A silver lining following Bermuda's tax changes

Credit agency explains how domiciled re/insurers are winning following Q4

A silver lining following Bermuda's tax changes


By Kenneth Araullo

Recent tax changes in Bermuda brought some good tidings with them, evident from re/insurers’ financial reports from Q4 2023.

The island’s inaugural corporate income tax, set to be implemented in 2025, has enabled Bermuda-based insurers and reinsurers to recognize deferred tax assets for the first time, offering a tax credit against prior losses that can be applied to future tax obligations.

Greg Dickerson, an insurance credit analyst with AM Best, pointed out that the industry had been anticipating the move for several years.

“Prior to this becoming official, you can’t recognize anything on your balance sheets. Now, they know that’ll be the rule. So, reinsurers are putting that deferred tax asset on their balance sheet with the expectation of writing some of that off every year,” Dickerson said.

The Bermuda Corporate Income Tax Act of 2023, enacted in December last year, introduced a 15% tax rate on local businesses part of multinational groups generating $750 million or more in annual revenue. Bermuda’s government argues this move aligns with international efforts led by more than 140 countries since 2021, aiming to establish equitable tax regulations globally.

These measures also adhere to the Organization for Economic Cooperation and Development’s standards to prevent tax evasion and ensure countries do not lose revenue to jurisdictions with low or no taxes.

One notable example of a company benefiting from this new tax regime is Arch Capital Group, which reported a $1.18 billion deferred tax asset in the fourth quarter, accounting for more than half of its $2.3 billion net income for the same period.

Marc Grandisson, Arch’s CEO, mentioned during an earnings call that this asset would be amortized over approximately 10 years, excluding it from operating income due to its one-off nature.

The adjustment has also prompted life and annuity insurers to view Bermuda as an appealing location for starting new entities or acquiring reinsurance, aiming for capital efficiency and risk mitigation. Major industry players, including Prudential Financial Inc. and Fidelity Investments, are among those expanding their reinsurance presence in Bermuda.

Chubb also recognized a $1.14 billion deferred tax asset, attributed to the enactment of the Bermuda corporate income tax law. Peter Enns, Chubb’s CFO, explained that this one-time benefit, stemming from a required asset revaluation to fair value, represents a permanent increase in both book and tangible value, to be realized over the next decade starting from 2025.

Similarly, RenaissanceRe and SirusPoint reported substantial deferred tax assets, with Renaissance expecting a $593.8 million benefit and SirusPoint noting a $101 million gain. These assets are expected to be utilized over a 10-year period, despite expectations of higher tax liabilities starting in 2025. Hiscox also disclosed a $150 million deferred tax asset following the new tax law’s approval.

Despite these deferred assets not translating directly to cash reserves, AM Best’s Dickerson highlighted their potential to bolster companies’ capitalization. As firms amortize these benefits, the resulting lower tax payments could effectively enrich their financial standing, albeit as an intangible asset on their balance sheets.

AM Best explained that it will closely monitor how companies manage the amortization of these benefits in the coming years.

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