P&C insurers cheer a lower corporate tax rate, but companies with offshore reinsurance affiliates may be hurt.
Property and casualty insurers have begun to assess the impact of the recently enacted tax law on their business, and the early reviews are generally favorable. “I think the industry came out amazing well,” David Sampson, President and CEO of the Property/Casualty Insurers Association of America, told Insurance Journal in a video interview. “Most of the issues are going to be the transition issues from the old system to the new system. [But] I think the industry is pretty well pleased.”
Jay Gelb, Barclays Managing Director, echoed those sentiments at a recent P&C conference sponsored by the Insurance Information Institute, telling a panel that the tax law would have “a clear bottom-line benefit for U.S.-domiciled companies.” Gelb pointed to Berkshire Hathaway, which he estimated would see a $34 billion gain thanks to a drop in its deferred tax liability. That, in turn, would boost the insurer’s earning power by 12%, he said
Of course, a complex new tax code will have far-reaching effects on P&C insurers. All agree that a lower corporate tax rate benefits P&C insurers, but some other stipulations could necessitate significant changes to many insurers’ operations.
Industry analysts particularly cheered the reduced corporate tax, which fell from 35% to 21%. Meyer Shields, an analyst with Keefe Bruyette & Woods, Inc., told Business Insurance that a lower tax rate translates into higher pretax profits for U.S. companies that don’t have offshore affiliates.
Shields added, however, that a lower tax levy also affects how companies calculate taxes on deferred tax assets. As a result, companies with large amounts of deferred tax assets, including losses taken against future earnings, must adjust their balance sheets to reflect the lower rate.
The Hartford did just that when calculating its fourth-quarter financial results, which it estimated would be reduced by $850 million because of the 21% rate placed on its net deferred tax asset holdings. The insurer also announced a $117 million after-tax hit from catastrophe losses, mostly due to wildfires in California.
Nevertheless, The Hartford sounded bullish on the long-term impact of tax reform. “Although the new U.S. tax law reduces the company’s net deferred tax asset position, the company expects a net favorable future economic impact from both the lower corporate income tax rate and the repeal and refunding of the corporate alternative minimum tax credits,” it wrote in a statement.
Other provisions may greatly benefit P&C insurers as they determine net operating losses. An article in the National Law Review explains that the final tax bill enables a P&C insurance company to carry losses back for two years and forward for 20 years. P&C insurers can also apply losses against 100% of taxable income.
The new tax code eliminates a long-derided loophole that enabled foreign insurance companies to escape taxes on income generated in the United States by shifting those profits to jurisdictions with lower taxes, a move that many in the industry believe will make domestic insurance companies more competitive on the international stage. Combined with the lower U.S. corporate tax rate, the “perception now, in the industry, may be that they feel they are more competitive with their foreign rivals,” Jason Diener, an attorney with Wilson Elser Moskowitz Edelman & Dicker, L.L.P., told Business Insurance.
For offshore insurers and reinsurers, however, Gelb predicted a neutral to slightly negative impact. Shields agreed, saying that insurers with offshore business affiliates in places like Bermuda may be forced to restructure their operations as those deals become less financially attractive.
As the National Law Review explained, U.S. P&C carriers that set up overseas reinsurance entities may have to pay a minimum tax required under the new Base Erosion and Anti-Abuse Tax (BEAT) provision that essentially closes the offshore loophole.