Seeking Business, States Loosen Insurance Rules

Today, all it takes is a trip to Vermont.

Vermont, and a handful of other states including Utah, South Carolina, Delaware and Hawaii, are aggressively remaking themselves as destinations of choice for the kind of complex private insurance transactions once done almost exclusively offshore. Roughly 30 states have passed some type of law to allow companies to set up special insurance subsidiaries called captives, which can conduct Bermuda-style financial wizardry right in a policyholder’s own backyard.

Captives provide insurance to their parent companies, and the term originally referred to subsidiaries set up by any large company to insure the company’s own risks. Oil companies, for example, used them for years to gird for environmental claims related to infrequent but potentially high-cost events. They did so in overseas locations that offered light regulation amid little concern since the parent company was the only one at risk.

Now some states make it just as easy. And they have broadened the definition of captives so that even insurance companies can create them. This has given rise to concern that a shadow insurance industry is emerging, with less regulation and more potential debt than policyholders know, raising the possibility that some companies will find themselves without enough money to pay future claims. Critics say this is much like the shadow banking system that contributed to the financial crisis.

Aetna recently used a subsidiary in Vermont to refinance a block of health insurance policies, reaping $150 million in savings, according to its chief financial officer, Joseph M. Zubretsky. The main reason is that the insurer did not need to maintain conventional reserves at the same level as would have been required by insurance regulators in Aetna’s home state of Connecticut.

In other big transactions, companies including MetLife, the Hartford Financial Services Group, Swiss Reinsurance, Genworth Financial and the American International Group, among others, have refinanced life, disability and long-term-care insurance policies, as well as annuities.

For the states, attracting these insurance deals promotes business travel and creates jobs for lawyers, actuaries and other white-collar workers, who pay taxes. States have also found that they can impose modest taxes on the premiums collected by captives.

For insurers, these subsidiaries offer ways to unlock some of the money tied up in reserves, making millions available for dividends, acquisitions, bonuses and other projects. Three weeks after Aetna’s deal closed, the company announced it was increasing its dividend fifteenfold.

And as changes to the nation’s health systems are phased in, such innovations might even help hold down the cost of insurance for consumers, much as selling pooled mortgages to investors has made buying a home less expensive.

The downside, though, is that the states are offering a refuge from other states’ insurance rules, especially the all-important ones requiring companies to have sufficient reserves. California, for one, has already chosen not to try to lure such businesses. “We are concerned about systems that usher in less robust financial security and oversight,” said Dave Jones, the California insurance commissioner.

While saying that he wanted to remain open to innovation, Mr. Jones added, “We need to ensure that innovative transactions are not a strategy to drain value away from policyholders only to provide short-term enrichment to shareholders and investment bankers.”

The cost of some of the deals has been considerable. In 2008, MetLife used a subsidiary in Vermont to handle a crucial $3.5 billion letter of credit, with help from Deutsche Bank, because the subsidiary was not subject to the same collateral requirements as in New York. The trade immediately bolstered MetLife’s balance sheet, helping the company to endure that year’s market turmoil without government assistance. But MetLife agreed to pay Deutsche Bank $3.5 million a year for 15 years, according to internal documents obtained by The New York Times — locking itself into high costs for years.

MetLife said its transaction was in keeping with industry rules and norms, and Deutsche Bank declined to comment.

Another issue is public oversight. State regulators normally require insurance companies to make available reams of detailed information. A policyholder can find every asset in an insurer’s investment portfolio, for instance, or the company the carrier turns to for reinsurance. But not if the insurer relies on a captive. The new state laws make the audited financial statements of the captives confidential.

 

Parties Seeking to Blame Each Other’s Policies for Gas Prices

President Obama touched off the latest flurry with a letter to Congressional leaders last week calling for the repeal of $4 billion a year in tax incentives for domestic oil and gas production, saying the industry was doing very well, thank you, and needed no help from the government. Republicans responded that the president’s proposal would only raise the cost of production and the price of gasoline, which now tops $4 a gallon in many parts of the country.

Both parties are planning legislative maneuvers this week to try to caricature their opponents as either in the pockets of the oil companies or hostile to domestic energy production.

The debate may generate a fair amount of noise that provides one side or the other with a temporary political advantage but is unlikely in the end to have an appreciable impact on gasoline prices.

