Government may consider tax cuts for reinsurers
Bermuda's largest reinsurers could get a tax break from government, it has emerged.
Rating agency analysts have been told a corporate tax break may be a way of mitigating the effects of a proposed international tax agreement imposing new tax obligations on large corporations.
The island may offset any imposition of new global taxes on reinsurers, by lowering local payroll taxes, executives have told analysts at ratings agency Standard & Poor's.
This was included in the latest S&P Global report on the island's reinsurance industry entitled: "After Bermudian re/insurers' half decade of underperformance, are better days ahead?"
The report said:
˖Bermudian re/insurers' underwriting performance has been lacklustre, with only a few producing underwriting profitability in the past five years (2017-2021).
˖Heightened catastrophe losses, and to a lesser extent COVID-19 losses, have battered performance but spurred pricing momentum in the reinsurance market.
˖A hybrid re/insurance model has become a key strategy as Bermudians seek to diversify away from volatility in their underwriting books.
˖Although we expect financial market volatility to erode capital buffers in 2022, stronger underwriting earnings, increasing investment income, and prudent capital management should sustain capitalisation as a pillar of strength for Bermudian re/insurers.
But the report also said: "The tax regime in Bermuda could be evolving with proposals regarding a global minimum tax under the Organisation for Economic Cooperation and Development Pillar 2 and the US passive foreign investment company regime.
"In December 2021, the OECD published detailed rules to assist in the implementation of a landmark reform to the international tax system, which will ensure multinational enterprises will be subject to a minimum 15 per cent tax rate from 2023. The minimum tax will apply to multinational enterprises with revenue above €750 million.
"We believe this minimum corporate tax rate could affect Bermudian re/insurers, whose corporate income tax rate could jump to 15 per cent from 0 per cent, reducing their profits.
"However, based on our conversations with some re/insurance executives on the island, the Bermudian authorities could possibly lower the payroll tax as a potential offset."
Questions have been put to the government regarding these statements, but no response has yet been rendered.
The S&P Global report concluded that Bermuda will remain a prominent global reinsurance hub, expanding its reach into growing lines of business such as mortgage and cyber reinsurance.
"The performance of the past five years has been lacklustre, but expected hardening reinsurance rates and new underwriting opportunities could be the lifeline needed for Bermudian re/insurers to regain their footing and begin to earn their cost of capital, once again.
"We expect capitalisation to remain a strength for these companies. While rising interest rates and ensuing unrealised investment losses will likely erode capital buffers, they will also bolster investment income.
"In addition, we expect improving reinsurance pricing will support stronger underwriting earnings, bolstering the industry's capitalisation.
"Despite uncertainty and seemingly nonstop headwinds, we believe Bermudian re/insurers will continue to adapt and hunt for market opportunities."