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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