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Potential for tax-driven rate reviews looms over P&C industry

A January statement from California Insurance Commissioner Dave Jones about his intent to ensure policyholders benefit from the "windfall" associated with the lower federal corporate tax rate offers a perceived, if not yet real, risk to the property and casualty industry's generally optimistic 2018 outlook.

Executives at several publicly traded P&C insurers faced questions in recent public forums about the potential for state regulators to use federal tax reform as a reason for pushing back on rate filings, particularly in the auto insurance business where many carriers continue to broadly push for hikes. A January letter to that effect was circulated by the Consumer Federation of America; Jones cited it in his announcement of a regulatory review of insurers' rates and the department's legal authority to address the impact of lower federal taxes in rate formulas.

Allstate Corp. Chairman and CEO Thomas Wilson II addressed the topic at length during a Feb. 8 conference call, where he reminded the audience that loss costs account for a majority of the industry premiums, and they will not be impacted "at all" by a lower tax rate. Wilson specifically took issue with what he referenced as "bad math" in the Consumer Federation letter, which alleged that consumers "would not benefit" from the industry's supposed "tax-related profit windfall of $25 billion or more."

Mercury General Corp. officials said they do not anticipate having to make changes to the pending request by California Automobile Insurance Co. for an overall increase of 6.9% in its California private auto rates to reflect the lower federal corporate tax rate.

"In California, the rates are determined by return-on-surplus formula, and the formula is based on an after-tax return," Mercury General Chief Product Officer Robert Houlihan said during a conference call. "But it's important to note, the formula doesn't yield one number, it yields a minimum, a max[imum] or a range. So the range will be shifted downward slightly by the change in tax laws."

Houlihan added that Mercury General had reviewed filings submitted in the past several years by Cal Auto and Mercury Insurance Co., and concluded that rates that had been requested and approved "would still be within that range, even after adjusting for the lower tax rates."

Kemper Corp., which generated approximately 81% of its nonstandard auto earned premiums in 2017 from California, faced several questions from analysts during a recent conference call about Golden State rate filings on a post-tax reform basis.

"There has not been a particular conversation that suggested ... a rate rollback is required," said President and CEO Joseph Lacher during a call in explaining that Kemper was in constant contact with the California regulator.

The company's recently announced agreement to acquire Infinity Property & Casualty Corp. will make its nonstandard auto business somewhat less concentrated on California. On a pro forma basis, Kemper and Infinity generated about 66% of their combined nonstandard auto earned premiums in the Golden State in 2017.

Lacher said that Kemper currently earns a "reasonable return" on its California business, but it is not "wildly profitable." CFO James McKinney added that the lower effective tax rate is not likely to "dramatically change the margins that these businesses have earned over a period of time."

Compass Point analysts in a recent note to clients mentioned a request by the Nevada Division of Insurance for a State Farm Mutual Automobile Insurance Co. subsidiary to recalculate the projected after-tax rate of return for the private auto liability and physical damage lines. A review of Nevada filings finds similar requests related to the new 21% federal corporate tax rate, perhaps most notably in response to a homeowners rate filing by Liberty Mutual Holding Co. Inc.'s Liberty Insurance Corp. and LM Insurance Corp.

In that case, Liberty Mutual informed the regulator it would incorporate any tax rate-related changes in future filings as it continues to work to "holistically understand the full ramifications" of the legislation. The regulator responded that the company should include the changed tax rate in the profit provision of the current filing, particularly because it viewed the existing provision of 19.4% as "high" and potentially "excessive" under state law.

The industry will be watching to see whether the requests simply seek routine model updates or represent the start of something more significant.