Chubb Battles To End Bermuda Tax Loophole

Warren, N.J.-based Chubb has joined the fight to eliminate tax advantages for foreign competitors, the insurer's vice chairman said Monday.

“We're working with a coalition of U.S.-domiciled property-casualty companies to urge Congress to amend the U.S. tax code,” said John Degnan, vice chairman of Chubb during an earnings conference call.

The goal was a level playing field with carriers who avoid U.S. taxes by transacting insurance business on shore, and then cede all or most of the premiums to “affiliates in tax-haven jurisdictions,” Mr. Degnan said, noting that Bermuda is just one such haven.

During the call he also supplied updates on various other state and federal legislative issues, including the tax issue, as well as favorable court rulings impacting Chubb's business. The carrier announced a 5.7 percent increase in first-quarter net income Monday night.

Mr. Degnan did not disclose other coalition members or specifics of changes being proposed by the coalition, but he did predict the battle would become contentious and more public by the end of the year.

Chubb, with The Hartford, led the last fight to eliminate tax advantages in 2000, with proposals including increasing the federal excise tax on related-party reinsurance and taxing imputed income of U.S. subsidiaries, according to the Feb. 21, 2000 print edition of NU.

Mr. Degnan said U.S. primary p-c insurers now have a “heightened concern” about competitive disadvantages that have been “aggravated by the increasing number of carriers engaging in [the described] tax avoidance strategy and by the very substantial percentage of their premiums ceded to tax haven affiliates”–a figure that he said “respected commentators” have put in the $10-to-$20 billion range, without further identifying the source of the figure.

“The landscape has changed and this is a Democratic Congress looking for paybacks whenever they want to fund a new program,” he said, adding that “this is an easy way to harvest some tax revenues that ought to be coming from companies that are avoiding [them] now.”

Mr. Degnan's words echoed those of William Berkley, chairman of Greenwich, Conn.-based W.R. Berkley Corp., first reported Nov. 20, 2006 by NU Online News Service, when he announced his intention to meet with Congressional Democrats to eliminate tax advantages of Bermuda companies.

Responding to an analyst who asked how investors could follow the progress of the coalition, Mr. Degnan said: “It will be easy to follow because the arena is going to be a public one before Congress. There will be committee hearings and bills introduced–and I imagine a pretty rigorous debate [with] our competitors.” He added that there have already been a lot of private discussions with federal lawmakers.

Mr. Degnan is a former New Jersey state attorney general who served with the administration of former Democratic Gov. Brendan Byrne.

During a separate earnings conference for W.R. Berkley yesterday, reporting a 17 percent jump in net income, Mr. Berkley was asked to comment on business strategies he might adopt to cope with the competitive tax advantages of offshore companies–including the possibility of moving out of the United States.

“We'll have to cross that bridge when we come to it,” he said. “For the moment, we're optimistic that we'll be able to deal with the Bermuda issue.” He added that the company would evaluate all its options when this session of Congress ends.

In his remarks yesterday morning, Mr. Berkley was not critical of companies that have adopted the strategies he's been fighting against. “That is what you want to do for shareholders,” he said. “I'm not suggesting that [competitors are] wrong in what they're doing, just that…the government should be cognizant of the problem…, and that if they leave it as it is, the result ultimately will be all insurance companies leaving the United States.”