P&C insurers face significant impact from US tax change

The 2017 US Tax Cut and Jobs Act brings with it both opportunities and challenges for the US property/casualty (P&C) insurance industry, according to a new analysis by Conning.

“The 2017 Tax Cut and Jobs Act was signed into law in December, and insurers are still processing the Act’s major elements and planning responses,” said Alan Dobbins, a director, insurance research at Conning.

Based on Conning’s proprietary P&C model, the tax rate reduction to 21 percent will increase the industry’s net income by approximately 15 percent for 2018 and 2019.

The elimination of the corporate alternative minimum tax is also a positive for the industry, according to a Jan. 18 press release, but the reduction in the corporate tax rate will reduce the relative attractiveness of tax exempt municipal holdings that represent almost a third of the industry’s current bond holdings. The law also reduces the value of deferred tax assets and liabilities with the reduction in corporate tax rate, with a corresponding effect on surplus, according to Conning’s “Property-Casualty Forecast & Analysis” fourth quarter edition.

In addition, the Base Erosion Anti-Abuse Tax will impact multinational insurers, said Steve Webersen, head of insurance research at Conning.

“For re/insurers, this minimum tax is meant to address business ceded from US subsidiaries to foreign-domiciled subsidiaries,” Webersen said.

“We expect that this change will significantly reduce the estimated $90 billion in premiums ceded by US subsidiaries to affiliates, and initiate a re-allocation of capital to US subsidiaries.

“In response to these and other tax law changes insurers will need to plan responses to the tax act to optimize performance with possible structural adjustments and reassess their strategic investment allocations,” Webersen noted.

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