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Insurance Industry Responds to GOP Tax Cuts

by Precise Leads

January 15, 2018

Despite some changes to reserving requirements, the new tax law will lower insurer’s tax bills.

The insurance industry has responded to the recent reforms of the nation’s tax code with mostly favorable reviews, with many industry analysts and trade group leaders convinced that the legislation will mostly benefit insurers and agents of all sizes.

“It seems to us that lower taxes are a net benefit to the industry,” Wells Fargo analyst Sean Dargan wrote in an analysis of the Tax Cuts and Job Act. While Dargan predicted reduced capitalization rates for life insurers resulting from lower deductions for taxable income reserves, he argued that the new bill will trim their overall tax charges. He added that rating agencies and state insurance regulators will modify their risk-based capital rules and formulas to reflect the new tax rules. 

“A Huge Win”

National Association of Mutual Insurance Companies (NAMIC) SVP of Government Affairs Jimi Grande said that a 14% reduction of the corporate tax levy and the elimination of the corporate alternative minimum tax would greatly benefit property and casualty insurers. “Given that property/casualty insurance industry’s average effective tax rate has been in the low 30s, a 21% corporate rate is a huge win for us,” Grande said in a statement.

S&P Credit Analyst Deep Banerjee agreed that U.S. insurers stand to gain from a lower corporate tax rate. He added, however, that before insurance companies reap those lower taxes, some insurers may need to book a lower capitalization rate due to a write-down of deferred tax assets (DTA). “We expect this to have a meaningful near-term impact especially for U.S. life insurers and multiline insurers that currently have sizeable DTAs on their balance sheets,” Banerjee noted.

Banerjee also said that changes to deferred acquisition cost amortization and loss-reserve rules in the new tax code will increase taxable income levels for life and property and casualty insurers, but he claimed that their effective tax rate will drop because of the lower corporate tax levy.

A.M. Best, meanwhile, offered a mixed outlook of the new tax law. While the rating agency predicted that the revised tax code would provide “overall benefits” to life and property and casualty insurers, the repeal of all net operating loss carrybacks could reduce total adjusted and risk-based capital for life insurers. This revision may slash gross deferred tax reserves, which in turn could reduce capital holdings and surplus. “Higher after-tax earnings may offset the surplus declines, but this may take time to emerge,” A.M. Best said, adding that it will review companies on “a case-by-case basis to determine future surplus expectations as the new law takes effect.”

Offshore Tax Treatment

The Coalition for American Insurance asserted that a reversal of the tax treatment of offshore insurance entities puts domestic insurers on an equal footing with their international counterparts. By closing a long-standing loophole that allowed foreign insurance companies to avoid paying taxes on their U.S.-generated revenues by shifting those monies to lower-taxed countries, the Coalition argued that the U.S. will gain tax revenues and establish a balanced competitive field for domestic insurers.

“If nothing is changed, this loophole will cost the U.S. taxpayer nearly $9 billion over the next decade and continue to give foreign-based insurers a significant competitive advantage over U.S. companies,” the Coalition previously said in a statement in support of the Base Erosion and Anti-Abuse Tax (BEAT) provision that was included in the final version of the bill. The Coalition called BEAT “an important reform that will reduce the incentive to send U.S.-generated profits overseas.”

S&P’s Banerjee maintained that while BEAT will cause “some degree of repatriation of offshore retained profits” to the U.S., reinsurers and some insurers that set up offshore reinsurance captives may raise their prices in response. The Coalition for Competitive Insurance Rates (CCIR) also predicted higher rates in the U.S. and a loss of global capacity in the wake of BEAT. “This is truly a blow to consumers and business, particularly those in Florida, Texas, California, South Carolina, Louisiana and other disaster-prone states who rely on this capacity in times of catastrophe,” CCIR said in a statement.

Other Changes

The new tax law repeals the individual mandate requiring all Americans to buy health insurance, a move that Banerjee expected will “worsen the morbidity profile of the individual market, hurting health insurers with meaningful presence in that segment.” Nevertheless, Banerjee didn’t foresee any rating changes in the short term.

An article in Insurance News Net noted that a doubling of the estate tax exemption from the current $5.6 million for individuals and $11.2 million for couples would decrease the need for “big-case” life insurance policies. That exemption is scheduled to expire in 2024. The law left intact current rules on 401(k) retirement account contributions that permit individuals to stash up to $18,000 in those accounts tax-deferred.

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