ACE CEO Calls For Cat Reserve Talks

ACE Chief Executive Officer Evan Greenberg told an investors conference today that federal rules barring the accumulation of catastrophe reserves need fixing, but tax statutes relating to Bermuda companies are adequate.

Mr. Greenberg addressed the first issue voluntarily during his presentation of ACE Limited's competitive strengths and strategies during the Goldman Sachs Insurance Conference.

He was asked about whether tax laws should or might be changed in the next Congress during the question-and-answer session following his prepared remarks.

“Lack of cat reserves creates unnecessary volatility and potentially could lead to the wrong management, investor or political behavior,” said Mr. Greenberg, addressing the catastrophe issue.

Noting that current accounting does not allow insurers to build reserves for future catastrophes, he said catastrophe losses are instead paid directly out of the capital account when they occur. That means that in light catastrophe years, instead of going into a cat-reserve account, catastrophe insurance revenues flow to earnings–and ultimately into the capital account (after taxes), creating “the illusion of outsized profits and potentially excessive capital.”

“In years when there are significant cats, losses come out [of] the capital account, which can potentially become impaired,” he said. “This, in my opinion, is an inefficient process.”

Mr. Greenberg noted that with many companies announcing record 2006 earnings, the industry faces a perception problem that has the media and some politicians already suggesting insurers benefited excessively from last year's catastrophes. “This is an obvious distortion and an uninformed view of our industry and its economics,” he said.

He continued: “In my opinion, it's unfortunate that there is no serious and thoughtful discussion on the use of cat reserves. Cat reserves would dampen volatility and would increase the industry's wherewithal to take risk.”

He predicted that there is little chance Congress would entertain the issue.

As to the question of whether Congress should address proposals to increase taxes for Bermuda companies, Mr. Greenberg said the Internal Revenue Service already has tools to ferret out companies that set up Bermuda companies and reinsure U.S. business to Bermuda to game the tax system.

He began his response asserting that “ACE is a major taxpayer in the United States,” paying U.S. tax on its U.S. business at an overall tax rate of 22-to-24 percent. “We do not have excessive reinsurance to Bermuda,” he added.

Mr. Greenberg said managing business “on a global basis…has everything to do with capital management,” not tax management. “You use reinsurance to be able to manage capital efficiently,” he said.

Among the tools the IRS has to identify companies that are gaming the system by using reinsurance to lower their tax bills are “transfer pricing laws that measure the arms-length nature of reinsurance” deals, he said.

He added that the IRS can look simply at the volume of reinsurance as one measure signaling questionable activity.

“I'm not sure what problem you're fixing that there aren't already rules [for], and I don't hear an appetite right now in Congress, among those who are thoughtful, to address [the tax situation] in a different way.”

Any proposal to put a tax on business that goes to the more tax-favored jurisdiction of Bermuda “would send a chill around the world,” Mr. Greenberg opined, characterizing such proposals as “protectionist reactions.”

“What are you then going to say about other lower-tax jurisdictions than the United States?” he asked.

During the New York conference–Webcast earlier today–Mr. Greenberg also threw his support behind the optional federal charter concept for a dual system of insurance regulation.

“Fifty-state regulation is…a trade barrier,” he said. “If we had to confront that in another country, we'd call that a trade barrier and U.S. trade representatives would be actively engaged.”