Insurers to see mixed effects from tax reform: Best
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The overhaul of the U.S. tax code will be a “mixed bag” for insurers, with some benefits from a lower corporate tax rate but uncertain impacts in the near term, according to a new A.M. Best Co. Inc. briefing.
Congress passed the legislation on Wednesday and it would generally be effective for taxable years beginning after Dec. 31, 2017, assuming President Donald Trump signs it. It would, among other things, replace the current structure of corporate income tax rates, which has a top rate of 35%, with a 21% rate.
“A reduction in the corporate tax rate from 35% to 21% will benefit (property/casualty) insurance companies’ income statements, but short-term impacts are uncertain,” the Oldwick, New Jersey-based rating agency said in its report published Thursday.
The legislation preserves current law for net operating losses of property/casualty insurers, which may be carried back two years and carried forward 20 years, according to the briefing.
The legislation makes changes to tax-reserving policies for property/casualty insurers, according to the briefing. To determine loss reserves for tax purposes, these insurers will be required to use loss payout patterns prescribed by the U.S. Treasury Department and a discount rate that reflects an average of monthly yields on investment grade bonds for the prior 60 months.
“This is a departure from the current law that allows insurers to use their own experience in determining the loss payout patterns and the new discount rate would be higher than the one used previously,” Best said in its report.
The Congressional conference committee that reconciled the U.S. House of Representatives and Senate versions of the bill adopted a Base Erosion Anti-Abuse Tax, which would impose a minimum tax on certain deductible payments made to a foreign affiliate, including payments such as management fees and royalties, but excluding costs of goods sold, beginning in tax years after Dec. 31, 2017, Best noted.
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