XL re-domiciles blaming reputation and taxes

Move no indication of a general trend

As the latest in a string of
companies that re-domiciled from offshore financial centres to Europe, Bermudan
insurer XL Capital announced plans to change its place of incorporation from
the Cayman Islands to Ireland.

XL Capital, which does not have any
employees in the Cayman Islands, said in a statement that the move will lower certain risks and help
reinforce the company’s reputation.

“We believe
that changing XL’s place of incorporation from the Caymans to Ireland is in the
best interests of XL and our shareholders,” said XL
Capital’s CEO Michael
McGavick in a press statement.

Among other benefits, we believe the proposed
move will reduce certain risks that may impact us and offer us the opportunity
to reinforce our reputation, which is one of our key assets, and to better
support our global business platforms,” he said.

In contrast to the press statement,
a filing with the Securities and Exchange Commission, outlining the company’s key
risks, provides a more detailed picture of XL’s motivation behind the move.

“We
are subject to reputational, political, tax and other risks because of negative
publicity regarding companies that are incorporated in jurisdictions, including
the Cayman Islands, whose economies have low rates of, or no, direct
taxation,” the company said in a proxy statement.

“Additionally, there have been, and
could be in the future, legislative or regulatory proposals that could increase
taxes for companies incorporated in jurisdictions such as the Cayman Islands,”
the company said in its filing

This
echoes in part the statements made by a long line of Bermudan companies that
have carried out similar transactions in the past 15 months.

In 2008, XL Capital’s competitor
ACE Ltd, whose main executive offices are located in Bermuda, re-domiciled its
holding company from Cayman to Switzerland.

Willis
Group, the world’s third-largest insurance broker, completed
the relocation of its registered office from Bermuda to Ireland last week,
making XL Capital the third insurer with headquarters in Bermuda that moved the
registered out of an offshore location.

Willis’ officials cited the need
for “a more stable environment” and stated that Ireland is better positioned
than Bermuda to “maintain a competitive . . . corporate tax rate”.

In an SEC filing the company also
listed specific risks in the form of work permit issues, the uncertain
political environment, expiring tax exemptions and the general international
regulatory pressure on offshore financial centres as reasons for the move.

Although legislative proposals in
the US and Europe, which potentially restrict the use of tax havens, have been
toned down in recent weeks, the reputational risk and the risk of higher
taxation for companies incorporated in the Cayman Islands or Bermuda remains.

XL Capital’s transaction is part of
a trend involving a long line of companies, from the insurance and other
sectors, that have removed their registered seat from Cayman and particularly
Bermuda during the past 15 months.

Oil and gas equipment provider
Weatherford International Ltd, electronics manufacturer Tyco International Ltd and
engineering contractor Foster Wheeler Ltd moved to Switzerland from Bermuda and
offshore driller Transocean Inc relocated from the Cayman Islands.

Bermuda-based transportation
company TBS International re-domiciled to Ireland, giving the need for a “stable
political and economic environment” as the main reason, whereas health care
products company Covidien Ltd moved its headquarters from Bermuda to Ireland to
take advantage of the country’s favourable tax structure and location.

Other companies that recently moved
their company seat out of Bermuda include Accenture, Warner Chilcott, Cooper
Industries, Tyco Electronics and Ingersoll Rand.

However, figures from the Cayman
Islands company registry do not confirm a trend of more companies re-domiciling
due to a concern over reputational or regulatory risks.

The total number of companies that
have moved their registered seat out of Cayman increased only slightly from 68
companies in 2008 to 71 companies in 2009 and remained well below the 85
companies that de-registered in 2007 to move their company seat to a different
jurisdiction.

The preferred destination of the
companies that re-domiciled was the US state of Delaware attracting roughly a
dozen company re-domiciles each year. The British Virgin Islands which was the
most popular in 2007 is no longer as attractive, nor is Bermuda the most
popular destination in 2008. A specific trend of companies relocating form
Cayman to Europe cannot be observed on the basis of the information released in
the Cayman Islands Gazettes.

XL
said its name will change from XL Capital Ltd. to XL Group PLC as part of the
re-domestication.

Shareholders
will receive one ordinary share of the Irish company for each share they
currently own.

XL
will submit the proposal for re-domestication to its shareholders in a few
months and expects to complete the transaction on 1 July 2010.

The
proposal will be subject to approval by shareholders and the Cayman Grand
Court.

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