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US tax overhaul to hit capital adequacy of some insurers in the near term

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According to Market Intelligence, December 2022

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US tax overhaul to hit capital adequacy of some insurers in the near term

S&P Global Ratings said some U.S. insurers' capitalization will decline following the tax reform due to the required write-down of their deferred tax assets, or DTAs.

In a report analyzing the impact of the new tax regime on rated U.S. insurers, the rating agency said it expects the write-down to have "a meaningful near-term impact" especially for U.S. life insurers and multiline insurers that have sizeable DTAs on their balance sheets.

"U.S. insurers will need to be quite nimble in adapting to the new regime," noted S&P Global Ratings credit analyst Deep Banerjee. "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."

A lower 21% corporate tax rate will lead to higher after-tax income for most companies, including most insurers, in the long term and will provide a competitive edge, especially for U.S. insurers looking to compete in international jurisdictions.

Meanwhile, the shift to a territorial tax system and the base erosion tax provisions as part of the new multinational entity taxation rules will affect U.S. insurers with international operations, along with foreign reinsurers with admitted U.S. subsidiaries, S&P Global Ratings said. The agency expects some degree of repatriation of offshore retained profits to bring cash into the U.S.

The changes to the amortization of deferred acquisition cost and loss-reserve updates will push the taxable income higher for life and property/casualty insurers, respectively. However, it will be offset by the lower effective tax rate. The agency said it did not expect these amendments to impact ratings in the near term.

"Overall, 2018 will be a rather active year for insurers as they adapt to the new tax regime," S&P Global Ratings said. "Insurers that are negatively affected in the near term may need to update their strategies for funding any capital deficiencies."

U.S. President Donald Trump signed the Republican tax cut bill on Dec. 22.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.