U.S. Carriers Regrouping To Challenge Bermuda's Advantage On Taxes

Chubb has rejoined the fight to eliminate tax advantages for foreign competitors, the insurer's vice chairman said last week, predicting that private discussions with lawmakers would soon become public through Congressional hearings.

“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 Warren, N.J.-based Chubb, during an earnings conference call.

“Our goal is to…level [the] 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,” he said, noting that Bermuda is just one such haven.

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, together with The Hartford, led the last fight to eliminate offshore tax advantages in 2000, with proposals including a hike in the federal excise tax on related-party reinsurance and taxing imputed income of U.S. subsidiaries, National Underwriter reported in its Feb. 21, 2000 edition.

Chubb is no stranger to the Bermuda market. In 2001, Chubb and American International Group were among the lead investors in Allied World Assurance Company, a Bermuda company formed in the wake of 9/11–which has since become a public company. In 2005, Chubb was also a lead investor in Harbor Point, a reinsurance company essentially created from what was once the Chubb Re book of business.

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 on NU's Online News Service on Nov. 20 last year, when he announced his intention to meet with Congressional Democrats to eliminate tax advantages of Bermuda companies.

“It's not just Bermuda,” noted Mr. Degnan, who said the coalition targets all jurisdictions “where tax advantages adhere to the ceding of reinsurance premiums.”

Responding to an analyst who asked Mr. Degnan how investors could follow the progress of the coalition, and when the news might hit The New York Times, Mr. Degnan predicted: “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.”

Adding that there have been “some allusions to this already in the public press,” he also revealed there have been a number of private discussions with federal lawmakers. “Once Congress has a hearing and the other side engages, you won't have any trouble following it,” he said.

During a separate earnings conference for W.R. Berkley, in addition to 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,” adding that his company would evaluate all its options when this session of Congress ends.

There are a number of ways to address taxation issues, “none of which I believe are good”–and moving to Bermuda or the equivalent is only one of them, he said, promising to have a more informed response by the third quarter.

In his remarks last week, 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. “Right now, if you're smart and shrewd, you can take money from all over the world and move it to tax havens….It's happening not just here, but in the U.K. People are doing it from Lloyd's.”

(Earlier this year, London-based Kiln plc announced its intention to set up a Bermuda operation–see the April 16 edition of NU. An insurance subsidiary of W.R. Berkley is a significant Kiln shareholder.)

“The ultimate question [is], how are governments going to get revenue to support their societies?” Mr. Berkley continued. “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 [the taxation system] as it is, the result ultimately will be all insurance companies leaving the United States.”

Executives of two Bermuda companies–Everest Re, which reported a 77 percent jump in first-quarter income, and Partner Re, a 1 percent decline–reacted to Chubb's announcement in response to analysts' questions the same day.

At Everest, CEO Joseph Taranto said he didn't expect the Bermuda tax situation to change, basing his prediction on the outcome of the last public battle.

“There clearly was a big push to make changes…years ago, and that gained some momentum, but ultimately that was not seen as the right way to go by the Treasury or in Congress,” he said, suggesting that more study was put into the issue back then than seems to be the case today.

Executives, including Mr. Berkley, generally seemed to agree that companies writing reinsurance only, such as PartnerRe, are not the target of the battle. “But we may well get caught up in the solution to this problem” anyway, said PartnerRe CEO Patrick Thiele.

However, he predicted that any damage caused by a taxation change to a company writing reinsurance business would be less than the damage done to primary companies.

“Over a long period of time, it is clear that either through regulation or legislative fiat, there will be a gradual slow reduction in the Bermuda advantage,” Mr. Thiele added.