The excise tax and anti base erosion tax included in the U.S. tax reforms could be bad news for global re/insurers, however its impact is expected to be limited as firms adopt new strategies for U.S. business operations, according to Morgan Stanley.
The excise tax calls for 20% tax on payments to foreign affiliates in the House bill, while the Senate bill would levy a 10% anti base erosion global minimum tax.
Under this scenario, Morgan Stanley said, the firms in its coverage – Everest Re, Arch, Axis, Chubb, XL, and RenaissanceRe – with 6 – 42% total premiums ceded to foreign affiliates, could see a 1 – 5% earnings drop.
This estimation assumes a scenario of a weighted average of their current tax rate and a 20% U.S. tax rate.
In the worst case scenario of a full 20% U.S. tax – earnings impact could drop from 4 – 19%.
Conversely, a potential 20% U.S. corporate tax rate could boost domestic P&C earnings by 14% on average.
However, firms in Bermuda have said they’ll adapt to changes to tax law to mitigate the impact of the reforms through strategies such as retaining more business in the U.S. – where tax rate goes lower.
Morgan Stanley said firms that stand to benefit most are those with higher tax rates and larger U.S. exposure, such as Brown, PGR, AIG, WR Berkely, Allstate, and Berkshire Hathaway – although potential limitation on interest expense deduction could chip away some upside.
Analysts added that firms ‘reinvesting’ some of the tax savings in their business could further erode potential earnings upside.
This confirms previous analyst predictions that the lower corporate tax rate and its application to underwriting profits ceded to foreign affiliates could act as a mini Border Adjustment Tax.
Morgan Stanley and Keefe, Bruyette & Woods analysts had previously predicted that offshore reinsurers and higher-margin U.S. lines of business that are ceded to foreign affiliates such as P&C could be the most negatively impacted.
While the future impact of the reforms on earnings and reinsurance rates appears volatile, its impact is expected to be manageable.