OLDWICK, N.J.--(BUSINESS WIRE)--As a result of the 2017 tax reform law, the U.S. life/annuity and property/casualty insurance industries have seen large drops in deferred tax assets, according to a new AM Best report.
A deferred tax asset (or liability) is created to account for temporary differences between statutory accounting requirements and tax-based requirements. The Tax Cuts and Jobs Act allowed property/casualty companies to continue to carry net operating losses back two years and forward 20 years, but for life/annuity companies, the new law repealed all net operating loss carrybacks. This reduced the amount of gross deferred tax assets that can be admitted. The Best’s Special Report, titled, “Varying Impact of Tax Reform on U.S. Insurers,” states that the life/annuity segment’s net deferred tax asset balance fell to $26.9 billion in 2018 from $38.8 billion at year-end 2016. Excluding adjustments for deferred tax liabilities, life/annuity insurers’ aggregate deferred tax assets were $75.3 billion and $55.3 billion in 2016 and 2018, respectively. The life/annuity industry was hit the hardest as the net DTA balance dropped to 6% of surplus in 2018 from 10% of surplus in 2016.
Property/casualty insurers experienced smaller declines in aggregate deferred tax asset amounts between 2016 and 2018. Deferred tax asset balances fell to $39.1 billion in 2018 from $56.9 billion in 2016. In aggregate, however, property/casualty insurer deferred tax liabilities exceeded deferred tax assets in 2016 and 2017, and in 2018, there was a very small net deferred tax asset balance of $0.3 billion. Net deferred tax assets for health insurers actually rose to $5.5 billion in 2018 from $4.0 billion in 2016.
Several aspects of the tax law can affect the pricing of a number of life insurance products. Required capital for life insurers is now higher, which will pressure their NAIC risk-based capital. Life insurer required capital is determined post-tax, and a lower tax rate results in higher post-tax required capital. Additionally, a number of Blue Cross Blue Shield companies continue to enjoy a significant windfall from the new tax law owing to the elimination of the alternate minimum tax. These companies’ net deferred tax assets, combined with the decline in the tax rate, lead to a surplus increase of $8.8 billion from 2016 to 2017.
The report also looks at the consequences of the Base Erosion Anti-Abuse Tax provision, as well as how the tax reform law has affected insurers’ municipal bond allocations.
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