I love it when I hear that mental “click”! I’ve been squirreling away several important news links like pieces of a jig saw puzzle trying to figure out how to make them fit and be understandable to a broader audience. This post is partially in response to the recent guest column by Eli Lehrer of the Competitive Enterprise Institute that ran in the Sun Herald last Thursday. The S/H was no doubt attracted to the piece by Mr Lehrer’s use of scare tactics including yet more premium increases for our private/industry run insurer of last resort and it is with that incredible piece of propaganda that we start:
As it girds for the busy months of hurricane season, Mississippi has plenty to worry about. Homeowner’s insurance coverage remains difficult to find and expensive for those who have it.
If that weren’t enough, some members of Congress now want to change the tax law in a way that would drive already expensive coastal Mississippi insurance premiums even higher.
The proposed new tax will impact “offshore affiliated reinsurance” — a rather esoteric product that matters a lot in Mississippi. Explaining why requires some background. To begin with, all sizeable primary insurers — companies like Allstate, Farm Bureau, Nationwide and State Farm — buy insurance of their own, reinsurance, to help cover particularly large losses and diversify their own portfolios.
Particularly in high-hurricane-risk areas like the Gulf Coast, many companies find it advantageous to buy some or all of their reinsurance from a parent or sister company that they know won’t abandon them following a major storm.
Now we slabbers well know the reinsurance examples he uses have a grain of truth to them and indeed the domestic insurers Lehrer mentions sometimes use reinsurance but generally not the high priced kind used by our windpool. Allstate, for example, reported on page 35 of their last quarterly financial statement filed with the SEC, a mere $141 million of property and casualty reinsurance premiums for Q1 2009. (Considering Allstate measures it assets in billions of dollars $141MM is a very small amount). Readers interested in greater detail on the interplay of reinsurance and catastrophe payouts should start with this link, which I featured in this post. From there we have posts on the trend to and use of insurance linked securities in lieu of traditional reinsurance treaties (and the subprime problems contained therein) here, here, here, here, and here. Not to be out done by the people in Bermuda, State Farm, among others, created their own Bermudan reinsurance subsidaries to play the tax game.
Suffice it to say Slabbed is calling bullshit on Eli Lehrer. Not only is his opinion piece propaganda of the type that would make Joseph Goebbels proud it is insulting he actually pretends to care what people here pay for wind premiums (or even know that people well off the beach pay huge amounts for wind insurance here). The CEI is working equally hard to insure HR 1264, Gene Taylor’s multiple peril bill remains DOA with the Prez along with Ron Klein’s Homeowners Defense Act, which would allow the states to share Hurricane risk in a much bigger pool with better purchasing power. The CEI and Eli Lehrer are not above misrepresenting the issue either to get their way saying these bills are subsidies for the wealthy. What they don’t say is Mr Lehrer’s mouth is being rented by offshore Bermudan reinsurers that fund the CEI.
I left an abbreviated version of this post in a comment to the story. The comment that followed mine well illustrates why people here view these suits in a manner akin to child molesters. Simply put, the blue collar types that make up the vast majority of coastal Mississippi’s population have become the economic equivalent of slaves to Bermudan reinsurers that sell our private/industry run windpool. Unable to sell out and leave due to the astronomic costs of wind insurance, the people instead have to work longer simply to pay the monthly escrow payment, which is generally larger than the P&I reduction of the related mortgage.
Either way those of us that live on America’s Coastline are going to get screwed. If Congress doesn’t want us living on the coastlines then they should just pay us to move. Please pay my house off and give me moving money, I’d be gone…..
I often wonder who will work the refineries, the shipyards, the military bases and the chemical plants once everyone has moved hundreds of miles inland but that is another post. Far from wealthy and very unlike a typical Bermudan reinsurer like Hiscox which continues to report very strong earnings and huge top line growth, the average coastal Mississippian is stretched to the limit and then some paying for Robert Hiscox’s huge salary (and funding those Sierra Club donations):
Hamilton, Bermuda (11 May 2009) — Hiscox Ltd (LSE:HSX), the international specialist insurer, today issues its Interim Management Statement for the first three months of the year to 31 March 2009.
The Group’s readiness to take advantage of changing markets has led to strong growth. Overall premium income was up 51% to £486.5 million (2008: £321.3 million). At constant exchange rates year on year growth was 25%.
Robert Hiscox, Chairman, commented:
“As we said before, the tide turned for reinsurance rates and we are taking full advantage of this. As always we need to balance our catastrophe book with more stable local business and it is pleasing to see the steady growth in the UK, Europe and the USA.”………..
