Bermuda’s reinsurers are expected to use deferred tax accounts for provisions in Bermuda’s Corporate Income Tax Act over a rolling period, a rating agency report has said.

AM Best, in a composite review of seven Bermuda and US reinsurers, further pulled out the four Bermudian-based reinsurers from the group, in discussing how the CIT rate provided a one-time boost to the companies’ capital and earnings.

The CIT Act imposes a 15 per cent corporate income tax rate on businesses that are part of multinational enterprise groups with annual revenue of at least €750 million.

The report’s discussion notes: “The tax is effective as of January 1, 2025, but beginning at year-end 2023, companies were allowed to establish deferred tax accounts for provisions in the CIT Act that allow for an equitable transition to the new regime, including the Economic Transition Adjustment and the opening tax loss carry-forward.

“The ETA election allows for an adjustment equal to the difference between the fair market value and carrying value of assets and liabilities (as of September 30, 2023).

“The OTLC allows losses from 2020 to 2024 to be carried forward. The DTA is expected to be used over a ten-year period, although amortisation periods vary somewhat by company.

“The 2023 ROEs of the four Bermuda-based reinsurers in the composite improved between 5 per cent and 8 per cent, due to early recognition of the future tax benefits expected to be realised from OTLCs.

“As a percentage of equity, DTAs accounted for 4 per cent to 7 per cent for these four reinsurers as of year-end 2023.

“While recognising that DTAs are intangible assets that cannot be liquidated to pay claims, AM Best views DTA levels of less than 10 per cent of total equity as manageable and expects these assets to be converted into tangible equity over time, as the OTLCs are used to offset taxes on future earnings.”

Best’s Market Segment Report includes the analysis “US-Bermuda Reinsurers’ Results Maintain Positive Momentum”.

The report was outlining how the composite underwriting results for Bermuda and US reinsurers maintained a positive momentum, improving for a third straight year.

The rating agency isolated the composite of companies, made up of seven reinsurance groups domiciled here or in the US, for which the reinsurance business accounts for the majority of their underwriting portfolio.

The companies are Arch Capital Group, Everest Group, General Re, Odyssey Group Holdings, PartnerRe, RenaissanceRe Holdings, and Transatlantic Holdings.

The 2023 combined ratio of 85.1 per cent was a 6.4 point improvement over the prior year.

It points out the significant growth in overall profitability and projects a 2024 premiums increase for the group “at a similar pace as in 2023, reflecting the high ongoing demand for reinsurance capacity, bolstered by underlying exposure growth.

In a departure from the prior two years, catastrophe losses were borne disproportionately by primary carriers rather than their reinsurers.

The report said that reflects the lower severity of catastrophes during the year, and changes made to the structure of the reinsurance programmes.