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CEO: US reinsurance tax fears premature

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It's too early to tell how the Bermuda reinsurance industry will be impacted by likely tax reform in the US.

That's the view of Mike McGavick, chief executive officer of XL Catlin, who believes that making it more expensive for US firms to buy reinsurance through higher taxes would backfire on the US by weighing on economic growth.

In contrast, industry rival William Berkley, chairman of US insurer WR Berkley, expects US President Donald Trump's administration to raise taxes on non-US insurers to “level the playing field” and support the domestic property and casualty insurance industry.

Both executives were speaking in conference calls with analysts this week after their companies had announced fourth-quarter results.

Mr Trump's “America first” focus and his threat to impose border taxes on imported goods made outside the US while slashing domestic corporate tax rates, has given the island's reinsurers much food for thought in how their businesses could potentially be targeted.

During the conference calls the Neal bill — a proposal originally made by Democratic Congressman Richard Neal that would tax transactions involving US insurers ceding risk to an offshore affiliated reinsurer — was mentioned as an example of what might be included in a tax reform bill.

When asked about the issue by an analyst, Mr McGavick said that “running these companies isn't just about tax” and that this was not how they competed or won business.

“The idea that reform is going to be a huge competitive disruption, I really think that idea is nonsense,” Mr McGavick said.

“Look, we're absolutely for lowering the rates in the US. The US has been at a global tax disadvantage and anything that stimulates US economic activity is a plus. Going to be more to insure, and of course as it relates to our US taxes, we would pay less.

“Other questions that are floating around as you've mentioned like border adjustments or the Neal bill, it just seems to me to be very premature. It's not exactly clear what will be proposed, it's not exactly clear what will result from what will be no doubt a very complex legislative process.”

He then described one of the advantages for the US of buying reinsurance cover from overseas — a point Bermuda industry representatives will likely make to US politicians in the months ahead.

“The idea of exporting your risks is a good idea and the idea of it making it more expensive and more difficult to do is not a way to grow your economy, but rather a way to retard growth,” Mr McGavick said.

“It seems to me that that will become evident in the discussion ahead and we're certainly going to make sure that that is clearly understood.”

XL Catlin, whose headquarters are in Bermudiana Road, has around 7,000 employees working in 30 countries around the world.

“One other point I'd make on this, remember, the companies with whom we're mostly competing are global, not US domestics,” Mr McGavick added. “And I don't see that changing very much. So overall, we're comfortable with the way we approach tax, we're comfortable with our competitive position. Absolutely, no matter what comes.”

William Berkley, in the WR Berkley call, who has for many years advocated changing US tax rules to disadvantage non-US insurers, believes President Trump and the Republican-controlled Congress will make it happen.

“I think the answer is we have a president and a legislature, who are very conscious of the fact that we shouldn't have a tax law that gives preference to non-US entities and that is what insurance tax laws do at the present time,” Mr Berkeley said.

“So two companies who write US business one offshore and one domestic, the company offshore pays substantially less to no tax. So we think that will benefit us because we think this president and his legislature will recognise that some time over the next 12 months and level the playing field.”

Analyst Jay Cohen asked Mr Berkley whether such changes would make it more expensive to buy reinsurance from non-US firms.

“I think if you go to the border adjustment plan, the most likely event in our opinion would be most of the major foreign insurers-reinsurers would open US subsidiaries and that would take care of the problem,” Mr Berkley said.

In his “America first” drive, Mr Trump has focused mainly on manufacturing industries and goods imports. One analyst suggested that financial services might not be in his sights.

“I think that certainly there are lots of people, especially those people located in Bermuda and Ireland, that would like to put forth a view that's the case,” Mr Berkley said.

“I think that if you look at what the administration has put forth is they don't want US business enterprises to be at a disadvantage ... There is no enterprise that would be more suited to their concerns than the property casualty insurance business.”

Insurance tax-rules change could bring in “billions of dollars in revenue ... maybe even tens of billions”, Mr Berkley added.

XL Catlin CEO Mike McGavick
William Berkley, chairman of WR Berkley Corp

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Published February 03, 2017 at 8:00 am (Updated February 03, 2017 at 5:29 pm)

CEO: US reinsurance tax fears premature

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