A provision in the recently enacted Tax Cuts and Jobs Act may impact how life insurers use offshore affiliated reinsurance in 2018.
The Base Erosion and Anti-Abuse, or BEAT, excise tax imposes a tax on premiums sent to affiliated insurers not domiciled in the U.S. for the purposes of avoiding paying U.S. taxes. The penalty is set to grow over several years, with insurers paying a 5% rate in 2018, then 10% starting in 2019, and rising to 12.5% starting in 2026. The tax would not apply to companies with average annual gross revenues under $500 million for the prior three years, or if the foreign affiliates are subject to U.S. income taxes.
The new tax will raise costs for some insurers that cede premiums to offshore affiliates. To avoid paying the tax, some insurers may retain more risk on their books, which may impact their capital positions, according to an S&P Global Ratings report.
The U.S. life insurance industry ceded roughly $60 billion in total premiums to offshore affiliates in 2016.

Munich Re Co.'s U.S.-based subsidiaries retroceded $2.0 billion in life and accident and health premiums to its affiliates in 2016 with 83.43% of the premium leaving the U.S., according to an analysis by S&P Global Market Intelligence. Munich Re AG executives on a Feb. 6 earnings call noted the negative aspects and the challenge they now face due to the excise tax.
"For us, it's a challenge because our capital management policy typically works on strategies that we channel risks and volatility to Germany, to the parent company," CFO Jörg Schneider said, according to a transcript of his remarks. Schneider said the parent entity, Munich Re AG, receives over 70% of the reinsurance business. The company is taking a few measures to rearrange groups or affiliated reinsurance agreements in light of the tax, he added.
Reinsurance Group of America Inc., sent roughly half, or $2.60 billion, of its retroceded life premiums to offshore affiliates in 2016. During its 2017 fourth-quarter earnings call, RGA officials said that the company's practice is to generally cede premiums to offshore affiliated entities that pay U.S. taxes, meaning the new excise tax would not apply to those premiums. Those transactions have been more related to capital management than being tax plays, CFO Todd Larson said.
Hannover Re subsidiary Hannover Life Reassurance Co. of America ceded the most premiums to offshore affiliates in 2016, with almost $22.0 billion retroceded. Due to Hannover's structural flexibility it will be able to avoid a major impact of the new tax, according to company executives.
"Due to XXX and AXXX reserving, historically large part of our U.S. business was ceded to Ireland … and will not be continued," Hannover Re Chairman and CEO Ulrich Wallin said on a Feb. 7 guidance call. The company has an entity in Bermuda that, while not subject to U.S. regulatory account, does pay U.S. taxes, so the new excise tax is not applicable, he explained.
Although AXXX and XXX reserve financing is not tied to tax reform, insurers that cede term life or universal life with secondary guarantees premiums offshore may find some future reserve relief if they decide to retain the risk on their book due to the implementation of PBR. Companies may set reserves using the new PBR framework for life insurance contacts issued on or after Jan. 1, 2017.
As noted by Lincoln National Corp. CEO Dennis Glass on the company's third-quarter 2016 earnings call, PBR will allow for lower reserves, which would translate to a reduced need to do reserve financing for its term business.

Prior to PBR, there was some belief that universal life with secondary guarantees and term insurance carried redundant reserves and did not accurately reflect the risk profile of those products. State regulators expect the new method to lower reserves for certain products while increasing reserves for others. A Swiss Re Institute report in November 2017 said the new reserving method will "reduce but not eliminate demand for excess reserve financing."
S&P Global Ratings and S&P Global Market Intelligence are part of S&P Global Inc.
Click here to view a template that shows Life companies' market share by line of business. Click here to view a template to Life Schedule S, Part 1, Sections 1 & 2 and Schedule S, Part 3, Sections 1 & 2 summary and relationship detail formatted to the order and categorizations as filed in the statutory statement. |

