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Tax reform would benefit insurance industry

Posted On: Dec. 4, 2017 2:41 PM CST

Domestic reinsurers and specialty insurers would be the primary beneficiaries of tax reform, along with insurance brokers, standard commercial insurers, personal insurers and the Bermuda market sector, Keefe, Bruyette & Woods Inc. analyst Meyer Shields said in a note Monday.

The Senate’s weekend vote on the tax reform package makes its passage “more likely,” Mr. Shields said.

Domestic reinsurers and specialty insurers “face the most competition from insurers utilizing affiliated subsidiaries in lower-tax jurisdictions,” Mr. Shields said, something tax reform could help alleviate, though the Senate and House of Representatives approaches differ.

For reinsurance brokers, “a smaller gap between U.S. and Bermudian tax rates could incrementally depress demand for reinsurance exploiting the current tax arbitrage opportunity,” Mr. Shields said. Brokers in general, however, will see a reduced interest expense deduction.

Domestic standard insurers “should initially incur lower taxes,” Mr. Shields said, due to “less Bermudian participation in domestic standard commercial lines,” in favor of more profitable specialty lines. He added, however, that “we expect rate competition, and, to a much lesser extent, regulatory pressure, to eventually absorb most of the bottom-line upside from lower domestic tax rates.”

For the Bermudian insurers and reinsurers, Mr. Shields said he expects “significantly lower cessions to foreign affiliates, although incremental taxes, at 20% on higher domestically retained income should be offset by lower excise taxes of about 1% on all premiums ceded internationally and taxes currently incurred on net-profitable ceding commissions.”