Benefits of Bermuda domicile will endure despite corporate tax
A new 15 per cent corporate income tax in Bermuda will reduce the island’s advantageous status, according to a ratings agency.
However, Fitch Ratings said in a report that despite the CIT “the overall benefits of maintaining a Bermuda market domicile and operations will likely endure”.
Fitch has just published its Bermuda 2024 Market Update, which said that favourable underwriting and investment performance had driven solid returns and boosted capital.
The Government approved the Corporate Income Tax Act last December. It is scheduled to take effect in 2025 and will charge 15 per cent on the profits of multinational enterprises that have more than €750 million (about $808 million) of revenue annually.
The report said: “Bermuda’s corporate income tax reduces the island’s advantageous status at the margin with the net profitability gap between Bermuda and non-Bermuda companies narrowing over time.
“However, the overall benefits of maintaining a Bermuda market domicile and operations will likely endure, including access to underwriting expertise, strong and efficient regulatory system, and reciprocal jurisdiction status in the US.”
Fitch said the tax was in response to the 15 per cent global minimum tax rate under Pillar Two of the OECD Global Anti-Base Erosion Rules introduced in 2021.
“Implementing a corporate tax rate minimises a potential top-up tax payable to jurisdictions on profits earned in Bermuda. Bermuda also wants to make sure it continues to be a fully co-operative tax jurisdiction and maintains S2 equivalence with the EU.
“Bermuda companies currently pay no corporate income tax but pay payroll taxes and US federal excise tax on premium payments. However, these do not count towards the global minimum tax requirement.
“As a potential offset, Bermuda may reduce or credit these taxes and is developing refundable tax credits for policy initiatives, such as local recruitment and training incentives, capital investment in infrastructure, sustainability and R&D.”
Saying that financial results were superb with capital rebounds, the report added: “The combined ratio will approximate 85 per cent to 86 per cent for full-year 2023 for the group of Bermuda-based reinsurers followed by Fitch Ratings, which is much improved from 92.7 per cent in 2022.
“Catastrophe losses will represent three to four percentage points on the 2023 combined ratio, down sizeably from 9.8 points in 2022. Underwriting improvement will be more limited in 2024 as premium rate rises subside.”
Fitch’s report said that shareholders’ equity grew 23 per cent at the end of 9M23 from the year ending 2022 owing to increased underwriting and investment income, equity market gains, stabilisation of unrealised bond losses, common equity issuances to support growth and reduced return of capital.
It said return on average equity would approach 20 per cent in 2023, “comfortably above the cost of capital”.
On Bermuda M&A and IPO activity returns, Fitch’s report said the Bermuda sector M&A activity rebounded, “driven by improved expected returns for risk, especially in property”.
“As a result, organic growth opportunities have been complemented with select acquisitions. Several Bermuda companies also moved forward with IPOs as equity market valuations improved.”
The report added: “The hardening market continued at the January 2024 reinsurance renewal, although it was much more orderly than the chaotic experience one year ago as the supply/demand imbalance narrowed.
“The hardening environment is also supported by relatively limited new capacity entering the market and deteriorating loss-cost trends from social inflation.”
Pricing was flat to up in most lines, said Fitch, although some retrocession experienced rate declines as robust capacity returned to the market.
“Reinsurers generally held firm on the tighter terms and conditions negotiated in 2023.
“Fitch expects market conditions to remain favourable for reinsurers at the 2024 midyear renewals, although with mostly flat rates as pricing is generally adequate.”
It added: “Capital levels of insurance-linked securities reached a record in 2023, as returns in the sector became increasingly attractive, with particularly strong catastrophe bond issuance.
“Fitch expects favourable conditions to lead to continued growth in the alternative reinsurance capital market in 2024.”
• For the full report, see Related Media
Need to
Know
2. Please respect the use of this community forum and its users.
3. Any poster that insults, threatens or verbally abuses another member, uses defamatory language, or deliberately disrupts discussions will be banned.
4. Users who violate the Terms of Service or any commenting rules will be banned.
5. Please stay on topic. "Trolling" to incite emotional responses and disrupt conversations will be deleted.
6. To understand further what is and isn't allowed and the actions we may take, please read our Terms of Service
