U.S. Insurers Face Uphill Battle to Alter Foreign Insurers’ Tax Break

By | May 5, 2008

A coalition of U.S. insurers is calling on lawmakers to close a tax loophole that helps foreign insurers, and although it has won the support of presidential hopeful Hillary Clinton, it faces a harder task convincing others.

The coalition, led by William Berkley, chairman of a U.S. insurance company that bears his name, says foreign insurers are cutting their U.S. tax bills through reinsurance deals with affiliates in countries with lower tax rates. Berkley said the tax on such agreements must be raised to level the playing field, or else U.S. insurers may leave the country.

Despite quietly lobbying Capitol Hill over the past year, the coalition has not succeeded in getting a bill introduced by Congress. It recently ramped up efforts, including a $1 million donation by bond insurer MBIA Inc , a coalition member.

The group has also hired Jon Talisman, an assistant secretary of tax policy in former President Bill Clinton’s administration, to lobby on its behalf.

But those who closely track tax developments say the group faces an uphill battle to win wider support.

Two similar measures over the past 20 years have failed to get a nod from lawmakers, who fear essentially raising taxes on foreign insurers would ignite a trade war with powerful European insurers and encourage some overseas insurers to stop writing policies in the United States.

And insurers in the U.S. are posting strong profits, which makes it difficult for lawmakers to be sympathetic to complaints about competitiveness, or to view threats to leave the country as credible.

For U.S. insurers to move their headquarters to another country could leave them with a large capital gains tax bill, Fitch wrote in a recent report.

But Berkley, Chairman of W.R. Berkley Corp , said the potential for U.S. insurers to leave is real.

“The government either has to find a way for us to be competitive, or the rules of economics will apply,” said Berkley, who last year addressed the Senate Finance Committee on the matter.

While the coalition largely has Bermuda insurers in its sights, Berkley said it is a global issue.

Bermuda, a mid-Atlantic British territory with no corporate income tax, has over the past few decades built itself into the world’s fourth-largest insurance market after Germany, the U.S. and Switzerland.

“If there was a way to just go after Bermuda they (the coalition) might have a chance of success; but it goes beyond that, and once you start changing the rules on insurance for the rest of the world, you are in a trade war,” said a person close to tax developments in Washington, and to those that could be affected by the measure.

Berkley said he has no imminent plans to pull up W.R. Berkley’s Greenwich, Connecticut, roots, but he sees European domiciles as more attractive than Bermuda, which he cites as “expensive in every way.”

“In Ireland or Switzerland you are going to be paying 7 to 15 percent (tax), which is a heck of a lot higher than (no corporate tax) in Bermuda, but less than half the tax we pay here,” Berkley added.

Other coalition members include Ambac Financial Group Inc , American Financial Group Inc , Berkshire Hathaway Inc , Chubb Corp , EMC Insurance Group Inc affiliate EMC Insurance Cos, and Hartford Financial Services Group .

Senator Clinton embraced the measure on the presidential campaign trail last month in Pennsylvania .

A U.K. ISSUE AS WELL

Britain has also battled a similar tax issue, but insurance bosses there have called for taxes to be lowered across the board, rather than for foreign firms to be penalized.

“You don’t build competition by building barriers and being protectionist,” Lloyd’s of London Chief Executive Richard Ward said in an interview last month.

Lloyd’s, which continues to meet with the UK government on the matter, counts on business in the United States for about 40 percent of annual premium written.

Foreign insurers pay U.S. tax on income generated by their U.S. operations, but they can minimize their U.S. tax bills by entering reinsurance agreements with overseas affiliates. Companies do have to pay an excise tax on those deals.

Reinsurers sell insurance to other insurers, thereby spreading the risk of losses.

Insurers transferred $32.5 billion of U.S. business to affiliated companies in 2006, according to the Reinsurance Association of America. Of that, more than half was ceded to Bermuda-based affiliates, while Swiss company transactions accounted for about one-quarter of the transactions.

(Editing by Gerald E. McCormick)

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