This is sure to piss everyone off>
Lightly Taxed Insurers Aim to Tap TARP!>
Several of the biggest U.S. life-insurance companies are seeking a piece of the taxpayer-funded $700 billion federal bailout program, but pay little in income taxes themselves, securities filings show.
Consider Prudential Financial Inc., which last week announced that it is seeking an unspecified amount of aid through the federal Troubled Asset Relief Program, or TARP.
Despite reporting pretax profits to shareholders of nearly $25 billion over the past decade, Prudential has paid just $1.3 billion in taxes to federal, state and foreign governments in that period, filings show, for an effective tax rate of 5.1%. That compares with a statutory combined federal and state corporate income-tax rate of about 39.5%.
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Prudential said in a statement that the company "pays its fair share of all applicable taxes and adheres to all applicable tax laws." A company spokesman said its taxes should have no bearing on its participation in TARP. He declined to comment on why Prudential was applying for assistance. Like many life insurers, Prudential has seen its investment portfolio hurt in recent months.
Other insurers applying for federal bailout money also pay taxes at low rates on publicly reported profits. Hartford Financial Services Group Inc., which estimates it is eligible for between $1.1 billion and $3.4 billion in Treasury money, has paid $1.4 billion in taxes over the past decade, an effective rate of 7.7%.
Lincoln National Corp. has paid taxes at a rate of 15.5% over the 10-year stretch. Genworth Financial Inc., a spinoff of General Electric Co., has paid taxes at a rate of 11.4% during the five years it has reported independent earnings.
The insurers aren't doing anything improper. They are benefiting from a variety of provisions in the tax code intended to favor the industry.
The risk to the overall economy of big life insurers running low on capital if the market continues to deteriorate may make government assistance necessary -- though it is unclear whether the insurers will receive funding. Only $15 billion remains unallocated from the initial $350 billion authorized by Congress.
The Treasury released the latest list of recipients Tuesday, and it didn't include any of the insurers. It hasn't requested the remaining $350 billion, which Congress could refuse to release.
Some critics contend any bailout money should be accompanied by changes to boost the industry's future tax rates.
The life-insurance companies "want to be subsidized when they're making money and be bailed out when they're not," said Robert McIntyre, director of Citizens for Tax Justice, a liberal tax-policy research group in Washington, D.C. "If they're going to get a bailout I think they should promise they'll start paying taxes in the future."
Frank Keating, the president and chief executive of the American Council of Life Insurers, said: "If the U.S. government is going to intervene to provide liquidity to the nation's economy, then...the life-insurance industry should be on an even plane" with other financial-services industries. A spokesman for the trade group said any government funding would be repaid.
In general, the commercial banks and investment banks that have received the bulk of federal bailout money have much higher effective tax rates than life insurers.
The Wall Street Journal calculated effective tax rates by examining the cash companies actually paid to governments over the past decade, as disclosed in securities filings compiled by Standard & Poor's Compustat, and compared that with pretax profits reported to shareholders. The cash taxes often are far less than the tax provisions included in income statements, largely because of more-generous rules governing the way certain deductions are treated in the tax code.
For example, life insurers get to immediately deduct on tax returns the entire cost of signing up new policyholders. But when it comes to reporting profits to shareholders, those expenses are spread out over several years, or amortized.
Insurance companies also benefit from rules that allow them to take tax deductions for additions they make to reserves.
The insurance industry as a whole has been the single biggest lobbyist on tax issues over the past decade, spending $918 million to influence Congress on the issue, according to the Center for Responsive Politics.
The Journal's method was based on one developed by three accounting professors, Michelle Hanlon of the University of Michigan, Scott Dyreng of Duke University and Ed Maydew of the University of North Carolina. The trio published a paper this year arguing that the "long run cash effective tax rate" is the best measurement of a company's true tax obligations, in part because it eliminates distortions from a single year's swings.
A Genworth spokesman said the deductions arising from commissions paid to agents that sign up new policyholders were the single biggest factor behind its low taxes. "The company is audited annually and pays all of its tax obligations," he said.
The Prudential spokesman disputed any characterization of its low tax rates as a subsidy. The company attributed its tax rate to a number of factors, including foreign earnings subject to different tax rules; tax losses generated before the past decade; and an overfunded pension plan, which creates nontaxable income.
Hartford attributed some of its tax savings to the ownership, largely through its property and casualty businesses, of $11 billion in municipal bonds, which generate tax-free interest. Lincoln didn't respond to requests for comment.
In recent months, life and property and casualty insurers have taken a big hit from turmoil in the bond markets, where much of their cash is invested. In the third quarter, the industry took tens of billions of dollars of realized and unrealized losses.
Some insurers are buying savings-and-loan companies to become eligible for the bailout, which was initially targeted at banks and similar financial institutions.
online.wsj.com |
