trending Market Intelligence /marketintelligence/en/news-insights/trending/dipabhl02dl0sxvqj3gyza2 content esgSubNav
In This List

EY: US tax reform to hit 'large number' of Lloyd's underwriters

Blog

The Big Picture 2022 Insurance Industry Outlook

Podcast

Next in Tech | Episode 37: Insurance impacts on technology and vice versa

Case Study

A Prestigious Global Business School Gains a Competitive Edge

Video

S&P Capital IQ Pro | Unrivaled Sector Coverage


EY: US tax reform to hit 'large number' of Lloyd's underwriters

A "large number" of Lloyd's of London syndicates and members will have to pay a U.S. tax aimed at stopping companies from sending profits to offshore affiliates, according to an EY tax practice partner.

The Base Erosion and Anti-Abuse Tax, or BEAT, was part of the sweeping reform legislation signed into law at the end of 2017 by President Donald Trump. It targets U.S. tax-paying companies, including those that reinsure business through offshore entities.

Lloyd's syndicates will be particularly affected by BEAT, said EY's Jeff Soar, because unlike their peers in the London company market — non-Lloyd's insurance companies writing global business from London — Lloyd's underwriters are generally considered to be U.S. taxpayers.

"The fact that so much business comes from the U.S. and the way the business comes from the U.S., the syndicates are deemed to have a taxable presence there," he said.

Soar was speaking to S&P Global Market Intelligence as EY released a report on U.K. specialty insurance, including Lloyd's. The report said U.K. specialty insurers would be "heavily impacted" by BEAT and that the new rule could have "significant and market-changing implications for cross-border affiliate reinsurance — especially groups with U.S. and/or Lloyd's platforms which reinsure to offshore affiliates."

Lloyd's described the U.S. as its "main market" in its 2017 annual report, and it derives more than 40% of its premium from the country.

Although BEAT could in theory affect all Lloyd's underwriters, the new rule does not apply to companies below a certain size or whose overseas payments are relatively small, Soar noted. But even so, "it is going to be a large number that would get caught," he said.

He added that some companies in the London company market would be affected by the tax, "but it is much less widespread in the company market than it would be in the Lloyd's market."

Transactions involving Lloyd's underwriters that are most likely to attract BEAT are intragroup reinsurance arrangements, where the syndicate is being reinsured by a non-U.S. sister company, or intragroup financing arrangements. Soar said the use of both is "common" among Lloyd's firms.

"I wouldn't go quite so far as to say it is the norm, but it is probably pretty close to being the norm," he said. "In the largest members and syndicates it is very common. It is less common in the smaller ones."

Uncertainty prevails

Companies are considering a range of options to reduce potential BEAT costs, Soar said. These including not using intragroup reinsurance for the U.S. portion of their business or using a captive reinsurer based in one of the U.S. states set up as captive domiciles, such as Vermont. But it is not yet clear how BEAT applies in all cases.

"At the moment people are scenario testing and scenario planning because we don't quite have the certainty we would like to have," Soar said. "Even today we still don't really have a deep understanding of the IRS's likely interpretation of the law."

There could be more clarity from the IRS toward the end of the third quarter or the fourth quarter, Soar said, but he noted that Lloyd's members have several deadlines late in the year, such as "coming into line," when members ensure syndicates have the right amount of capital for their underwriting ambitions, and submission of syndicate business plans for the following year.

"It doesn't really give you a lot of time to understand the likely cost of it before you get into a filing season," he said.

M&A boost

Although "it is hard to find positives" from BEAT for U.K. specialty insurers, according to Soar, he said other elements of the U.S. tax reforms would be beneficial and could "reignite the U.S. acquisition trail." For example, firms can now acquire subsidiaries and investments under U.S. holding companies without "punitive tax" implications, the EY report said.

Soar said: "I think there will be more acquisitions from U.S. companies and more M&A as a result."