Challenges are looming on the horizon for Bermuda re/insurers whose relative competitive advantage to U.S. firms stands to be somewhat diminished by the recent sweeping U.S. corporate tax law changes.
In a report on the Bermudian market Fitch said; “U.S. tax reforms will shrink the profitability gap between Bermuda and U.S. companies that has already been narrowing over the last several years as competitive market conditions have reduced Bermuda’s historical ROAE advantage.”
In the near term, the change will likely cause firms to review how they manage offshore operations in an effort to mitigate the negative effects.
Until recently, Bermuda-domiciled re/insurers have benefited from a low tax rate as they’re not required to pay a Bermuda corporate income tax, thus the reduction in U.S. corporate tax to 21% from 35%, removes, but doesn’t eliminate much of the Bermudian taxation advantages.
However, Fitch pointed to Bermudian re/insurers taking steps to offset any negative impact by increasing geographic diversification and giving underwriters more flexibility to write business in jurisdictions outside of Bermuda.
“Nonetheless, Bermuda will continue to provide a substantial percentage of its capacity to the U.S., the world’s largest insurance market. At the margin, Bermuda could potentially see some loss of insurance personnel on the island as employees are shifted to the U.S., but a mass exodus of jobs from Bermuda appears unlikely,” said Fitch.
No rating downgrades are expected as a result of the new U.S. tax law, but Fitch highlighted Validus and Renaissance Re as being potentially vulnerable to ratings action due to having over 70% of their capital or earnings in Bermuda – should they decide to diversity operations out of Bermuda.
Fitch’s expectations for the sector are in line with predictions of other analysts, such as the Deutsche Bank, who said the U.S. tax reform carries the potential to level the taxation playing field with Bermudians who have traditionally had the upper hand on U.S. natural catastrophe business in June and July renewals – this could be a positive for European reinsurers.
The tax reforms are also expected to reduce the practice of U.S. entities inverting offshore, Fitch said this was highlighted recently when “Assurant Inc., a U.S. insurer, amended the structure of its pending acquisition of The Warranty Group (based in Bermuda) to have the surviving entity be U.S.-domiciled rather than the Bermuda-domicile that was originally structured when the deal was announced in October 2017.”
