Last week we looked at how insurers and insurance associations like PIA are viewing the tax reforms passed by Congress and signed into law by President Trump. PIA National likes what it sees so far. So do other insurance associations.
Not everyone involved with insurance is so positive.
A.M. Best has a mixed view of how the reforms are going to impact insurance. In a statement Best said, “The insurance industry will see overall benefits from the reduced corporate tax rate as a result of The Tax Cuts and Jobs Act, however, partially offsetting the benefits are certain revenue enhancements that will impact life and property/casualty insurers.”
Reserve changes will impact property and casualty and life insurers. “It remains to be seen how companies’ capital management, product pricing and risk management will be impacted as management of these companies and investors re-evaluate risk and return measures such as effective cost of debt, cost of capital or return on equity,” A.M. Best added.
Standard & Poor’s Global Ratings credit analyst Deep Banerjee agrees that not all is rosy. He said, “Although we don’t expect immediate rating changes, the manner in which U.S. insurers adjust to the tax code revisions will determine the longer-term impact on individual company ratings. Additionally, we don’t expect to revise our ratings methodology or ratings expectations for rated insurers as a result of the new tax code.”
Banerjee noted the 21% tax rate for corporations will give U.S. insurers an international competitive edge but with an asterisk. “Before they can enjoy the benefits of the lower tax rates, some insurers will see a decline in their capitalization due to the write-down of their deferred tax assets (DTA) in line with the new tax regime. We expect this to have a meaningful near-term impact especially for U.S. life insurers and multiline insurers that currently have sizeable DTAs on their balance sheets,” he said.
As for insurance agencies, PIA National notes the lower individual brackets will benefit many who are S-corps — pass through — businesses.
As you know, many PIA members own independent insurance agencies that are organized as sole proprietorships, partnerships, or Subchapter S corporations. They do not pay corporate income tax. Instead, their income “passes through” the firm and appears directly on their owners’ individual tax returns, where it is taxed as normal income.
In a statement PIA National said, “While the bill provides provisions that will result in savings for some pass-through entities, the benefit is limited by an income threshold that will prevent some PIA members from benefitting from the maximum new deduction available to certain pass-throughs. Still, overall this legislation will be a net positive for most PIA members. PIA will work with our members to maximize their benefit from this measure and will remain involved in the forthcoming regulatory process.”
Jimi Grande of the National Association of Mutual Insurance Companies (NAMIC) agrees it is good for the industry. “Given that property/casualty insurance industry’s average effective tax rate has been in the low 30s, a 21 percent corporate rate is a huge win for us. Congress deserves high praise for its ability to balance the very real need to keep our corporate tax rate internationally competitive with the need to ensure that they did not create a fundamental mismatch between the federal tax code and our industry’s regulatory and accounting systems. We think they struck this balance nicely,” he said.
The American Insurance Association and its spokesman David Pearce like the reforms and think it’s an important step in reforming the tax code. “In addition to a more competitive corporate rate, AIA supports this simpler, fairer approach, especially as it relates to our industry’s unique business model,” Pearce said.
Source links: PIA National, Carrier Management