Bermudian insurers and reinsurers could be facing a corrosion of their competitive advantage, rating agency Standard & Poor’s (S&P) said recently in a report that examines how President Donald Trump’s economic policies could affect the island’s business landscape.
S&P analysts reported that while it’s too early to put a definite cap on how new U.S. policies would affect Bermudian re/insurers credit ratings, a reduction in U.S. corporate tax rates from 35% down to 15% could mean Bermudian companies will have to reassess their choice of tax domicile.
“Although most U.S. re/insurers already pay effective tax rates below the current rate, a lower U.S. tax rate would further compress the spread between onshore and offshore effective tax rates,” said S&P.
A lower corporate tax rate seems the most likely to materialise compared with other proposed policies, although S&P analysts remain uncertain as to how far-reaching the impact would be; “It is unclear how broadly the Trump administration will define “special interest loopholes” and whether it will extend to hedge-fund reinsurers or even more-traditional Bermuda re/insurers.”
But other proposed changes such as a border adjustment tax, and a lighter-touch regulatory regime in the U.S., could have a knock-on effect on Bermudian re/insurers’ competitive value.
S&P analysts commented that; “if reinsurance underwritten in Bermuda were considered the import of a product that cost American jobs, rather than an export of risk abroad, it is conceivable that the proposed border adjustment tax could apply.”
Although the border tax proposal has been met with considerable resistance from various industries and lawmakers and may never take shape past conception – or only affect “manufacturing jobs instead of a relatively small, services-oriented industry like reinsurance,” analysts noted.
Other possible changes for the industry include the chance of higher interest rates in the U.S., if Trump’s policies create economic growth.
For re/insurers, in the short-term, this could mean lower shareholder’s equity levels as bond portfolio’s lose value as their cost of capital rises with more risk-free rates, warns S&P.
However, over the long-term, S&P said that higher interest rates would lead to increased investment income, and it believed ensuing “lower equity levels shouldn’t have an adverse material impact on the creditworthiness of Bermudian reinsurers.
“Higher rates also may have the added benefit of slowing the tide of excess third-party capital flowing into insurance-linked securities (ILS) in search of yield, as yields on more-mainstream and liquid asset classes rise.”
The agency concluded that while it’s too early to determine how U.S. policies will impact Bermudian re/insurers’ credit ratings, the storm-clouds of growing market volatility have already added an uncomfortable and uncertain outlook.
And just as European firms have been looking for ways to manoeuvre around Brexit’s implications, Bermudian industry players will have to stay carefully tuned to their changing environment and innovatively manage lines of business to insure new policies will benefit and not harm their competitiveness.
