US insurers must be nimble to tackle tax reforms

US insurers will need to be nimble if they are to maximise the potential benefits – and overcome potential pitfalls – stemming from US tax reforms, according to S&P Global Ratings, in a new report called ‘US Tax Reform: A Mixed Bag Of Goods For Life, Health, and P/C Re/Insurers’.

At the heart of this tax proposal is the lower corporate tax rate. A 21 percent corporate tax rate is attractive for most corporates, including most insurers, and will result in higher after-tax income in the longer term. Also, there would likely be competitive benefits, especially for US insurers looking to compete in international jurisdictions, the report notes.

But before they can enjoy the benefits of the lower tax rates, some insurers will see a decline in their capitalization due to the write-down of their deferred tax assets (DTA) in line with the new tax regime. “We expect this to have a meaningful near-term impact especially for US life insurers and multiline insurers that currently have sizeable DTAs on their balance sheets,” the report said.

Another major change being introduced by the tax bill relates to multinational entity taxation rules. Shift to a territorial tax system and the base erosion tax provisions will affect US insurers with international operations as well as foreign reinsurers with admitted US subsidiaries.

“We expect some degree of repatriation of offshore retained profits to bring cash into the US (from foreign subsidiaries). Conversely, the increased excise tax may result in reinsurers and certain insurers that use offshore reinsurance captives adjusting their capital optimization strategies or product pricing due to the higher taxes,” the report said.

"US insurers will need to be quite nimble in adapting to the new regime," said S&P Global Ratings credit analyst Deep Banerjee. "Although we don't expect immediate rating changes, the manner in which US insurers adjust to the tax code revisions will determine the longer-term impact on individual company ratings."

He added that the agency does not expect to revise its ratings methodology or ratings expectations for rated insurers as a result of the new tax code.

Other key aspects of the tax bill include deferred acquisition cost amortization changes and loss-reserve updates that will increase taxable income for life and property/casualty insurers respectively, though it will be offset by the lower effective tax rate. The repeal of the tax penalty associated with the health insurance mandate will worsen the morbidity profile of the individual market, hurting health insurers with meaningful presence in that segment. But overall, S&P said it does not expect these changes to have a ratings impact in the near term.

More of today's news

Deutsche Rück boss quits; hunt starts for successor

Ed poaches new marine boss from Aon

Allianz and Liverpool Victoria push ahead with JV

Starr hires former ambassador into its Philippines unit

UK temporary insurance platform completes MBO

Pioneer launches ocean marine division

Patria Re appoints director in London

Don't miss our insurtech email newsletter - sign up today