Fitch: tax changes negative for Bermuda market
US tax reforms approved this week by the US Congress will be “credit negative” for the Bermuda re/insurance market, Fitch Ratings says.
The US credit rating agency added that it expected the tax reforms, which will take effect from January 1, to benefit US reinsurers at the expense of Bermudian and other international reinsurers serving the US.
The Tax Cuts and Jobs Act will cut the US corporate tax rate to 21 per cent from 35 per cent, reducing Bermuda’s tax advantages over US rivals, and a new tax on premiums ceded by US insurers to foreign affiliated reinsurers will be levied.
“We do not anticipate immediate rating implications as we expect Bermuda will largely maintain its strong position in the global reinsurance market, continuing to benefit from its underwriting expertise, strong and efficient regulatory regime and full Solvency II equivalence,” Fitch said in a statement today.
“Moreover, partly in anticipation of US tax reform, Bermudian reinsurers have been adapting their businesses and increasing their geographic diversification.
“Nonetheless, the US continues to be their most important market. Significant declines in business or earnings could prompt negative rating actions.”
“The corporate tax cut and the Base Erosion and Anti-Abuse Tax will reduce the tax advantage of reinsuring US risks to Bermuda, with more reinsurance business and capital incentivised to stay in the US.
Bermuda does not have a corporate income tax but most Bermuda reinsurers pay income and other taxes given their international operations. Notably, they pay a US excise tax on premium payments from the US to offshore affiliates that is currently 4 per cent on direct premiums and 1 per cent on reinsurance premiums.
The added Beat will be at a significantly higher rate: 5 per cent in 2018, then 10 per cent until 2025 and 12.5 per cent thereafter.
Fitch said Bermudian reinsurers’ US business is largely written in US subsidiaries and then transferred to Bermuda.
“From a group perspective, the tax changes may affect the location of the business rather than the amount, with the business and associated capital more likely to be retained in the US subsidiaries,” Fitch said.
“We expect most Bermudian reinsurers with US subsidiaries will take up the option to pay US corporate taxes on the subsidiaries’ profits instead of Beat.
“Any reduction in supply of reinsurance capacity from Bermuda following the US tax changes is likely to drive global reinsurance premium rates up. Rates in some lines of reinsurance are already on the rise following this year’s high catastrophe claims.”
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