Fitch: Bermuda’s benefits go beyond tax

  • Strengths beyond tax: Fitch expects Bermuda to maintain its position as a global re/insurance centre despite an impact from US tax reform

    Strengths beyond tax: Fitch expects Bermuda to maintain its position as a global re/insurance centre despite an impact from US tax reform

Rating agency Fitch expects Bermuda to maintain its position as a global centre for insurance and reinsurance — despite taking something of a hit from US tax reform.

In a statement released today Fitch said US tax cuts would diminish the island’s tax advantage, but the island’s benefits go beyond taxes.

And it added that efforts to offset the impact of the tax rule changes could lead to more mergers in the Bermuda market.

“This year’s cut in the US corporate tax rate to 21 per cent from 35 per cent and the new base erosion and anti-abuse tax (Beat) will significantly reduce the long-standing tax advantage of Bermudian re/insurers over those in the US,” Fitch stated.

“However, Fitch does not anticipate immediate rating implications. We expect the overall benefit of a Bermuda domicile and operations to be reduced, but not eliminated, with the island largely maintaining its established position in the global market due to its underwriting expertise, strong and efficient regulatory regime and full Solvency II equivalence.”

Beat, levied at an initial rate of 10 per cent on premiums ceded from a US insurer to an affiliated reinsurer overseas, will impact Bermudian insurance groups with US subsidiaries.

Some analysts have said they expect Bermudian groups to file as US taxpayers for the purposes of business emanating from the US.

Non-affiliated reinsurance coverage of US insurers will not be subject to Beat.

Fitch also commented on American International Group’s proposed $5.56 billion acquisition of Bermudian reinsurer Validus and predicted more consolidation ahead.

“AIG’s announcement this week that it will purchase Validus will further reduce the number of independently owned and publicly traded Bermuda re/insurers,” Fitch said.

“But companies continue to be launched in Bermuda, demonstrating that the island remains attractive for start-ups.

“Bermuda market M&A could be driven this year by attempts to offset the impact of US tax reforms and a continued competitive market.”

Fitch estimated that Bermudian re/insurers would post combined ratios averaging 108 to 109 per cent for 2017, indicating an underwriting loss, with an impact of more than 20 percentage points from catastrophes.

“This would exceed the 107.1 per cent posted in 2011, the last year with significant insured losses from catastrophes, and compares with 91.8 per cent in 2016, when catastrophe losses contributed only 5.3 percentage points.

“The large catastrophe losses of 2017 appear to have ended several years of soft pricing, with market data this month showing rate increases in most lines, particularly property and catastrophe business.

“But the increases look modest and it is questionable whether there will be a longer-term shift to a harder market, given the still-strong capitalisation in the global reinsurance market and extra capacity from the insurance-linked securities market.”

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Published Jan 23, 2018 at 3:55 pm (Updated Jan 23, 2018 at 3:57 pm)

Fitch: Bermuda’s benefits go beyond tax

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