Strong Democratic opposition to the Neal bill surfaced in Washington yesterday as Bermuda's reinsurance industry came under the scrutiny of US lawmakers.

The bill — which aims to raise more taxes from some non-US reinsurers doing business in the US and which would impact several Bermuda companies — received a two-hour hearing before a subcommittee of the tax-setting Ways and Means Committee of the House of Representatives.

The Select Revenue Measure Subcommittee hearing was chaired by Richard Neal himself, the Massachusetts Democrat whose bill was being explored, along with a milder proposal from the Obama adminstration.

But Rep. Neal's fellow Democrat Kendrick Meek, of Florida, was outspoken in his opposition to the bill, because of the impact it could have on insurance premiums in his hurricane-prone state.

Rep. Meek said Floridians were "biting their nails hoping we don't have a hurricane", worried about the impact of the Gulf oil spill on their economy and the last thing they needed was a potential rise in insurance premiums.

Insurance companies were leaving Florida, he added, leaving more people to buy their insurance from the state insurer Citizens.

"This is not just a Floridian issue," Rep. Meek said. "All states that get hit by hurricanes will be affected by the passage of this legislation. Speaking to some of my friends in the Senate and the House, this is something that they would start to grab arms for, to try to make sure this legislation does not move forward, because of the effect it would have on Floridians and folks on the Gulf coast, who are putting up with more than they can bear right now."

Rep. Meek said he wanted his colleagues to leave the hearing with one thought: "What would be the impact on states like mine that are already on their knees?"

The Neal bill (HR 3424) proposes to tax affiliated reinsurance, which occurs when a US-based subsidiary cedes premiums earned in the US to its affiliate overseas in the form of reinsurance.

HR 3424 proposes to tax affiliated reinsurance that exceeds to industry average of reinsurance bought by domestic US insurers in different lines of business. This aims to raise nearly $17 billion over ten years.

The alternative, proposed in President Barack Obama's Budget plan, aims to bar companies from deducting reinsurance premiums that exceed 50 percent of the total premiums that the insurer received for each line of business, with the aim of raising $2.3 billion over ten years.

At the hearing, US Treasury Deputy Assistant Secretary for international tax affairs, Stephen Shay, outlined the Obama proposal and said: "The Budget proposal would reduce the incentive to use reinsurance to move profits offshore and thereby reduce US tax, by reducing the US tax benefit for doing so in cases in which a US insurer enters into excessive reinsurance with foreign affiliates not subject to US tax."

Mr. Shay then faced questions on the jobs and economic impact of the proposal.

Two of the US insurers who are the Neal bill's biggest supporters were represented. William Berkley, of the WR Berkley Corp. and John Degnan, of The Chubb Corp. testified.

Arguing against the bill was Sean Shaw, insurance consumer advocate for the state of Florida.

No one from Bermuda's largest industry testified. In his opening remarks Rep. Neal said seven CEOs of non-US reinsurers and two reinsurance trade groups had turned down his invitations to testify.

Mr. Shaw told the committee why he thought the bill was a bad idea.

"I'm concerned about American consumers," Mr. Shaw told the panel. "Consumers can expect to pay an additional $11 billion to $13 billion every year because of this tax increase.

"That would be a bad idea, even in the best of times. And that is a terrible idea now, in the midst of a serious recession and a disastrous oil spill."

Mr. Shaw said international reinsurers were "indispensable" for high-risk states such as hurricane-prone Florida and added that US companies bought around half of their $100 billion in reinsurance from overseas.

He quoted a study, commissioned by parties opposed to the bill, and carried out by the Boston-based economics consulting firm, the Brattle Group, which found that total supply of reinsurance would decline by 20 percent following enactment of HR 3424 and that Floridians alone would pay $800 million a year more in insurance costs.

Mr. Shaw quoted the Florida Insurance Council, which represents 200 insurers and insurance groups and whose membership is reliant on reasonably priced reinsurance programmes to be able to offer affordable insurance to customers. The group stated: "These tax proposals would increase costs that must ultimately be passed onto Florida families."

Mr. Degnan, Chubb's vice-chairman and COO, talked of the need to close a "tax loophole" that had become known as "the Bermuda Triangle".

This had caused a migration of insurance capital abroad to tax havens, he said, highlighting three Bermuda companies he said had "inverted" — Arch Capital, White Mountains and Everest Re.

"Bermuda, which is a no-tax jurisdiction, accounts for nearly two-thirds of the total related-party reinsurance of US insurance in 2008," Mr. Degnan said. "This data indicates that the principal incentive for this increased related-party reinsurance activity has been the avoidance of US income tax."

Mr. Berkley, WR Berkley's chairman and CEO, said more US insurance capital would migrate overseas if the law was not changed.

Referring to a published remark by John Berger, the CEO of reinsurance at Bermuda-based Alterra Holdings, Mr. Berkley added: "One of my foreign competitors put it more boldly, chastising US companies for not relocating to tax havens: 'If you're not in one of these [offshore] domiciles, shame on you. All things being equal, the tax advantage will win over time.'"

The tax advantage allowed Bermuda companies to achieve higher after-tax return on equity than their US rivals, Mr. Berkley said, attracting insurance capital abroad.

"The reinsurance industry has already been lost overseas to tax havens as a result of a tax advantage," Mr. Berkley added. "We should not sit idly by and let the same migration occur with our primary domestic insurance industry."

Answering a question from Connecticut Deomocrat John Larson on the Brattle Group's finding that US consumers would pay higher premiums if the legislation was enacted, Mr. Berkley said: "It's nonsense that the Neal bill would create a $12 billion increase in premiums."

The idea that increased cost for insurers would be passed on to consumers in the form of higher premiums was "an imaginary thing", he added. State regulators would not allow them to pass on the cost, he said. Mr. Berkley attacked the Brattle Group report as the "fallacious reasoning of a group of economists".

Mr. Shaw said there was "almost unanimous opposition to this proposal in the state of Florida" and added that insurance commissioners in other wind-prone Gulf states, such as Louisiana, Mississippi and Alabama, had also expressed concern over resulting higher premiums.

Oregon Democrat Earl Blumenauer asked how a tax measure that sought to gain $17 billion in extra revenue over ten years could result in $110 billion to $130 billion in higher premiums for US consumers. He asked Mr. Shaw: "Does this mean they charge low rates now because they pay lower taxes?"

Mr. Shaw pointed out that he was a consumer advocate and that this was a question of company policy.

Illinois Republican Peter Roskam said it was strange to see CEOs of American corporate giants lining up behind a revenue-raising proposal from the Democrats, adding the administration was pursuing a "massive revenue grab".

"Be careful of the partner you are dancing with," Rep. Roskam said. "Once you are done dancing, they're going to take you out onto the dance floor and say 'we are dancing all night long'. That is the insidiousness of this proposal."

While the US Government was increasing the tax burden on many US companies, through the different treatment of overseas earnings, it was claiming to be helping US companies in the case of reinsurance — with an increase in revenue for itself the aim in both cases, he said. If the Government really wanted to help US companies it would lower tax rates to allow them to become more competitive, he added.

Rep. Neal responded: "This is not to be construed as a revenue grab. When you consider that the war in Iraq was paid for with borrowed money and now the bill has become due — that's the real issue — and our veterans' hospitals and a host of other considerations. We need to address this issue perhaps in tandem with corporate tax rates."