A.M. Best expects rated U.S. domiciled re/insurers with material financial arrangements with foreign affiliates to make significant changes to these reinsurance contracts in response to the base erosion and anti-abuse tax (BEAT) measure of the tax reform.
In particular, quota share, excess of loss, or stop-loss agreements with foreign affiliates are contracts on the radar to be adjusted to the new taxation regime.
The tax law reforms impacting Property/Casualty Re/insurance Groups include; the reduction in the Corporate Tax rate from 35% to 21%, the base erosion and anti-abuse tax (BEAT) – which taxes payments to foreign affiliates by adding payments back to taxable income.
In addition, the repatriation tax implements a tax system that taxes foreign subsidiaries’ earnings not distributed and modifies the discount calculation and loss payment patterns used to determine tax-basis loss and loss adjustment expense (LAE) reserve balances.
The rating agency said companies have already begun to report expected financial adjustments as a result of the new tax regime: firms are taking measures such as adjusting their deferred tax assets or liabilities and are incorporating an estimate of the effects of the legislation and additional less prevalent changes.
The impact of tax reform will be a net positive for the financial position of U.S. property/casualty insurance companies and US-parented global re/insurers with the largest benefit being the reduction in the corporate tax rate, however, A.M. Best noted that some of the other tax reform provisions may serve to limit the benefit of the reduction.
However, global re/insurers have publicly stated that the impact of tax reform will not be material, this is likely due to having multiple platforms and options from to which to transact business.
A.M. Best said it will continue to monitor the impact of tax reform on insurers’ financial statements as they close their books and report results.
The Deutsche Bank previously noted that European reinsurers could stand to benefit from the tax reform as it creates a more equal playing field with Bermudian players who will see some of their traditional tax advantages eroded. These changes to the market environment could surface in July 2018 renewals which typically focus on U.S. natural catastrophe business.
The A.M. Best report adds to the general consensus among industry experts that reforms are likely to encourage firms to concentrate risks within the U.S. to prevent paying higher rates on premiums ceded to foreign affiliates and that the new legislation could act as a mini border adjustment tax but with limited overall industry impact particularly for big players who already operate through U.S. entities.
