US tax cuts represent a mixed bag for insurers
The insurance industry in the US will see overall benefits from the reduced corporate tax rate as a result of The Tax Cuts and Jobs Act, once it is signed into law; however, partially offsetting the benefits are certain revenue enhancements that will impact life and property/casualty (P/C) companies. In particular, a repeal of all net operating loss carrybacks could reduce total adjusted and risk-based capital for life insurers, according to a new AM Best briefing.
The Best’s Briefing, “First Look – Tax Reform 2017,” highlights the provisions in the new US tax reform legislation, currently awaiting President Donald Trump’s signature, that AM Best believes will initially have the greatest impact on insurers. The new law’s repeal of the individual mandate for health insurance promulgated under the Affordable Care Act will be discussed in greater detail in the future.
For life insurers, the repeal of the loss carryback period has the potential to reduce the amount of gross deferred tax assets that can be admitted, thereby reducing capital and surplus. Higher after-tax earnings may offset the surplus declines, but this may take time to emerge. AM Best will view companies on a case-by-case basis to determine future surplus expectations as the new law takes effect.
Reserve changes will impact life and P/C companies; however, changes applicable to business in effect as of Dec. 31, 2017 will be spread over the next eight years. While life insurance risk-based capital ratios could be significantly impacted, the required capital in Best’s Capital Adequacy Ratio may not change significantly.
The rating agency notes that it still remains to be seen how companies’ capital management, product pricing and risk management will be impacted as management of these companies and investors re-evaluate risk and return measures such as effective cost of debt, cost of capital or return on equity.
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