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Structural flexibility allows Hannover Re to 'BEAT' US tax reform hit

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Structural flexibility allows Hannover Re to 'BEAT' US tax reform hit

Hannover Re will shift retroceded U.S. life reinsurance business to Bermuda from Ireland in the aftermath of federal tax reform in the U.S.

The base erosion and anti-abuse tax, or BEAT, provision of the recently enacted legislation, which aims to prevent companies from transferring business out of the U.S. to avoid tax liability, would be applicable to Hannover Re (Ireland) DAC, Hannover Re officials said during a Feb. 7 conference call. The company's Hannover Life Reassurance Co. of America (Bermuda) Ltd. unit, however, pays U.S. taxes, meaning that U.S. business can be transferred to it without falling afoul of the BEAT provision.

The company's Hannover Life Reassurance Co. of America (Bermuda) Ltd. unit, however, pays U.S. taxes, meaning that U.S. business can be transferred to it without falling afoul of the BEAT provision.

"Luckily we have a U.S. taxpayer in Bermuda that is not subject to U.S. regulatory accounting, but it is subject to U.S. taxes and, therefore, BEAT is not applicable to that company," explained Hannover Re Chairman and CEO Ulrich Wallin. "It is cumbersome and makes it all rather complicated," Wallin added with respect to plans to have the Bermudan unit effectively take the place of the Ireland-domiciled affiliate.

Hannover Life Reassurance Co. of America retroceded $26.87 billion in total losses and aggregate reserves to Hannover Re (Ireland) as of Dec. 31, 2016, up from $8.46 billion on the same date in 2015, according to the notes to its audited statutory financial statement.

Hannover Life Reassurance Co. of America reported a record level of assumed premiums in 2016 as it entered and later upsized a reinsurance agreement with an American International Group Inc. subsidiary. It retroceded all of the associated business to Hannover Re (Ireland).

Annual statement data show that Hannover Life Reassurance Co. of America assumed $18.80 billion in life premiums from AIG's American General Life Insurance Co. on a coinsurance with funds withheld basis under an agreement that took effect July 1, 2016. American General Life separately disclosed that it initially ceded roughly $5 billion in reserves associated with blocks of whole life and current-assumption universal life business, then amended the agreement, effective Dec. 31, 2016, to incorporate the cession of approximately $14 billion of reserves on in-force term life and guaranteed universal life business.

Hannover Life Reassurance Co. of America reported the assumption of $1.54 trillion of life in-force, with $29.25 billion of associated reserves and $21.62 billion in premiums, from unaffiliated U.S. entities in 2016. AIG units ranked as the company's largest such cedant at the group level, representing $611.25 billion of assumed life in-force.

Other Hannover Life Reinsurance Co. of America cedants from which the company assumed more than $100 billion of life in-force at the group level as of year-end 2016 were Aetna Inc., Voya Financial Inc. and Genworth Financial Inc.

Hannover Life Reassurance Co. of America (Bermuda) was a direct subsidiary of Hannover Life Reassurance Co. of America. The Ireland- and U.S.-domiciled companies are direct subsidiaries of Germany's Hannover Life Re AG. A Hannover Re spokeswoman said the Bermuda company, which applied to the Florida Office of Insurance Regulation in December 2017 to become an eligible reinsurer, has become a subsidiary of a U.S. financial holding company.

Hannover Life Reinsurance Co. of America's retrocessions to its then-subsidiary in Bermuda totaled $80.5 million in losses and aggregate reserves as of Dec. 31, 2016, up from $75.5 million a year earlier.

In addition to the Ireland- and Bermuda-domiciled affiliates, Hannover Life Reassurance Co. of America also ceded losses and aggregate reserves of $559 million up to Hannover Re and $2.99 billion to Sand Lake Re Inc., a Vermont-domiciled captive insurance subsidiary.

Sand Lake Re was licensed in January 2016 for the purpose of ceding business in compliance with the National Association of Insurance Commissioners' Actuarial Guideline 48, which pertains to certain life reserve financing transactions. Hannover Life Reassurance Co. of America recaptured three blocks of term life business it had ceded to the Ireland-domiciled affiliate, then ceded the business to the Vermont captive.

The company reported $5.06 billion in assumed premiums through the first nine months of 2017, down from $8.36 billion in the year-earlier period.

Wallin said U.S. tax reform would not have nearly the same sort of structural impact on Hannover Re's property and casualty reinsurance business.

"The only effect there might be that it becomes slightly more attractive to write the business from the U.S. due to the lower taxes compared to Germany," he said. "But we are not changing our business model at this point in time."