US Insurers Ask Treasury To Attack Bermudan Competition

Mike Godfrey, Tax-news.com, Washington

07 March 2000

In an attempt to capitalise on recent moves by the US Treasury to close offshore tax loopholes, four of America's biggest established insurers are pressing Congress to end the tax loophole that has allowed recent entrants into the US insurance market to set-up their profit-making activities out of the reach of the IRS in income tax-free Bermuda. But the motivation behind the lobbying efforts of insurance giants Chubb, Hartford, Kemper, and Liberty Mutual is by no means altruistic - it is plain old envy because under US tax laws re-locating to Bermuda would lump their shareholders with a hefty tax bill from the IRS.

The four US insurers have asked the Treasury to do something about a growing number of their fellow property and casualty insurance companies that have begun to exploit a long-standing but little used loophole in federal tax law. It's unfair competition, they claim. The Treasury says it stands to lose $7bn a year if all insurance companies did the same.

The loophole exists for any insurance company that makes a loss at the underwriting level, but a profit from its investment activities. It is perfectly legal for a company to keep its underwriting loss in a US subsidiary, but to move its headquarters, including its investment business to an offshore jurisdiction. The investment profits won't be subject to US taxes except to the extent that a US subsidiary is in a state such as California that applies 'unitary' taxation. One of the biggest insurers using this tactic is the ACE Group of Companies, a Bermuda company that in the last year has acquired two United States insurers, Capital Re and a Philadelphia company formed from what was once the property-casualty division of Cigna.

Because of its expertise in insurance, the offshore jurisdiction of choice for this manoeuvre is Bermuda. Companies taking advantage of the Bermuda tax shelter can use the savings to offer lower prices to customers or keep prices steady and earn higher profits for shareholders. Hence the howls of protest from US insurers which for various reasons (patriotism perhaps not among them) can't or won't take advantage of the tax-saving option.

It seems that the Treasury Department only learnt about the practice when representatives of the four big companies came to Capitol Hill three weeks ago to complain. The tax counsel for Democrats on the House Ways and Means Committee, John Buckley, said he was stunned to see a loophole that, while legal, was so blatant and, unlike the arcane transactions in most tax shelters, so easy to understand.

American insurers have long ignored the tax advantages enjoyed by Bermuda companies because they were happy enough to take reinsurance and liability cover from them. Only now, when the Bermudan companies have become strong enough to challenge the domestic players on their own turf have they run crying to Mummy Treasury (most of the rest of their time they spend trying to avoid taxes themselves).

Since the ACE acquisition of Signa, five other newish US insurers have announced moves to Bermuda, or have been acquired by Bermudan companies. It is much more difficult for a long-established insurer to make such a move, because capital gains tax on the sale or transfer overseas of their enormous undistributed assets would be prohibitive. The US insurers at the Treasury's door want a Bermudan parent of a US insurer to be caught by US taxation.

Of course it would be quite easy for the red braces to work out a way of splitting up the insurers so they could have their cake (glitzy offices on 5th Avenue) and eat it (white sand and sunshine), but that is not how an insurance executive thinks. However, even the US Treasury in its current slash-and-burn mode may think twice before asserting tax sovereignty over an independent nation. A pox on these British colonies! Time to call the Marines (or the OECD)?

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