Bermuda insurance groups face a "real risk" of US tax law proposals that would impact them negatively becoming law by as soon as next year.

That is the view of Barclays Capital analysts Jay Gelb and Charles Marr, expressed in a note to investors yesterday.

As reported in The Royal Gazette Business section yesterday, the US Senate Finance Committee has invited comment on proposed legislation that would penalise Bermuda companies which reinsured business written by their own US subsidiaries.

The time allowed by committee chairman Senator Max Baucus for comment is significant, the analysts believe.

"Chairman Baucus has requested public comments by February 29, 2009," the note read. "This implies that a provision is unlikely to be included in the early fiscal stimulus bill (which will waive pay-go requirements).

"The new Baucus proposal, combined with key House interest and Obama's general tax approach, underscores the real risk Bermuda insurers face of a tax offset being included in a tax bill later in 2009."

The bill targets all non-US insurance groups, not only Bermuda, which write premiums in the US through subsidiaries and then cede the risk to their non-US parent, thereby reducing their US tax liability.

In this way, it is very similar to the bill put forward by Representative Richard Neal in the House of Representatives in September. The analysts wrote that the insurers that would be most impacted by the proposal becoming law are XL Capital, Arch Capital, Everest Re, Allied World and Ace Ltd.

Those with "low exposure" include Aspen, Montpelier Re, Flagstone and RenaissanceRe.

The note adds that one factor that could mitigate the potential for higher taxes for Bermuda companies is that "the proposal would deny a deduction for any premiums reinsured in excess of the industry average of reinsured policies, rather than the entire amount".

The analysts noted: "Recall that during the campaign, Senator McCain took a very pro-Bermuda stance and his defeat was another incremental negative for the Bermuda coalition.

"President-elect Obama has not specifically targeted this offset (as Senator Clinton did), though he has generally targeted offshore tax havens."