Tax Cuts Come With Writedowns for Insurers

S&P estimates the cut in the corporate tax rate will result in an aggregate writedown of about $14 billion of life insurers' deferred tax assets.
Matthew HellerDecember 27, 2017

Before the Republican tax cuts boost insurers’ after-tax earnings, they may take an earnings hit due to writedowns of deferred tax asset (DTA), according to S&P Global Ratings.

DTA accumulates on corporate balance sheets when companies overpay taxes or take tax losses. S&P estimates that its rated U.S. life insurers had about $35 billion of DTA on their statutory balance sheets as of Sept. 30, 2017.

With the passage of the tax bill, some insurers may have to write down DTA to bring their balance sheets in harmony with the new code. In aggregate, S&P said, the cut in the corporate tax rate from 35% to 21% will result in an aggregate writedown of about $14 billion of life insurers’ DTA, representing 4% of statutory capital.

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“We expect this to have a meaningful near-term impact especially on U.S. life insurers that currently have DTAs on their balance sheets,” the rating agency said.

It added, however, that “despite the likely deterioration of capital adequacy and any related recognition of losses through earnings, we are unlikely to change ratings in the near term as long as we believe insurers have a clear, viable strategy of rebuilding their capital adequacy. Additionally, somewhat offsetting the negative hit to capital is the fact that most insurers are currently maintaining capital above their target levels.”

One insurer, RenaissanceRe, has already announced that it will write down a portion of its deferred tax asset, reducing its net income by about $40 million in the period in which the tax bill is enacted.

Excluding the negative effect on DTA, S&P sees “clear positive effects from the lower tax rate. For one, we expect higher after-tax profit metrics, especially for the nonlife insurers that currently have higher effective tax rates. Also, there would likely be competitive benefits, especially for U.S. insurers looking to compete in international jurisdictions.”

Other key aspects of the tax bill such as the reserve deduction updates, lower interest deductibility, and repeal of the individual mandate are also expected to affect some insurers.

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