Some companies have been called economic traitors for seeking to lower their tax bills by moving overseas. But life insurers are accomplishing the same goal without leaving the country, saving as much as $100 billion in federal taxes, much of it in the last several years.
The insurers are taking advantage of fierce competition for their business among states, which have passed special laws that allow the companies to pull cash away from reserves they are required to keep to pay claims. The insurers use the money to pay for bonuses, shareholder dividends, acquisitions and other projects, and because of complicated accounting maneuvers, the money escapes federal taxation.
The Transamerica Life Insurance Company used a state law in Iowa last year to reap $1.8 billion from its reserves while also avoiding an estimated $640 million in federal taxes, according to company documents. The deal was unusually large but otherwise followed the general industry trend.
South Carolina, Arizona and Delaware are other states competing for these deals, hot on the heels of Vermont, which pioneered the idea many years ago. Hawaii is positioning itself as the venue of choice for fast-growing Pacific Rim insurers.
But other states have refused to go along, and in New York, the state’s financial services superintendent is appealing to Washington to block the practice.
“There is no sound policy reason why the American taxpayer should continue to subsidize certain life insurance companies in this fashion,” said Benjamin M. Lawsky, the New York State financial services superintendent, in a letter to Treasury Secretary Jacob J. Lew, a copy of which was obtained by The New York Times. Mr. Lawsky, who has declared a moratorium on the transactions in New York State, recommended that the Internal Revenue Serviceexamine the deals. A Treasury Department representative said it had received the letter and was reviewing it.
Transamerica’s chief financial officer, Michiel van Katwijk, said that its arrangement in Iowa had been reviewed by outside actuaries and auditors, as well as the I.R.S., and that it complied with the law.
“The I.R.S. reviews it, and it’s not contentious,” he said.
The pre-eminent goal of insurance regulation, which is handled state by state, is making sure all insurers operate safely, keeping enough money on hand to pay claims promptly. But some states allow them to reduce sharply the amounts they must hold, well below the level set by law, through the complex deals.
The deals are structured to let companies report their reserves as unchanged. This is where the tax savings comes in. By federal law, reductions in reserves are treated as taxable income. But because on paper it appears that the reserves have remained the same, the insurers do not pay the federal tax. The maneuvers are sometimes known as “shadow insurance.”
Mr. Lawsky has been calling the transactions “financial alchemy” because they seem to make money appear out of nowhere. But his moratorium has been unsuccessful, because so many other states want the deals. The National Association of Insurance Commissioners has hired a consultant to work on the issue, but agreement among the states remains elusive.
Iowa, for the moment, appears to have “state-of-the-art statutes and regulations.” That is what the Symetra Life Insurance Company said in explaining last January why it was moving its legal domicile from Bellevue, Wash., to Des Moines.
The Iowa insurance commissioner, Nick Gerhart, said his staff performed a quarterly analysis of all such transactions to make sure they were sound and that he could step in if anything went wrong. He added that Iowa had reviewed the laws of other states “to pick out what we thought were the best.” Iowa now requires both the parent and the subsidiary to be seated in Iowa for regulatory purposes, allowing his staff to “see through” the transactions “from start to finish.”