The impact of U.S. tax reform is a mixed bag for captive insurers, although it is a positive for offshore captives that have elected to be taxed under the U.S. tax code in some cases, according to a new A.M. Best Co. briefing.

In December, President Donald Trump signed the Tax Cuts and Jobs Act, which replaced the graduated corporate income tax structure and its previous top rate of 35% with a 21% rate and repealed the alternative minimum tax, among other things.

“In many cases, the reduced corporate tax rate has resulted in higher net income, but for others there may have been other changes to the business structure that affected operating performance,” the Oldwick, New Jersey-based rating agency said in its report released Monday. 

Some offshore captives are registered under Section 953(d), which allows a controlled foreign corporation engaged in the insurance business to affirmatively elect to be treated as a U.S. corporation for U.S. tax purposes. Several owners with Section 953(d) captives have said they viewed the tax overhaul as a long-term positive even if required one-time write-downs in the short term. 

For some U.S. corporations with foreign subsidiaries, there is a minimum tax on payments to foreign subsidiaries if the corporation’s receipts are over $500 million and payments to its foreign subsidiaries are greater than 3% of total deductible payments, the report noted. This Base Erosion Anti-Abuse Tax, known as the BEAT tax, would not apply to a foreign subsidiary that elects to be taxed as a U.S. taxpayer under Section 953(d). Other provisions have been put in place to repatriate overseas income and profits if a company was previously able to defer tax on them.

“Because A.M. Best’s rated captives are domiciled in various jurisdictions and their size and structures vary greatly, assessing the impact of tax reform on the companies’ business profiles is impracticable,” the ratings agency said. “Parent companies’ BEAT calculations may affect the amount of business ceded

to a non-U.S. captive. In several cases, however, these captives have made a 953(d) election and are being taxed as U.S. taxpayers, so the impact is nil.”

To date, tax reform has not affected Best’s industry ratings, including for the captive sector.

“Overall, the impact of tax reform is a net positive for U.S. insurers, including domestic captives and offshore captives who have made the Section 953(d) election,” the agency said. “U.S.-parented captives in foreign domiciles are working to achieve the most efficient solutions from an operations and cost perspective. Management teams considering strategic alternatives in the wake of tax reform continue to include us in discussions, as they contemplate changes to existing business or new corporate formations.”