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U.S. life insurers can expect mixed impact from tax reforms: Fitch Ratings

12th January 2018 - Author: Luke Gallin

Fitch Ratings has said that the U.S. tax reforms set to come into effect in 2018 will have both positive and negative impacts for domestic life insurers, but warned that a cut in the corporate tax to 21% could result in players using less offshore reinsurance.

Essentially, Fitch warns that U.S. life insurers can face a mixed impact from the tax reforms, but feels the cut from 35% to 21% could improve companies’ cash flows and earnings, dependent on the volume of tax saving that’s passed to customers.

At the same time, Fitch warns the tax reform will be negative for insurers’ risk-based capital (RBC) positions, as a result of likely higher RBC requirements and lower deferred tax assets.

“We expect that insurers whose RBC levels fall below target as a result of the tax changes will plan to restore RBC over time,” said Fitch.

While Fitch expects the tax reform to have some negative impacts on capitalisation, the ratings agency expects this to be somewhat alleviated by increased value of the margins in companies’ statutory reserves.

Furthermore, “reforms may also lead to less use of affiliated offshore reinsurance as base erosion provisions in the tax act are expected to reduce the associated tax benefit,” warns Fitch.

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