Fitch: Tax Reforms Reduce Advantage of Reinsuring US Risks to Bermuda

US tax reforms set to take effect in 2018 are credit negative for the Bermuda re/insurance market, Fitch Ratings said. The cut in the US corporate tax rate to 21 percent from 35 percent, and a new tax on premiums ceded by US insurers to foreign reinsurers will benefit US reinsurers at the expense of Bermudian and other international reinsurers serving the US, according to Fitch.

The rating agency does not anticipate immediate rating implications and expects Bermuda will maintain its strong position in the global re/insurance market, continuing to benefit from its underwriting expertise, strong and efficient regulatory regime, and full Solvency II equivalence. In anticipation of US tax reform, Bermudian reinsurers have begun to adapt their businesses and increase their geographic diversification. Nonetheless, the United States continues to be Bermuda's 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 (BEAT) will reduce the tax advantage of reinsuring US risks to Bermuda, with more reinsurance business and capital incentivized to stay in the United States. While Bermuda does not have a corporate income tax, most Bermuda reinsurers pay income and other taxes, given their international operations. Specifically, they pay a US excise tax on premium payments from the United States to offshore affiliates that is currently 4 percent on direct premiums and 1 percent on reinsurance premiums. The added BEAT will be at a significantly higher rate: 5 percent in 2018, then 10 percent until 2025, and 12.5 percent thereafter.

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. 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.