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Fitch: US tax reform will negatively impact Bermuda re/insurers

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Fitch: US tax reform will negatively impact Bermuda re/insurers

Fitch Ratings maintained that the tax overhaul in the U.S. is credit-negative for the Bermuda re/insurance market.

The rating agency said the cut in the U.S. corporate tax rate to 21% from 35% and a new tax on premiums ceded by U.S. insurers to foreign reinsurers will benefit U.S. reinsurers at the expense of Bermudian and other international reinsurers serving the U.S.

The rating agency does not anticipate rating implications as Bermuda will preserve its "strong position" in the global reinsurance market.

"Moreover, partly in anticipation of U.S. tax reform, Bermudian reinsurers have been adapting their businesses and increasing their geographic diversification," according to the report.

But, the rating agency wrote, the U.S. is the most important market to Bermudian firms. "Significant declines in business or earnings could prompt negative rating actions."

Fitch wrote that the corporate tax cut, coupled with the Base Erosion and Anti-Abuse Tax, known as BEAT, will reduce the tax benefit of reinsuring U.S. risks to Bermuda, because more reinsurance business and capital will be encouraged to remain in the U.S.

The island does not have a corporate income tax, but most Bermuda reinsurers pay income and other taxes given their international operations, the report states. Those reinsurers pay 4% on direct premiums and 1% on reinsurance premiums from the U.S. to offshore affiliates. The added BEAT will raise the rate to 5% in 2018, then 10% until 2025 and 12.5% thereafter.

As a result, any reduction in supply of reinsurance from Bermuda following the tax changes is likely to drive global reinsurance premium rates up, Fitch wrote. Rates in some lines of reinsurance are already on the rise following high catastrophe claims in 2017.