In a conference call with investors and reporters made last week to announce the purchase, officials with both companies declined to specify which offices would be closed, and Validus’ communications office in New York did not return a call from The Coast. But employees in Halifax have been told to expect lay-off notices in a matter of weeks.
The reinsurance industry issues insurance for insurance companies. In the wake of Katrina and other hurricanes in 2005, the industry had to pay out hundreds of billions of dollars, and so premiums went up. At the same time, the American housing bubble was pushing trillions of dollars into speculative markets and hedge funds, and about a dozen new reinsurance companies—referred to collectively as “the class of 2005,” and including both Flagstone and Validus—popped up in Bermuda, where regulation is weak and American bankers can park their money to avoid US taxes.
These newest reinsurance companies speak of being in the “catastrophe industry.” Using sophisticated computer modeling of impending disasters—an active hurricane is called a “live cat”—they bet on the post-catastrophe payouts by insurance companies. “It works like this,” explains one Flagstone employee. “Say there’s a hurricane coming up the Gulf of Mexico, and all the weather service models say it’s going to hit Texas, but our models show that it’s going to hit Florida. So we go to the Texas insurance companies and sell them five-day policies to cover what they think are their losses are going to be. We collect money, but don’t have to pay any out.”
Leaving aside the moral issues of having superior computer modeling than the weather services and not publicizing that data, there’s enormous money to be made through these kinds of bets.
Here in Nova Scotia, by 2005 economic development managers thought the financial boom would last forever, and wanted to get a slice of the reinsurance pie. They held Ireland up as the template for Halifax becoming a financial services centre, and to jumpstart this fantasy millions of dollars in payroll rebates were issued to financial firms looking to set up back offices. Flagstone has received two three-year rebates. In 2005-08, it received $559,342 in payroll rebates, and from 2008-11 it received $966,872 in payroll rebates plus a $156,000 “recruitment incentive.”
“It is important to recognize that payroll rebates are incentives used to attract new international businesses to Nova Scotia and to help Nova Scotia companies looking to expand,” wrote Nova Scotia Business, Inc. spokesperson Cindy Roberts in an email to The Coast. “A company must first create a pre-determined number of jobs (based on audited hours) at a minimum average salary, before they can apply for their rebate. This process ensures that new jobs are created and tax revenue is generated for the province. At the end, there is no cost to the taxpayer.
“The tax revenue generated by the new jobs created is always higher than the amount paid out by a payroll rebate,” continued Roberts. “Payroll rebates offer a strong financial return for Nova Scotia and they offer a competitive tool to attract new international investment that can help attract new immigrants, create new jobs for graduates, and infuse new skills and knowledge into our economy.”
But payroll rebates skewer the tax structure as written into the tax code, effectively lowering the rates on the selected companies and therefore increasing the tax burden onto other companies and individuals. The rebates also create an measure of arbitrary, selective taxation decided by bureaucrats, rather than collectively through elected representation.
Critics additionally point out that the rebates have been used to bolster unsustainable industries. Millions of dollars in payroll rebates were given to firms establishing call centres in rural Nova Scotia, only for those firms to relocate to The Philippines and India when the rebates ran out. Likewise, millions were dumped into the financial service industry, just as the global financial industry imploded. The labour force is disrupted, and there’s no long-term economic benefit to the province.