Swiss Reinsurance Co. and Munich Re, the world’s biggest reinsurers, are battling a proposed congressional bill that may reduce earnings from the U.S.
In legislation introduced to Congress last year by Democrat Representative Richard Neal, profit on premiums repatriated by foreign reinsurers would be taxed at the U.S. corporate tax rate of 35 percent. That compares with the Swiss average of 21.2 percent and Germany’s 29.4 percent, industry consultants at KPMG International said. Swiss Re said its annual tax expense would increase by “hundreds of millions of dollars” in the new bill.
“Earnings would be hit badly,” said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington. “Some foreign reinsurers would pull out of the market if the bill is passed.”
Taxing foreign reinsurers, which sell half their policies in the U.S., would raise about $16.9 billion over 10 years, according to estimates by the congressional Joint Committee on Taxation. Neal said in July at a Ways and Means Committee hearing that growth in premiums sent offshore for reinsurance has been “significant.” His proposed law change follows President Barack Obama’s pledge to clamp down on tax havens in a bid to raise $210 billion of extra revenue in the next decade.
Foreign reinsurers and insurers minimize U.S. taxes by reinsuring risks with offshore affiliates and then deducting repatriated premiums from their taxable income, according to Michael McIntyre, a professor of tax law at the Wayne State University Law School in Detroit.
The reinsurance premiums sent to offshore affiliates increased more than eightfold to $33 billion between 1996 and 2008, according to a statement on Neal’s website. Almost $21 billion was shifted to Bermuda and more than $7 billion to Swiss affiliates.
“The assertion is that foreign companies have an unfair advantage because they can shift profits to low- or no-tax jurisdictions,” Alex Kaplan, vice president of Zurich-based Swiss Re’s regulatory affairs team, said in an interview from Washington. “This assertion is baseless. There is an anti-foreign sentiment.”
Swiss Re is examining ways to change the way it does business in the U.S., including reducing the policies it writes and raising prices, said Michael Natal, the reinsurer’s Armonk, New York-based vice president in the tax team.
“We just could not do business in the U.S. the same way if the Neal bill were enacted,” he said.
The company wrote 11.6 billion Swiss francs ($11.7 billion) of premiums in the U.S. last year, accounting for almost 40 percent of its total.
“Foreign reinsurers would probably need to review their business models,” said Paul Goodhind, a London-based analyst at Redburn Partners. Passage of the bill would make it more likely that the companies would “move the business onshore,” he said.
Munich Re, the world’s biggest reinsurer, said the Neal Bill violates double taxation treaties between the U.S. and countries such as Germany. Foreign reinsurers would be taxed twice, according to Anke Rosumek, a spokeswoman for the Munich-based company.
The bill may contravene World Trade Organization principles and a tax agreement between the two countries, Klaus Scharioth, the German ambassador to the U.S., wrote in a letter to Ways and Means Committee Chairman Sander Levin.
The European insurance and reinsurance federation added to the debate when it wrote in a position paper sent to the House of Representatives on July 26 that he bill may hurt the market for so-called disaster cover.
Munich Re and Swiss Re offer reinsurance for claims from natural catastrophes, including hurricanes on the U.S. Gulf coast and earthquakes in California.
Prospects for the bill probably depend on this week’s midterm elections, said Alex Brill, a research fellow at the American Enterprise Institute for Public Policy Research.
“Should Democrats retain control of the House, Congressman Neal will hold a very senior position and may attempt to become chairman of the tax writing committee,” said Brill. “If this were to occur, the risk of this legislation for foreign-based reinsurance companies would be significant.”
Obama has been making his final campaign-trail pitch to voters to help the Democrats win votes. The Republicans have predicted an historic election that sweeps incumbents from office.
‘Just a Scam’
Liberty Mutual Group Inc., the fifth-largest U.S. property and casualty insurer, supports the bill, saying it will “preserve American jobs” and stem the flow of capital offshore.
Without legislation, foreign-owned U.S. insurance companies will continue to have “an unfair competitive advantage,” the Boston-based insurer said July 14 in written testimony to the House Ways and Means Subcommittee.
The Neal reform would create a “level playing field,” said McIntyre of Wayne State University.
“The bill helps close a loophole that has created an enormous bias in favor of foreign insurers,” he said. “Affiliate reinsurance is just a scam as it has no economic purpose other than tax avoidance. In a sane world, it would be classified as evasion.”