Insurers, Brokers Capitalize on Taxing Situation

If you believe Aon Corp. (NYSE: AON), the world’s largest insurance broker, a foggy day in London Town is better than a windy one in Chicago. Following in the footsteps of the third-largest insurance broker, Willis Group (NYSE: WSH), Aon is moving its corporate headquarters to the United Kingdom.

It claims that crossing the pond moves it closer to “emerging markets” like the Far East. But if you look at a world globe, it doesn't add up. If Aon really wanted to be nearer to the Far East, it should move its headquarters from Chicago to sunny California. So what is the real reason? It’s the taxes, stupid!

And it appears that Aon and the insurance industry aren't the only ones who have discovered the holy grail of going abroad. The news media has been fixated on Apple Inc. (Nasdaq: AAPL) for shuffling its earnings through multinational loopholes to save $2.4 billion in taxes. But insurers have this move down pat. Cash-rich reinsurers -- the companies that back up domestic property casualty insurers such as Allstate (NYSE: ALL) when they get into trouble -- are often owned by US hedge funds that have already parked their money in offshore havens like Bermuda.

Analysts tell the New York Times that Aon can move foreign revenue into the UK without being exposed to US taxation, which could raise earnings by 40 cents a share per year. Nell Minow, a shareholder rights activist, told the paper that such an earnings boost “is not to be sneezed at.”

Should we say, “Bless you” or “Ouch”? Not paying taxes is not an option for most of us, yet insurers, at least non-US ones, seem to be getting away with it.

Why didn’t the empire strike back? New York State, which is headquarters to many of the insurers that have stayed put, instead opened the doors even wider to non-US insurers by reducing the amount of collateral they have to put up to do business there. This move may help coastal residents who've had their houses demolished by hurricanes get their insurance payouts faster, but it won’t add a dime to the Treasury’s nearly empty coffers.

The only voice raised in America’s defense belongs to Bill Berkley, who founded William R. Berkley Corp. (NYSE: WRB) in 1967. His firm handles property casualty insurance but also writes reinsurance. That puts him in direct (and, he says, unfair) competition with the boys in knee socks and Bermuda shorts.

The insurance publication Reactions called Berkley “Bermuda’s worst enemy,” because he joined with Rep. Richard Neal, D-Mass., to introduce a bill that would close the Bermuda “loophole” that allows foreign companies to deduct payments made for reinsurance to their offshore counterparts. Insurance Journal called him “Battleship Berkley” and said both sides have fired salvos in this battle, though “it’s still unclear which one will sink.”

As a chain of islands in the Atlantic, Bermuda would be tough to sink. Another alternative, suggested by the Heartland Institute, is to take the huge cash kitties insurers use to pay claims “onshore” in places like the District of Columbia and write an exemption to the federal Tax Code so they no longer have to hide the money. Others, like former Allstate CEO Ed Liddy, say we should set up a special fund into which insurers would put untaxed money for the day when the next multibillion hurricane comes roaring through.

Any solution would be better than the current situation, which is sending our companies and our insurance premiums to more favorable tax climates.