“Every time Americans have to shell out $60 or $80 to fill their tanks, they mutter under their breaths about government and it puts pressure on Congress and the White House to do something,” said Byron L. Dorgan, the former Democratic senator from North Dakota who is now co-chairman of an energy project at the Bipartisan Policy Center in Washington. “But it’s just howling at the moon. The basic laws of supply and demand haven’t changed.”

House Speaker John Boehner unwittingly gave the Democrats a political opening to pile on the oil companies by saying in an interview with ABC News last week that oil companies should “pay their fair share in taxes” and that Congress ought to reconsider some of the tax incentives they enjoy. He has since walked away from those remarks and said that raising any taxes would choke off the economic recovery and lead to higher prices of gasoline and other goods.

His comments came as lawmakers from both parties were home on recess, hearing a torrent of constituent complaints about the high cost of gasoline at the same time major oil companies were reporting near-record quarterly profits. Exxon Mobil, the world’s largest oil company, said it earned $10.7 billion in the first three months of the year, and other companies reported similarly robust earnings.

Mr. Obama seized on the opportunity to try to deflect some of the heat he has been feeling as gas prices have steadily climbed. He noted wryly at a political fund-raiser last weekend that his poll numbers tend to go up and down with pump prices, even as he admitted he had no “silver bullet” to bring those prices down in the short term. But he found ammunition in the tax breaks the oil industry has enjoyed for decades, portraying the industry as undeserving of them at a time when government needs all the revenue it can get.

“As we work together to reduce our deficits,” Mr. Obama said in a letter to Congressional leaders last week, “we simply can’t afford these wasteful subsidies.” Mr. Obama says the money saved should be used to finance more research into clean energy alternatives — a proposal he has made in his last two budget requests that has largely been ignored.

“The odds are low that the tax repeal goes through as a stand-alone measure, but you might see it as part of a broader deal,” said Michael A. Levi, an energy and environment specialist at the Council on Foreign Relations. He said it was in Mr. Obama’s interest to keep the issue alive both to align Republicans with the unpopular oil companies and to use as leverage as new budget negotiations begin.

Harry Reid, the Senate Democratic leader, said he would press for a vote as early as next week on repealing the tax subsidies. Democrats hope to paint Republicans who vote against the plan as tools of the industry.

“Now is not the time to stand idly by while large oil and gas companies get billions of dollars in tax breaks,” said Senator Max Baucus, Democrat of Montana and chairman of the finance committee. “Now is the time to take concrete steps toward cleaner, more affordable, domestically produced energy.”

The measure could well pass in the Democratic Senate, although some Democrats from oil-producing states, like Mary Landrieu of Louisiana and Mark Begich of Alaska, are likely to oppose it.

But it has little chance of even coming to a vote in the Republican-run House, where Speaker Boehner is orchestrating a fresh chorus of “drill, baby, drill” with a series of votes on bills to allow new oil and gas exploration in the Gulf of Mexico and off the coast of Virginia.

“Our goal is to expand the supply of American energy to lower gas prices and create jobs,” said Michael Steel, spokesman for Mr. Boehner. “Raising taxes would have the opposite effect.”

Neither the Senate tax measure nor the House drilling bills is likely to become law because of the fierce partisan calculus of the current Congress. But some Republicans, including Representative Paul Ryan of Wisconsin, the party’s leader on budget matters, have left open the door for rethinking a range of government tax breaks as part of an agreement on the federal budget and deficit ceiling.

Some conservatives oppose energy subsidies of all sorts — including those for ethanol, wind, nuclear and solar power — and would be willing to see them all repealed as part of a reform of the business tax code.

Oil industry tax breaks — some of them dating back a century — have been debated for years but have survived every elimination attempt. According to a breakdown by the nonpartisan Joint Committee on Taxation, oil companies receive about $4 billion a year in federal subsidies and can avail themselves of tax breaks at virtually every stage of the prospecting and drilling process.

One lingering provision from the Tariff Act of 1913 — enacted to encourage exploration at a time when drilling often led to dry holes — allows many small and midsize oil companies to claim deductions for tapped oil fields far beyond the amount the companies actually paid for them.

Another subsidy, devised by the State Department in the 1950s, allows U.S.-based oil companies to reclassify the royalties they are charged by foreign governments as taxes — which can be deducted dollar-for-dollar from their domestic tax bill. That provision alone will cost the federal government $8.2 billion over the next decade, according to the Treasury department.

David Kocieniewski contributed reporting from New York.

