Fitch: US tax bill will reduce Bermuda tax advantages

24-01-2018

Bermuda’s long-standing tax advantages for reinsurers have been reduced but not eliminated by the Trump Administration’s recent tax cuts, according to a new report by Fitch ratings.

In its Bermuda 2018 Market Update Fitch said that it expects the overall benefit of a Bermuda domicile and operations to be reduced, but not eliminated, with the island largely maintaining its established position in the global market due to its underwriting expertise, strong and efficient regulatory regime and full Solvency II equivalence. Fitch does not anticipate immediate rating implications.

In addition Fitch said that it expects that Bermuda's major (re)insurers will report elevated combined ratios for 2017, averaging around 108 percent-109 percent, including more than 20 percentage points from catastrophe losses. This would exceed the 107.1 percent posted in 2011, the last year with significant insured losses from catastrophes, and compares with 91.8 percent in 2016, when catastrophe losses contributed only 5.3 percentage points.

According to Fitch: “The large catastrophe losses of 2017 appear to have ended several years of soft pricing, with market data this month showing rate increases in most lines, particularly property and catastrophe business. But the increases look modest and it is questionable whether there will be a longer-term shift to a harder market, given the still-strong capitalisation in the global (re)insurance market and extra capacity from the insurance-linked securities (ILS) market. The ILS market grew to a record size in 2017 ($82 billion at end-September, according to Aon Benfield), with growth in both catastrophe bonds and collateralised reinsurance.”

The rating agency concluded by pointing out that AIG's announcement this week that it will purchase Validus will further reduce the number of independently owned and publicly traded Bermuda (re)insurers. However, it pointed out that companies continue to be launched in Bermuda, demonstrating that the island remains attractive for start-ups. Bermuda market M&A could be driven this year by attempts to offset the impact of US tax reforms and a continued competitive market.

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