Bermuda's advantage as a tax haven is the biggest factor that makes it loom large on the insurance map, and it's likely to stay that way--at least for now, analysts at Fitch Ratings predict.

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 recently 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 Bermuda companies face challenges similar to those experienced by counterparts in the North American and global insurance markets, with a few unique twists, including a challenge to its tax advantage.

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 for 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 1.5 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 in 2007 to convince federal lawmakers to pass a bill to remedy what they view as an unfair tax advantage for foreign insurance groups. "This is the third such challenge in the last 20 years," Mr. Rouck said.

However, he concluded, "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 noted that insurance capacity and 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.

Meanwhile, Fitch assigned a stable outlook to the Bermuda market, marking the first time the rating agency has assigned a rating outlook to the segment.

James Auden, managing director of Fitch's North American insurance group in Chicago, said the stable outlook indicates that rating actions on Bermuda companies are expected to consist predominately of affirmations over the next 12-to-18 months.

In addition, upgrade and downgrade actions are likely to approximate each other, said Mr. Auden, noting Fitch currently has published ratings on 18 Bermuda entities, and that the rating agency plans to expand rating coverage over the near term.

Mr. Rouck said the average financial strength rating for 18 Bermuda entities currently rated by Fitch is "double-A-minus" (using net premiums as weights). The high overall rating level, he said, is supported by the fact that profits in recent years drove significant improvements in the group's collective balance sheet and capital position.

Mr. Dickerson reviewed recent financial results and presented projections for 2008, noting that Fitch expects a composite of 22 Bermuda companies to post an aggregate combined ratio between 89 and 94, assuming an average level of catastrophe losses--coming out to five loss-ratio points.

He also said the expected return on average equity is between 11 percent and 14 percent, noting that in the last two years combined ratios have hovered in the high 80s, while returns have been in the mid-to-high teens.