Insurers Split as a Few Firms Get Big Tax Break

It began as an effort to win legitimate relief for the life insurance industry to protect it against an abrupt change in the tax laws.

But when the dust cleared last month after the final frantic hours devoted to writing the massive tax overhaul bill, only 15 big insurance companies were granted about $100 million in special tax breaks--and the rest of the industry was left out in the cold.

“It’s outrageous to give benefits to just 15 companies,” said Walter Gerken, chairman and chief executive of Pacific Mutual Life Insurance in Newport Beach, Calif., “for a problem that applies identically to hundreds of firms in the industry.”

The tangled tale of this “transition rule”--one of hundreds in the tax bill--comes down to a collision between economics and politics. And politics won.

O’Neill Role Reported

House Speaker Thomas P. (Tip) O’Neill Jr. (D-Mass.), according to congressional sources, had assured John Hancock Mutual Life that he would fully protect the Boston-based insurance giant from a new tax provision affecting discount bonds held in its portfolio.

When staff members discovered that the $100 million allocated for that transition rule was not big enough to spread around to the entire industry, O’Neill’s promise to John Hancock forced tax writers to handpick a number of favored firms instead of allocating more limited tax relief to the entire industry. Tax analysts estimated that it would cost $350 million to provide such treatment to all firms affected by the new law.

In most cases, those who received the benefit were those who had lobbied the issue heavily with well-connected lawmakers.

“It was a last-minute decision,” Rep. Pete Stark (D-Oakland) said recently. “I pushed for a generic rule (applying equally to everybody), but the staff was squeezed between a certain political commitment and a limited amount of money. They had no other way out.”

The rule would protect the favored firms from paying a 34% capital gains rate on discount bonds used to back life insurance contracts that were sold on the expectation that the existing 28% tax rate would be paid.

John Hancock, for example, is expected to save an estimated $10 million in taxes over the next five years, while Prudential would save $24 million, Aetna would receive a $15-million tax benefit and Transamerica would save $1 million. By contrast, Pacific Mutual estimates that it will lose $13 million because it has been left off the list, while other firms, such as Mutual of New York, Equitable Life and Travelers, also would lose varying amounts.

Efforts already have been started to overturn the decision, which was made so hastily that it could not be camouflaged with the obscure technical language typically used in the transition rules.

Indeed, the tax break is a key element in the dispute that is temporarily holding up sending the final bill to President Reagan for his signature. The Senate wants to modify a resolution to correct a number of drafting errors in the tax bill so that each insurance firm would be treated equally, but House tax writers appear bound by the promise to John Hancock.

Possible Future Action

If the insurance rule is not modified before the bill becomes law, several key lawmakers have vowed to press for changes next year as part of the expected technical corrections to the bill.

All of the firms that were singled out for the tax benefit--except John Hancock--are prepared to accept a modified rule offering a lesser amount of relief to all companies, according to spokesmen at the American Council of Life Insurance.

“We’re a little embarrassed by the whole thing,” said an executive for one insurance company included on the list.

Hancock officers say that, all along, they wanted a transition rule that would treat all firms alike but they are now unwilling to give up any of the $10 million they would receive under the tax break.

“We have no problems with a generic rule, but we think it would be grossly unfair to take our relief away from us,” said Jim Kenefick, a Hancock executive.

Company Denies Pledge

Executives at the Boston insurance company deny that O’Neill promised to fully protect Hancock against the tax change. “We communicated with most of the Massachusetts delegation on the issue,” said John McGillicuddy, the firm’s director of financial communications, “but we received no commitment, no pledge (from the Speaker).”

Although several major insurance firms did not obtain the tax relief, the dispute appears to have widened a split between the comparative handful of large insurance companies that control most of the industry’s assets and dominate its sophisticated Washington lobbying operations and the approximately 1,800 other smaller life insurance firms.

“The big guys tell us that we’re all in this together,” said a lawyer representing one Midwest insurance company, “but the little guys think they were sold down the river by the major companies on this case.”

However, not everybody agrees with that conclusion. “All the companies lobbying were united in favor of a generic rule,” a lobbyist for several big firms said, “but, when it became clear there was going to be a list because of the limited pool of money, some were simply more aggressive in getting themselves included.

“My gripe,” he added, “is those mid-sized companies that never paid attention but now have started breast-beating because they got left out.”