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Year-end deferred tax assets fell 38% for US life insurers in 2017

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Year-end deferred tax assets fell 38% for US life insurers in 2017

U.S. life and property and casualty insurers saw their net deferred tax assets fall sharply by the end of 2017, according to recent statutory filings.

The life insurance industry's net deferred tax assets, or DTAs, decreased 38.4%, while P&C insurers' net DTAs shrank by 37.3%, compared with the end-of-year figures for 2016. While many insurers recorded the impact of the lower tax assets as one-time charges for the year, those with significantly lower DTAs could see their risk-based capital ratios, a key regulatory metric, change as well.

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The passage of the federal tax overhaul on Dec. 22, 2017, lowered the corporate tax rate to 21% from 35%, which in turn reduced the future potential benefit of current DTAs. As companies revalued those assets at the lower rate, many took a one-time charge on their Dec. 31, 2017, statements.

Those write-downs may have more than a temporary effect and could impact insurers' year-over-year capital adequacy, S&P Global Ratings wrote in a December 2017 report. The National Association of Insurance Commissioners' risk-based capital, or RBC, formulas use after-tax capital factors. The lower future tax benefit would mean an insurer must maintain higher capital levels than previously used. That higher required capital level, combined with lower DTA balances, could lead to lower RBC ratios for some insurers, several of which have already disclosed the potential impact to RBC ratios from tax reform.

According to an S&P Global Market Intelligence analysis, 13 of the top 20 companies with the largest net DTAs at the end of 2017 are life insurance companies. Teachers Insurance & Annuity Association of America had the largest net DTA balance at $1.96 billion, compared to $3.21 billion in the prior period.

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Northwestern Mutual Life Insurance Co. had the second-highest net DTA of about $1.79 billion. Northwestern Mutual noted in its annual regulatory filing that it had a net decrease of $1.2 billion to its statutory surplus due to changes related to the new tax law. Northwestern Mutual expects to benefit from the lower corporate tax rate starting in 2018.

While life and P&C insurers took DTA charges, some health insurers were able to book one-time benefits. Net DTAs for the health insurance industry increased to $5.52 billion for 2017, versus $4.04 billion for 2016.

Health Care Service Corp. a Mutual Legal Reserve Co.'s net deferred tax assets increased by almost $1.0 billion at the end of 2017, the largest dollar amount increase in the analysis. The substantial increase was mainly due to a $3.1 billion decrease in the valuation allowance against its gross deferred tax asset. Under Statements of Standard Accounting Practice, a company may create a valuation allowance that decreases its gross deferred tax assets, if management determines it is more likely than not that those assets will not be realized in the future.

Blue Cross Blue Shield of Michigan Mutual Insurance Co. was the only other health insurer with a net DTA among the 20 largest. It also reassessed its valuation allowance, leading its net DTAs to increase to $583 million, a 375% increase from 2016.

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

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For a downloadable spreadsheet that shows a large array of NAIC exhibits for a single period, click here for property & casualty, life and health insurers.