US tax reform to lift P&C insurance earnings 14%: Morgan Stanley

The proposed House bill calls for 20 percent corporate tax rate, which could lift earnings of US property/casualty (P&C companies) by around 14 percent on average, according to Morgan Stanley analysts.

Companies with higher tax rates and larger US exposure such as Brown & Brown, Progressive Corporation, AIG, W. R. Berkley Corporation, Allstate Corp and Berkshire Hathaway could benefit the most.

At the same time, provisions on excise tax and intercompany debt could have negative implications for global P&Cs, the analysts said, while adding that the impact will be manageable.

The excise tax is a negative for offshore re/insurers, according to Morgan Stanley.

The excise provision calls for 20 percent tax on payments to foreign affiliates. This resembles a mini version of the Border Adjustment Tax (BAT) and is similar to the Neal Bill which levies taxes on premiums ceded to offshore affiliates. Companies can elect to pay US tax on the foreign earnings rather than the gross receipts.

Furthermore, the intercompany debt provision may increase global P&Cs' tax rates. The proposal limits deduction of interest by domestic subsidiaries of an international group. It is similar to the proposed Treasury regulations limiting tax benefits through 'earnings stripping'. In essence, 'earnings stripping' lowers taxable income at US subsidiaries through related party debt between US subs and foreign parent/subs. This provision could increase the effective tax rates for global brokers such as Aon, Willis Towers Watson or Marsh & McLennan Companies.