18 January 2018Insurance

Rate hikes and lower US tax lifts P&C industry

Higher pricing following the major catastrophe losses in 2017 together with a lower US tax rate is set to boost property/casualty (P&C) earnings in 2018, according to Morgan Stanley research.

Price increases following record catastrophe losses of around $130 billion in 2017 are expected to extend broadly beyond property cat reinsurance to primary insurance and casualty lines, according to a Jan. 17 report. Morgan Stanley estimates 1-5 percent net pricing increases could lead to 6-29 percent higher earnings on average.

In addition, analysts expect a lower US tax rate to result in an average earnings per share (eps) uplift of around 14 percent for domestic companies.

Lower federal corporate tax of 21 percent translates to 16-25 percent effective tax for domestic P&Cs. Companies do, however, face a one-time impact on deferred tax assets (DTA) or liabilities (DTL), analysts noted.

At the same time, a new base erosion and anti-abuse tax (BEAT) could result in higher taxes for global P&Cs. BEAT puts a 5.0-12.5 percent tax on premiums ceded to foreign affiliates compared to around 1 percent premium tax prior. However, companies could retain more premiums in the US to mitigate the impact, according to Morgan Stanley. If companies retain all premiums in the US, additional taxes on retained US profits could be offset by benefits from a reduction in premium tax, and lower tax rate on existing US earnings, the analysts explained.

On the negative side, slower reserve releases could be an earnings headwind. Morgan Stanley’s actuarial analysis reveals a small industry reserve deficiency, which points to lower future releases. Favourable reserve development accounted for around 20 percent of industry earnings since 2010. Reserve releases have slowed in 2017 and analysts see worsening reserves as an earnings headwind.

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More on this story

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