months. “M&A is a matter of not 'if' but 'when,'” Mr. Wilt wrote.

Special Reports /

Kiln Ltd., Bound For Bermuda, Follows Other Firms In Move Away From London

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