Many insurers and insurance agencies will gain big from the massive tax reform package passed by Congress just before Christmas. Many industry groups celebrated the bill’s passage and its double-digit reduction in the tax rate.

“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,” said Jimi Grande, senior vice president of government affairs for the National Association of Mutual Insurance Companies, which has 1,400 members. “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.”

David Pearce, vice president and director of tax policy for the American Insurance Association, said his group backs Congress’ “important step in reforming our 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.

Bob Rusbuldt, president and CEO of the Independent Insurance Agents & Brokers of America, said the new tax law will work well for the Big “I”‘s membership.

“The new 21 percent corporate tax rate will provide significant relief to our member agencies classified as C Corps and allow them to grow their business and hire new employee,” Rusbuldt said in prepared remarks. “Furthermore, while no legislation is perfect, the Big ‘I’ would like to thank Republican leaders in the House and Senate for the improvements they made throughout the legislative process which allow a greater number of our small business members organized as ‘pass-throughs’ to obtain more tax relief.

The new law also closes the so-called “Bermuda insurance loophole” that has allowed non-U.S. insurers and reinsurers with U.S. subsidiaries to avoid paying U.S. taxes by ceding reinsurance to their non-U.S. affiliated reinsurers in Bermuda and the Cayman Islands. This change has been a goal of for years of the Coalition for American Insurance, a coalition of 12 major insurers including The Hartford Allstate, Travelers and W.R. Berkley.

The group said it strongly supported the final version of the tax reform law due to the loophole closure, noting that the change “will ensure more equal tax treatment for U.S. based insurers and consumers by addressing a longstanding loophole that allowed foreign insurance companies to move their U.S.-generated insurance profits abroad to avoid tax.”

Reaction Isn’t All Rosy

Not everyone was ecstatic about the new bill.

A.M. Best, for example, offered a mixed assessment of how the bill would affect the property/casualty insurance industry.

“The insurance industry will see overall benefits from the reduced corporate tax rate as a result of The Tax Cuts and Jobs Act, once it is signed into law; however, partially offsetting the benefits are certain revenue enhancements that will impact life and property/casualty insurers,” A.M. Best noted.

The ratings agency said that reserve changes, for example, will impact both P/C and life insurers, but noted changes applicable to businesses in effect as of Dec. 31, 2017 will be spread out over the next 8 years. There are other uncertainties, too, A.M. Best said.

“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 noted.

Standard & Poor’s Global Ratings credit analyst Deep Banerjee said that U.S. insurers will need to act quickly to adapt to the new tax law.

“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,” he said. “Additionally, we don’t expect to revise our ratings methodology or ratings expectations for rated insurers as a result of the new tax code.”

He said the 21 percent corporate tax rate would likely give U.S. insurers looking to compete internationally a competitive edge, but there’s a catch.

“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,” Banerjee said. “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 shifting “to a territorial tax system and the base erosion tax provisions will affect U.S. insurers with international operations as well as foreign reinsurers with admitted U.S. subsidiaries.” Banerjee predicted some carriers would repatriate offshore retained profits, but added that the increased excise tax could also leave some reinsurers and some insurers that use offshore reinsurance captives “adjusting their capital optimization strategies or product pricing due to the higher taxes.”

The Coalition for Competitive Insurance Rates (CCIR), representing insurers that fought the closing of the Bermuda reinsurance loophole and imposition of the Base Erosion and Anti-Abuse Tax, said that the new tax law could be problematic.

“The global insurance and reinsurance industry is concerned that Congress would include a provision in the Tax Cuts and Jobs Act that will serve only to ‘Americanize’ risk by decreasing capacity benefits to insurance markets globally, thus increasing U.S. prices,” CCIR said. “This is truly a blow to consumers and business, particularly those in Florida, Texas, California, South Carolina, Louisiana and other disaster-prone states who rely on this capacity in times of catastrophe. The only winner under the double-taxation what will result from BEAT is a group of highly successful domestic insurance companies who stand to benefit greatly from the market distortion this provision will trigger. CCIR welcomes continued dialogue on this issue.”

Details of the Tax Cuts and Jobs Act (HR1)

The new tax law represents the biggest tax change in 30 years

Under the legislation, insurers, agencies and other businesses organized as C corporations will see their statutory tax rate slashed from a top rate of 35 percent to 21 percent starting next month. That is considered a “huge win” for the property/casualty insurance industry, as one lobbyist worded it.

There is some good news for other insurance agencies, too. The legislation adjusts taxpayer income brackets and lowers individual tax rates; rates will range from 10 percent to 37 percent in 2018. The reform benefits so-called “pass-through” businesses including S corps, partnerships and sole proprietorships—which many insurance agencies are — and whose pass-through income will continue to be taxed at individual rates. Some smaller pass-through service business owners (including in insurance) will also be able to deduct 20 percent of business income if their annual taxable income does not exceed $157,500 (single) or $315,000 (joint).

At the same time, the law almost doubles the standard deduction.

The corporate tax cuts are permanent, while the 20 percent pass-through deduction and individual tax rate changes are scheduled to expire at the end of 2025 unless Congress acts.

*This story is based on a look at the tax reform law and reaction to it published previously in our sister publication Insurance Journal. You can read that story by clicking here.