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Moody's: US tax law is credit positive for US-based insurance companies

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Moody's: US tax law is credit positive for US-based insurance companies

The impact of the U.S. tax law is credit positive for U.S.-based insurance companies, as it will boost profitability and make them more competitive with their global counterparts, Moody's said.

However, life insurers are bracing for a deterioration in action-level risk-based capital ratios mainly due to the write-off of net deferred tax assets. Risk-based capital ratios could further drop if regulators were to incorporate lower tax rates into the required capital calculation.

If risk-based capital ratios fall below a rating driver threshold, Moody's will provide a transition period for insurers to rebuild capitalization or to lower its risk-based capital threshold by a modest amount depending on if and how the National Association of Insurance Commissioners revises its risk-based capital formulas to incorporate the lower corporate tax rate.

The rating agency expects most insurers to enjoy the economic benefits of paying lower taxes through increased profitability and cash flows, which will help offset the decline in regulatory capital adequacy ratios over time.

U.S. P&C insurers and reinsurers are also poised to benefit from the tax law. While global insurers and reinsurers with large U.S.-based businesses that transfer or cede significant business to non-U.S. affiliates could pay higher taxes under the base erosion and anti-abuse provision, they have several options to alleviate the impact, including retaining or writing more business in the U.S.