With a 15% net income gain for U.S. P&C insurers expected for the first two years after the corporate tax rate reduction to 21%, Conning’s fourth quarter forecast for P&C insurers outlines a clear positive impact to the sector.
The new tax regime will reduce the relative attractiveness of tax exempt municipal holdings, that represent “almost a third of the industry’s current bond holdings,” Conning stated.
In addition, it reduces the value of firms deferred tax assets and liabilities with a corresponding effect on surplus.
“The 2017 Tax Cut and Jobs Act was signed into law in December, and insurers are still processing the Act’s major elements and planning responses,” said Alan Dobbins Director of Insurance Research at Conning.
Re/insurers’ Q4 results have been impacted by the one-off tax charge from the reduction in the value of deferred tax assets and liabilities, though many firms have cited expectations of a positive impact on earnings going forward.
However, Steve Webersen, Head of Insurance Research at Conning, warned that the Base Erosion Anti-Abuse Tax will have an impact on multinational insurers; “for re/insurers, this minimum tax is meant to address business ceded from U.S. subsidiaries to foreign-domiciled subsidiaries.
“We expect that this change will significantly reduce the estimated $90 billion in premiums ceded by U.S. subsidiaries to affiliates, and initiate a re-allocation of capital to U.S. subsidiaries.”
In response to these and other tax law changes, Conning advises insurers to plan responses to the tax act to optimize performance with possible structural adjustments and reassess their strategic investment allocations.