Catastrophe exposed reinsurance is the largest line of business for Hiscox and rates for US hurricane exposed areas are very firm, having seen increases ranging from 10 – 50% over the last year. Our energy business is also seeing rate rises in excess of 50% for Gulf of Mexico windstorm exposed business. Other energy rates have increased at an average of 10%. In both reinsurance and energy we are achieving tighter terms and conditions at higher thresholds, which makes the overall premium versus exposure very attractive. In other product lines, rates are broadly stable. However with a continued tightening of capacity in the market, increasing reinsurance costs, and lower yields on investments, we expect to see gradual rate increases throughout the year.
Hiscox Global Markets
Hiscox Global Markets has seen a 43% rise in gross written premiums to £254.7 million (2008: £177.7 million), assisted by favourable exchange rates. This growth is mainly driven by hard market conditions in the reinsurance and energy sectors. There are clear signs this will continue as we approach the main reinsurance renewal periods of June for Florida, and July for other USA business. Activity for our other lines of business, including property, specialty and global errors and omissions, is as expected.
We recently announced the rebranding of Hiscox Global Markets to Hiscox London Market, a vital centre of underwriting excellence in the Group now led by Russell Merrett.
Hiscox Bermuda is taking advantage of hardening rates in reinsurance and has doubled gross written premium to US$121.6 million (2008: US$61.3 million). The growth is due to increased rates in the US catastrophe and risk excess markets, and also to excellent opportunities in the pro-rata reinsurance and Industry Loss Warranty markets. Hiscox Bermuda has benefited from last year’s rating upgrade to A from A.M. Best.
With earnings like those it is easy to understand why reinsurers based in tax havens like Bermuda don’t want to pay US taxes on their US based premiums and it is there that our domestic insurers enter the fray. Consumers are simple pawns in this big money game but in this instance it seems to me our interests as US taxpayers is better served by closing loopholes and collecting more taxes not less. The Coalition for a Domestic Insurance Industry website looks like something a first grader learning html would put together. The companies signing the letter and executive summary include some of the finest TARP recipients this nation’s capitalist model could produce but they also do a decent job explaining the arcane rules related to the taxation of insurance companies and why Bermudan reinsurers should pay taxes on their US based profits:
The Coalition strongly supports H.R. 6969 and the Senate Finance Committee staff discussion draft. This legislation is essential to close a tax loophole for foreign-based insurers that costs the Treasury billions of dollars in tax revenues annually and provides them with a significant, unfair advantage over the U.S.- based property and casualty (P&C) insurance industry.
The loophole. Domestic insurance companies with foreign-based parents can escape U.S. tax on much of their underwriting and investment income derived from policies covering U.S. risks merely by reinsuring their U.S.-written business with a foreign affiliate in a low-tax or no-tax jurisdiction. By contrast, domestically controlled insurers must pay current U.S. tax on all profits from similar policies.
This provides foreign groups a significant and unfair tax advantage over domestic groups in attracting capital for writing insurance to cover U.S.-based risks. The legislation is necessary to preserve U.S. tax on profits from U.S. business activity and to treat all insurance of U.S. risks comparably.
Different purposes served. Third party reinsurance and related party reinsurance serve different purposes and should not be confused. Third party reinsurance is an arm’s length arrangement that shifts insurance risk (and a portion of potential profits) to the third party reinsurer. This helps to ensure that the financial liability for catastrophes or a series of large (or unexpected) losses does not overburden one company and adds overall capacity to the market. Related party reinsurance, by contrast, does not shift risks outside the group and thus has little to do with adding capacity for catastrophe coverage. Rather, it is used as an alternative to a capital infusion to manage intra-group capital and to provide ratings support for subsidiaries. For foreign-based groups, it is also used to strip income overseas to avoid U.S. tax liability. There is no reason foreign based groups should obtain a competitive tax advantage over U.S.-based companies for using this capital management technique.
Like events in Florida this little industry fight will require several bags of popcorn as the slabbed watch the truly wealthy fight for the spoils of US government largesse while enduring wind insurance premiums that alone amount to almost 4% of the value of their houses annually.
Oh yeah, Stan Tiner and the rest of the Sun Herald editorial board, welcome to slabbed. If we’re lucky, the parties involved in this industry squabble will utilize the Rochambeau technique to resolve this legislative dispute while the slabbed continue to toil in the fields for their Bermuda based post Katrina financial partners.