 

Seeking Clues in Goldman’s Succession Plan

The speculation may be more than idle gossip for bored bankers. Two friends of Mr. Blankfein, 56, say he has told them since last summer that he is exhausted from leading the company through the financial crisis and that he would consider stepping down when he could do so gracefully, without the move appearing to be anything but voluntary.

The choice of Goldman’s next chief could signal the firm’s direction and influence the broader thinking on Wall Street, where Goldman often sets the tone.

For decades, Goldman’s leaders came from its investment banking unit, which provided business strategy and merger advice to blue-chip companies. Mr. Blankfein, in contrast, was a commodities trader, and his ascension furthered the company’s makeover as a trading powerhouse.

To be sure, Mr. Blankfein may decide to stay a while, despite the chatter to the contrary. And as far as Goldman is concerned, Mr. Blankfein is not going anywhere. A spokesman for the firm, Lucas van Praag, declined to comment other than to note that Mr. Blankfein “says he has never felt so energetic and has no plans to retire.”

Even with its reputation tarnished by a Securities and Exchange Commission lawsuit last year, Goldman remains the world’s most powerful investment bank, with its own mystique on Wall Street. It is a training ground for government officials and hedge fund managers alike, and its powerful alumni network extends its influence.

While other eminent financial companies, like Merrill Lynch, were crushed by the collapse of housing prices and lost of tens of billions with a wager on subprime mortgage debt, Goldman actually spotted the threat early and made a bet against the housing market, racking up sizable gains.

Even as its traditional archrival Morgan Stanley struggles with a stagnant stock price, Goldman shares are up more than 20 percent over the last two years. When Goldman reports earnings Tuesday, analysts expect a profit of about $443 million, according to a consensus estimate from Thomson Reuters, although the latest results will be depressed by the bank’s plans to repurchase Warren E. Buffett’s $5 billion investment.

Like George Steinbrenner in his stewardship of the New York Yankees, whoever is at the top of Goldman cuts an outsize figure among peers. Two recent chiefs — Robert E. Rubin and Henry M. Paulson Jr. — went on to become secretary of the Treasury, and another, Jon S. Corzine, later was a senator from New Jersey, and then governor of the state.

What is more, Mr. Blankfein, who assumed the top job in 2006, is one of only two chief executives of major banks who were at the helm before the financial crisis and remain in charge today. Jamie Dimon of JPMorgan Chase is the other.

The top candidates to succeed Mr. Blankfein, according to three people briefed on the situation, are all company veterans, and they illustrate Goldman’s global reach.

One of them, Michael S. Sherwood, is British and oversees a broad swath of the firm’s international business from London. Another, J. Michael Evans, a Canadian and winner of an Olympic gold medal in rowing, is chairman of Goldman’s Asian business. (Mr. Sherwood and Mr. Evans are both vice chairmen of the firm.)

The final contender, Gary D. Cohn, Goldman’s president and chief operating officer, is Mr. Blankfein’s top deputy in New York.

No favorite seems clear, but that is not unusual at Goldman. Several former partners and analysts said they would be surprised to see an outsider selected. And whether or not Mr. Blankfein leaves soon — his urgency seems to have faded with the passing of the storm around Goldman, two people close to him said — he has been there long enough to justify focusing on a succession plan, analysts said.

Roger Freeman, a financial analyst at Barclays Capital, said Mr. Blankfein might wait to see his firm through the final negotiations with Washington over new regulatory rules for the banking industry in the second half of 2011, before handing Goldman to a younger team in 2012. “This has been an exhausting period,” Mr. Freeman said. “It would not be a surprising time to see a change.”

As the economy stumbled, Goldman’s success brought harsh public criticism, as lawmakers and even some clients complained that Goldman was no longer putting clients first.

 

Brazilian President Visits China Seeking Closer Strategic Partnership

 VOA News ?April 11, 2011

Brazilian President Dilma Rouseff is in China at the start of a six-day visit intended to deepen fast-growing economic ties between the two emerging nations.

Rouseff will also attend a summit Thursday of leaders from the so-called BRICS countries, which also include Russia, India and South Africa.

Trade and economic issues are expected to dominate Rouseff's meetings with Chinese President Hu Jintao, Premier Wen Jiabao and other top officials.? China has recently supplanted the United States as Brazil's largest trading partner and is now its biggest source of foreign investment.

China's official Xinhua news agency quoted Rouseff saying in an interview that she wants to expand Brazil's strategic partnership with China.? She told Xinhua the countries are strategic partners "in all areas" and that the relationship provides benefits to both countries.

[All VOA blogs...]

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