Bermuda's advantage as a tax haven is the biggest factor that makes it large on the insurance map, and it's likely to stay in place for now, analysts at Fitch Ratings said yesterday.

The rating agency presented its conclusion--along with the finding that Bermuda insurers have paid income taxes at a rate roughly 15 points lower than the rate for U.S. companies--in a just-published report on the market.

During a conference call, Mark Rouck, a Chicago-based Fitch analyst and lead author of the report, "Bermuda Market Overview," said that Bermuda companies face challenges similar to those being experienced by counterparts in the North American and global insurance reinsurance markets, with a few unique twists, including a challenge to its tax advantage.

While the biggest challenge is "maintaining profitability and underwriting discipline in a more competitive...price environment," Mr. Rouck noted that one thing that's unique for the Bermuda classes of 2001 and 2005 is that they "have yet to experience a soft market."

He said other unique challenges for Bermuda insurers are:

o Managing expansion strategies

o Coping with infrastructure challenges

o Maintaining and applying modeling and risk management skills

o Maintaining Bermuda's tax advantage

Referring to the last item, Gregory Dickerson, an associate director for Fitch in New York, said Fitch believes the lack of corporate income tax in Bermuda is "the single most important factor in Bermuda's emergence as an important insurance and reinsurance market."

Mr. Dickerson made the comment after presenting a comparison of recent financial results for 22 Bermuda companies in the aggregate and the U.S. property-casualty market overall.

While underwriting results have been less favorable for Bermuda companies, overall profits, measured by after-tax returns-on-average equity (ROAE) figures, have been higher for Bermuda companies than U.S. companies, he said, attributing higher Bermuda bottom-line profits primarily to a lower tax rate.

On the underwriting side, Mr. Dickerson noted that in each of the past five years, the aggregate combined ratio for the Bermuda companies was higher than the corresponding ratio for U.S. peers--with differences as low as 2.6 points in 2007 and as high as 30 points in 2005.

In contrast, the median ROAE for the last five years was 16 percent for the Bermuda universe, compared to 11.8 percent for U.S. peers, he said.

The 4.2 point difference "we view as significant," he said, noting the gap in returns is much narrower on a pretax basis, with just 1.4 points separating the Bermuda market's pretax median ROAE of 18.3 percent over the last five years and the comparable 16.8 percent return for U.S. insurers and reinsurers.

Fitch noted that a group of large U.S.-based property-casualty insurers challenged the current tax system, attempting to convince federal lawmakers to pass a bill to remedy what they view as an unfair tax advantage for foreign insurance groups in 2007.

"This is the third such challenge in the last 20 years," Mr. Rouck said.

"Our view is that the political maneuvering required to alter the current tax system is extensive and unlikely to occur in the near term," he continued.

In addition, he noted that insurance capacity and the costs continue to be "sensitive issues in politically important coastal states" in the United States, making it possible for opponents to any legislation that would increase taxes on Bermuda market companies to "convincingly argue that doing so would reduce capacity and thus increase the cost of insurance."

Even less likely, he said, is the possibility that tax burdens on U.S. companies will be lowered to level the playing field with Bermuda competitors because of Washington's reluctance to give up tax revenue, he said.

Special Reports /

Bermuda Tax Advantage Safe For Now: Fitch

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