Insurance and reinsurance industry analysts expect U.S. insurers to be able to adapt to the new U.S. tax regime, while the impact on the European reinsurance sector is expected to be broadly neutral.
The U.S. tax reform lowers the corporate tax rate from 35% to 21%, and, the bill also introduces measures aimed at the reinsurance industry, called the Base Erosion and Anti-abuse Tax (BEAT), a form of an excise tax.
Under BEAT, a minimum 10% tax will be imposed on Modified Taxable Income, for the years starting in 2018 the rate will move from 5% to 10% from 2019, and then climbing to 12.5% in the years starting in 2025.
Global ratings agency Standard & Poor’s (S&P) expects U.S. insurance companies to be “quite nimble in adapting” to the regime, and subsequently doesn’t anticipate any rating changes for U.S. players immediately after the law comes into effect.
“But the manner in which insurers adjust to the tax code revisions will determine the longer-term impact on individual company ratings,” says S&P.
S&P warns that optimism surrounding earnings from a lower tax rate could overshadow other operational priorities, but does add that the U.S. industry should be disciplined enough to resist underwriting to increased combined ratio targets.
The ratings agency believes that U.S. P/C insurers with historically higher effective tax rates will see greater earnings potential from the tax reforms.
At the same time, a lower corporate tax rate could stimulate merger and acquisition (M&A) activity in the marketplace, potentially making M&A more attractive to foreign buyers from 2018, says S&P.
For the European reinsurance sector, overall, analysts at J.P. Morgan expect the U.S. tax reform to have a “broadly neutral impact.” However, analysts were eager to point out that there is some potential for effective tax rates to increase in the future as a result of the BEAT tax.
“At this stage we do not believe the US tax reform will have a significant lasting impact on the sector, as although there may be some benefit from US earnings incurring a lower headline tax rate, this is not a major proportion of the sector’s earnings we believe as in many cases internal reinsurance is used in order to facilitate risk transfer or diversification,” says J.P. Morgan analysts.
Earlier in 2017 analysts at Deutsche Bank also commented on the U.S. tax reform and that potential impacts on the European reinsurance sector, stating that it could be positive for European reinsurers’ June and July renewals, as it carries the potential to level the taxation playing field with Bermudians.
