Tax Reform a Mixed Bag for Life Insurers

The Trump administration’s tax reform plan to cut corporate tax rates will generally favor life and annuity companies, but could cause some executives to take a more conservative management approach, analysts say.

The White House is pressing Congress to pass a plan by the end of the year, but some legislative analysts remain skeptical that anything would be passed before 2018 at the earliest.

“Tax reform is likely to be a modest positive for life insurers’ earnings and cash generation,” wrote Morgan Stanley analyst Nigel Dally in a research note last week.

“That said, we expect their risk-based capital ratios, which is a key measure of capital strength, to come under meaningful pressure,” Dally and his team wrote.

Deferred Tax Assets, Offsets at Issue

Slashing corporate tax rates from 35 percent to 20 percent, as proposed by the administration, would reduce the value of some deferred tax assets and lower tax offsets, Dally explained.

Reducing the value of tax assets and lowering tax offsets would raise the amount of required capital.

Regulators set capital adequacy levels so that companies have enough capacity to honor life insurance and annuity contracts in case of adverse financial developments.

Some companies with weaker capital ratios “could see their capital management plans impacted,” Dally wrote.

The “largest negative impact” to risk-based capital ratios would hit Prudential Financial and Brighthouse Financial hardest, but Aflac could also be affected as the company spins off its Japan operations into a separate subsidiary, he added.

Insurers Well Positioned

Dally and his team studied the capital ratios of 13 insurers and concluded that most companies won’t necessarily have to curtail capital management strategies as risk-based capital ratios for the group of companies have, on average, increased over the past 10 years.

Many insurers are overcapitalized and should benefit from higher cash flows to make interest payments and generate new capital, Dally said.

Even if capital ratios shrink, companies will remain above regulatory minimums while underlying risk profiles to which the companies are exposed won’t change.

Risk-based capital ratios held by Unum, Reinsurance Group of America and Torchmark Corp. are “potentially vulnerable,” to tax reform, Dally said.

Life and annuity insurers begin reporting third-quarter earnings next week and analysts will have an opportunity to question executives about the effects of the administration’s proposed tax rates.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].