Insurers must prepare for major changes from tax reform, experts say

Tax reform measures have brought potentially sweeping changes for the insurance industry and insurers need to be prepared, a panel of experts said Tuesday during a webinar.

The hour-long event was organized by PricewaterhouseCoopers and covered such topics as domestic insurance considerations, mergers and acquisitions, international issues, and executive and employee benefits.

Karen Miller, a partner with PricewaterhouseCoopers’ U.S. insurance tax practice, said it has been a challenging year-end for many companies, and “we recognize that a lot of you are still in the middle of your financial statement close process.”

“With insurance industry,” Ms. Miller said, “in the unique position of being impacted not only by the industry specific positions, which were included in the act, but also by the general corporate provisions, as well, we know that the impact to your companies have been broad and far-reaching.”

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, among other things.

A polling question conducted during the webinar found that the majority of respondents were expecting a lower effective tax rate.

Looking at the international implications of tax reform, Joy Tegtmeyer, U.S. insurance tax practice partner, said the statute specifically identifies reinsurance premiums and other considerations paid to related parties as base erosion payments.

The base erosion anti-abuse tax provision, intended to circumvent profit movement overseas, imposes 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.

“Even with this specific callout,” Ms. Tegtmeyer said, “the industry has been left with quite a bit of uncertainty.”

Turning toward M&A activity, Christine Watson, U.S. insurance tax practice partner, said tax reform is having an impact on the insurance deals market.

“The landscape has changed effectively overnight,” she said. “The impact of tax reform to most insurers is not just 21%, or a reduction in taxes that may be paid in the future, but overall value of tax to the company and overall value of the company in itself. And this extends to the valuation of transactions as well.”

Lisa Herrnson, managing director with PricewaterhouseCoopers’ U.S. human resource services practice, said that in light of tax reform, many companies are going to see a significant increase in earnings and performance-based awards that are tied to earnings may be inflated based on those results.