Mixed Views On “Bermuda” Tax Bill
Proposed legislation denying tax deductions for US reinsurance premiums paid to offshore affiliates will likely pass through Congress, a Bermuda executive predicted last year — but he criticized the measure as a restriction of free trade.
Speaking at the 2010 Standard & Poor’s Insurance Conference, Edward Noonan, chair and chief executive officer of Bermuda’s Validus Holdings, Ltd., said the “need for revenue in Washington will probably outweigh the need for principled regulation and taxation,” when asked about the potential fate of the so-called “Neal bill,” sponsored by Massachusetts Congressman Richard Neal.
The tax scheme is supported by a coalition of domestic American insurance carriers, headed by William Berkley of Greenwich, Connecticut-based W.R. Berkley Corp.
The proposal would disallow tax deductions for direct writing insurance companies in the United States that cede business to offshore affiliates, taking advantage of the so-called “Bermuda Loophole” in the American tax code.
Rep. Neal last week reintroduced his long-stalled legislation targeting the so-called “Bermuda loophole” in American’s tax code — a technicality he says allows re/insurers to avoid paying US taxes by basing their companies on the island and in other off-shore financial centres.
The Obama administration supported the legislation through similar provisions in its 2011 budget proposal.
“It’s a bad idea,” Mr. Noonan said. “This is really an international trade issue. The United States insurance market certainly is not disadvantaged,” he said, referring to the coalition’s contention that direct writing insurers that take tax deductions on offshore cessions have an unfair competitive advantage.
“I don’t have any dog in the fight,” Mr. Noonan proclaimed. “I don’t have a US subsidiary. I don’t have a quota share in an offshore location.”
Earlier this year, at a Bank of America Insurance conference, however, Mr. Noonan, responding to a question about his acquisition appetite, did muse about the possibility–at some future date–of moving into the U.S. market and diversifying Validus’ book to include casualty business.
Currently, Validus writes short-tailed reinsurance from an operation in Bermuda and short-tailed insurance out of a Lloyd’s operation known as Talbot, with no US operations.
Speaking at the S&P conference, Mr. Noonan said, “I am still stunned that major U.S. insurance companies suddenly decided that free trade is a bad idea and that they really need government protection.”
A few days earlier, Mr. Berkley, speaking at the 2nd Annual Oppenheimer Insurance CEO Summit, also predicted passage of the Neal bill.
“Yes, we will get our tax legislation passed,” he said, answering a question that had not even been asked at the start of a Q&A session. “And all those guys who are offshore taking advantage of Americans who pay tax–[those companies] who reinsure their affiliated business offshore will eventually have to pay up,” he said.
“It will happen sooner than later,” Mr. Berkley said.
In April, 2011 Premier Paula Cox dismissed the potential threat posed to the island’s insurance community by a beefed up version of the so-called “Neal bill” in the US, as she appealed for more international companies to come to the island during an address to UK businesses.
Premier Cox told an audience of prominent members of the London business community and investors in the City of London that she thought US president, Barack Obama had more pressing domestic and international issues to deal with rather than pushing forwards with the bill, which critics argue imposes an isolationist tariff on international companies operating in the US.
With 23 Bermuda-domiciled insurers and reinsurers estimated to provide 40 percent of the hurricane and earthquake coverage in the US, the prospect of the Neal bill, which would deny a tax deduction for reinsurance premiums paid to foreign-based affiliates by domestic insurers, becoming law has been a recurring threat for the island in recent years.
However, Premier Cox said that the island was not looking for any preferential treatment and just wanted a level playing field in which its insurance community could operate.
“What you are going to find if you look at Bermuda, just as you look at Ireland, Switzerland and Luxembourg, is that we have real people on the ground,” the Premier said.
“We don’t have shell banks. We have substance in terms of our companies. It is not some tax pass-through manoeuvre or form of tax evasion.
“I think Bermuda can hold its own, but we are certainly not complacent and we certainly don’t take our eye off the ball,” she continued.
“We recognise that we have competition and that there are those who look at us with a lean and hungry eye, mistakenly thinking that if they close Bermuda down, which they won’t , then the money will just magically go back onshore.
“It won’t. Those days are in the past.”
Premier Cox said that as politician, she was always sensitive to new areas of legislation by other jurisdictions which could prove to be “prejudicial and detrimental”.
“This is why we have our fixed position in terms of having a presence in Washington DC,” she said.
“As a politician you usually have domestic issues and international issues to worry about and I think that President Obama has a lot on his plate right now. I don’t know that it [the Neal bill] is going to be his top priority.”
Premier Cox was speaking at the Business Bermuda’s annual financial services conference in London.
Congressional sources have told re/insurance industry news outlets a number of issues surrounding the Neal proposal are currently generating concern.
The issues include the proposal’s impact on domestic insurance rates, concerns about how US trading partners view the proposed tax, and the disparity between the revenue projected by government agencies that would be generated by the Neal bill and the similar Obama administration proposal.
Specifically, the Congressional Budget Office and the Joint Tax Committee project that the Neal bill would generate $17 billion in additional revenue over 10 years, while the same agencies project the revenue generated by the similar Obama administration proposal at only $2.3 billion.
At S&P, Mr. Noonan said that “it’s just maybe a sign of the times that companies that have been ranting against regulation and taxation for years and years suddenly have concluded that what we really need is a more rigorous tax regime, simply directed at other people.”
Speaking at last year’s “RIMS On the Hill” conference of the Risk and Insurance Management Society in early June, Brad Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers [ABIR}, explained this range of cost figures, saying they are based on likelihood of a 20 percent reduction in the supply of reinsurance to the US market.
ABIR is the principle opponent of the Neal Bill, waging an ongoing lobbying effort against the proposed legislation in Washington DC.
At the Washington conference, Mr. Kading said that in addition to increasing costs to consumers, the proposed tax legislation “will distort the playing field” to the advantage of US insurers.
“It denies the ability to offset not only premium as a business deduction, but also claim payments as a business decision,” he said.
Speaking for RIMS, Scott Clark, risk and benefits officer for the Miami-Dade County School Board and a RIMS board liaison, said the group “has always opposed proposals to restrict market access to insurance capacity.”
“Over the past decade, [the tax change] has been proposed several times, not surprisingly, by a handful of US insurers which seek to gain via a protected market that would allow them to charge higher prices,” Mr. Clark said. “Nothing could be worse for US consumers.”
When them Wiggas were allowed to domicile in Bermuda a more astute enabeler would have made sure that serious issues such as this , that threaten our livelihood would have been rubber stamped away . Instead DREB decided to play Mr Big Humanitarian at the expense of an unsuspecting electorate , and now we will be paid in kind . No good deed shall go unpunished .