January 2, 2018 / 5:30 PM / a year ago

Fitch: U.S. Life Insurers Face Mixed Impact From Tax Reforms

(The following statement was released by the rating agency) CHICAGO/LONDON, January 02 (Fitch) U.S. tax reforms set to take effect in 2018 will have both positive and negative consequences for the country's life insurers, Fitch Ratings says. The cut in the corporate income tax rate to 21% from 35% could boost life insurers' cash flows and earnings, depending on how much of the tax saving insurers pass to customers through higher crediting rates or lower pricing. However, the tax cut will be negative for insurers' risk-based capital (RBC) positions due to likely higher RBC requirements and lower deferred tax assets (DTAs). Importantly, the reforms do not affect the tax-advantaged status of life and annuity products - a reduction in these tax advantages could have triggered a material fall in product sales. RBC requirements are likely to increase given the reduced tax offset to RBC charges for credit, market, insurance and operational risk. To date, the National Association of Insurance Commissioners has not indicated any plans to introduce RBC formula changes or transitional measures to mitigate the reduced tax offset. We expect DTAs admitted on insurers' statutory balance sheets to decline by nearly 40%, on average, as a result of the tax cut. Admitted DTAs represent 8% of statutory capital across the industry but are more material for some insurers. The negative impacts on capitalization will be alleviated by an increase in the value of the margins in insurers' statutory reserves, given the lower tax rate that will now apply when margins are released. These margins are the amount of reserve in excess of a best-estimate reserve and include provisions for adverse deviation and deferred gains. We expect that insurers whose RBC levels fall below target as a result of the tax changes will plan to restore RBC over time. The tax reforms will reduce the amount of separate account "dividends received deduction" that insurers can claim, which will reduce the benefit to insurers' earnings from the corporate tax rate cut. The reforms may also lead to less use of affiliated offshore reinsurance as base erosion provisions in the tax act are expected to reduce the associated tax benefit. Contact: Douglas L. Meyer, CFA Managing Director, Insurance +1 312 368-2061 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 David Prowse Senior Analyst Fitch Wire +44 20 3530 1250 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available on www.fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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