perspectives on the neal bill and what it could mean for coastal markets alex kaplan, vice...
TRANSCRIPT
Perspectives on the Neal Bill
and What It Could Mean for Coastal Markets
Alex Kaplan, Vice President, Regulatory Affairs
Michael Natal, Vice President, Finance (Tax)
CEI - Out of the Storm '09October 1, 2009
Slide 2
Introduction
H.R. 3424 introduced July 30 by Rep. Richard Neal (D-MA), referred to the Committee on Ways and Means
Alleged problem – foreign (re)insurers shifting profits offshore to “low, no tax jurisdictions to “escape” US tax
The current political/fiscal environment make this proposal more attractive than in previous years
Supported by a small coalition of companiesCEI - Out of the Storm '09October 1, 2009
Slide 3
How the Proposal Works
Disallows US tax deduction for premiums paid to affiliated non-US reinsurer
Amount disallowed based on US insurance industry averages:
Limit: generally, what a “typical” US insurer reinsures with non-
affiliates (e.g., 10% gross written premiums)
CEI - Out of the Storm '09October 1, 2009
Reinsurance premiums paid to non-affiliates and US affiliates (absorbs limit 1st)
Reinsurance premiums paid to non-US affiliates
US tax deduction disallowed
Slide 4
How the Proposal Works (cont.)
US insureds
Example
CEI - Out of the Storm '09October 1, 2009
US direct writer
$200 premium
$100 premium
US reinsurer
Reinsurance
capital relief
• enhance ratings
• expand business
off-load peak/cat risks
Non-US reinsurer (affiliate of US
reinsurer)
$50premium
Retrocession
capital relief
• enhance ratings
• expand business
off-load peak/cat risks
centralize capital – efficiencies
risk diversification
Slide 5
How the Proposal Works (cont.)
$100 premium
Example (cont.)
CEI - Out of the Storm '09October 1, 2009
$50premium
US reinsurer Non-US affiliate
$100 prem. income($50 prem. deduction)$50 net prem. taxed (US)
$50 prem. inc.(non-US jurisdiction)
Current treatment: $100 of
premium
taxed
+ =
$100 prem. income($25 prem. deduction)*$75 net prem. taxed (US)
$50 prem. inc.(non-US jurisdiction)
Proposed treatment: $125 of
premium
taxed
=+
* Assumes 50% of the premium is limited.
Slide 6
How the Proposal Works (cont.)
US Insurer100 premium income(90) establish reserves, pay acq.
costs*
(50) deduct reins premium45 reserves/costs (reins credit)
45 reserves to pay claims/costs45 reins received to pay claims/costs
(90) deduct payments to US insured
5 insurer taxable income1.75 tax (@ 35%)
US Reinsurer----
50 premium income(45) establish reserves/pay costs
45 reserves to pay claims/costs
(45) deduct payments to insurer--
5 reinsurer taxable income1.75 tax (@ 35%)
Total profit: 10, Total tax: 3.5
* Assume 10% profit on business, no reserve discount, and 1-year contract currently settled.
initial underwriting
reinsurance
final payment of claims
$100 premium
$50premium
Detailed Example - US v. non-US
Slide 7
How the Proposal Works (cont.)
US Insurer100 premium income(90) establish reserves, pay acq.
costs*
(25) deduct reins premium – LIMITED**
45 reserves/costs (reins credit)
45 reserves to pay claims/costs45 reins received to pay claims/costs
(90) deduct payments to US insured
30 insurer taxable income10.5 tax (@ 35%)
Non-US Reinsurer----
50 premium income – 2x TAX
(45) establish reserves/pay costs
45 reserves to pay claims/costs
(45) deduct payments to insurer--
5 reinsurer taxable income1.25 tax (@ 25%)Total profit: 10, Total tax: 11.75
* Assume 10% profit on business, no reserve discount, and 1-year contract currently settled.
initial underwriting
reinsurance
final payment of claims
$100 premium
$50premium
Detailed Example - US v. non-US (cont.)
** Assume 50% of the premium is limited.
Slide 8
Why the Proposal is Flawed
Effectively a gross premiums tax (losses ignored) – highly punitive
Imposes double tax – ignores US treaty regime (treaties seek to avoid double tax)
Proponents argue profits shifted to low-/no-tax jurisdictions, but proposal applies to all non-US reinsurers regardless of jurisdiction
– losses also sent offshore
Ignores powerful non-tax reasons for reinsuring with affiliates (e.g., centralization of capital)
Is based on an improper analogy to earnings stripping
CEI - Out of the Storm '09October 1, 2009
Slide 9
Why the Proposal is Flawed (cont.)
US already has rules requiring fair (arms’-length) pricing between related parties
Other technical concerns
CEI - Out of the Storm '09October 1, 2009
Slide 10
The Political Landscape
House: Rep. Neal has raised affiliate reinsurance issue several times over past decade
– bills introduced 2000, 2001, and 2008
– 2009 bill very similar to 2008 bill
– prior bills have all expired in subcommittee
Senate: only recently interested in the issue
– Sep. 26, 2007 Senate Finance Hearing
– Dec. 10, 2008 Senate Finance Committee “Discussion Draft” (virtually identical to 2008 Neal Bill), request for comments
– Feb. 28, 2009 deadline for comments
Administration: Did not include in FY2010 BudgetCEI - Out of the Storm '09October 1, 2009
Slide 11
The Political Landscape (cont.)
Senate Finance Committee comments
– 22 in support, all from 3 companies: Berkley, Chubb, and EMC
– 43 opposed, from various companies, governments, consumer groups, insurance commissioners, etc.
Support for 2009 Neal Bill appears weak, but Congress is seeking tax revenue; factors for/against passage: Pros Cons
Congressional Pay-Go rules, need for tax revenue
reaction by international community
focus on tax havens, closing the “tax gap”
the economic crisis, need for financial stability
anti-foreign sentiment higher insurance costs for consumers
CEI - Out of the Storm '09October 1, 2009
Slide 12
Economic Impact
Brattle Group Study: Report released May concludes Neal bill would deplete the US market of 20% of the current reinsurance capacity
The 20% reduction in capacity would result in a $10-12B annual increase in premiums for US policyholders
Minimum Premium Increase by State:
– Florida: $500M
– Louisiana: $76M
– Massachusetts: $108M
– South Carolina: $43M
– Texas: $350M
Slide 13
Overview Q&A
CEI - Out of the Storm '09October 1, 2009