Christopher Famous
Christopher Famous

Part II of II

The economy is still the number one issue for many Bermudians and here I continue to explore why ours took a downward turn, and take a glimpse at where we are headed.

Insurance Linked Securities

The OBA budget stated, they are focusing on growing Bermuda’s money management within IB, and talk about ‘Insurance Linked Securities’ (ILS). What is ILS you may ask?

By setting up reinsurance companies in Bermuda, money managers take advantage of a current tax loophole in IRS rules. Normally, when hedge fund managers invest money, they pay either income or capital gains tax on the transaction . When they move the hedge funds to jurisdictions such as Bermuda, they would also incur penalties on earnings from what the IRS calls passive foreign investment companies.

Here’s the trick: the IRS doesn’t penalize earnings from insurance companies. As a result, by routing that money through a Bermuda reinsurance company, which in turn invests it back into their own hedge funds, fund managers can avoid any taxes until selling the investment. They then only pay a lower capital gains tax rate. Meanwhile, the money grows tax-free, with savings add up. Investing $200 million in a hedge fund that returns 10 percent annually, and paying the top marginal ordinary income rate on profit, results in a $66 million profit after taxes, within 5 years.

So ILS is potentially big business for Bermuda, right? But given what you have already read about tax clampdowns, how long do you think this will last? Two years? Five years? Is this a sure bet for medium to long term growth in Bermuda’s money management sector or will another clampdown quickly follow? How do ordinary Bermudians benefit, as no great physical presence is required in Bermuda to achieve this? Are we praying that these hedge fund owners are going to want to buy houses here?

Outsourcing

This is the biggest job killer in Bermuda. In any given country there are only so many people capable of working in roles such as Actuary, Underwriter, Broker, Fund Manager or Investment Banker. All of these highly skilled positions require very specific qualifications and experience. Only a limited number of Bermudians are likely to achieve this. Most IB companies have historically hired Bermudians, such as claims processors, IT technicians, accountants, administrators, etc. That is coming to an end

With better technology and telecommunications globally, international companies now hire their support staff anywhere in the world – particularly where it is cheaper to do so. It is not cheap to do so in Bermuda. As a result, we now have major outsourcing of these services to other countries. Hence lots of Bermudians, women in particular, who could do those roles, are now redundant. Indian IT workers and accountants demand less pay than Bermudians.

We do not make much money from corporate tax revenue, we have to rely heavily on our payroll tax revenue. Less Bermudian workers employed means less payroll tax collected. Net result a major drop in Government revenues leading to budget shortfalls. Rocket science Mr. Fahy? I think not!

ILS isn’t going to solve this problem, as it does not require a lot of support staff to be located here.  So where are those 2,000 jobs coming from Mr Cannonier? Not from insurance focused IB, or the ILS driven investment management growth.

Reality check

For the last 20-30 years, we Bermudians have pinned most of our financial hopes on IB for. Employment; payroll taxes; high rental/mortgage incomes; high standard of living.

We all feel the pinch somehow or the other. So yes, it was natural for some to look to blame the PLP.

Bermuda allowed itself to be a one trick act. Everything was reliant on the financial sector. In upcoming columns, we will discuss ways forward, by diversifying our economy into other sectors. Bermudians must recreate businesses for themselves and careers for other Bermudians.

It is time for us to increase faith in ourselves, and our fellow Bermudians, irrespective of race and political views.

Snake oil doctors

Be wary of anyone who only tells you part of the problem. Because as sure as night turns to day, the rest of the problem will surface. Term Limits alone was not the issue. 

Last year, Fitch downgraded Bermuda’s rating. Citing these factors: “Regulatory changes that negatively affect international companies operating in Bermuda could also undermine creditworthiness”

“Bermuda’s economy depends extensively on tourism and insurance business, two industries that are in a mature stage.”

As for the OBA I will leave you with this quote:

Can’t trust no shadows after dark (shadows after dark), yeah-eh!

So, my friend, I wish that you could see,

Like a bird in the tree, the prisoners must be free, yeah! (free)

Never make a politician grant you a favour;

They will always want to control you forever, eh!

— Bob Marley

carib_pro@yahoo.com