Tax Reform

A look at Trump Tax Reforms offers mixed benefits to U.S. life insurers, according to Fitch Ratings. The cut in the corporate income tax rate to 21% from 35% could boost life insurers’ cash flows and earnings, depending on how much of the tax saving insurers pass to customers through higher crediting rates or lower pricing. However, the tax cut will be negative for insurers’ risk-based capital (RBC) positions due to likely higher RBC requirements and lower deferred tax assets (DTAs). Importantly, the reforms do not affect the tax-advantaged status of life and annuity products – a reduction in these tax advantages could have triggered a material fall in product sales. Fitch notes RBC requirements are likely to increase given the reduced tax offset to RBC charges for credit, market, insurance and operational risk. To date, the National Association of Insurance Commissioners has not indicated any plans to introduce RBC formula changes or transitional measures to mitigate the reduced tax offset. Fitch expects DTAs admitted on insurers’ statutory balance sheets to decline by nearly 40%, on average, as a result of the tax cut. Admitted DTAs represent 8% of statutory capital across the industry but are more material for some insurers. The negative impacts on capitalization will be alleviated by an increase in the value of the margins in insurers’ statutory reserves, given the lower tax rate that will now apply when margins are released. These margins are the amount of reserve in excess of a best-estimate reserve and include provisions for adverse deviation and deferred gains. Insurers whose RBC levels fall below target as a result of the tax changes will plan to restore RBC over time. The tax reforms will reduce the amount of separate account “dividends received deduction” that insurers can claim, which will reduce the benefit to insurers’ earnings from the corporate tax rate cut. The reforms may also lead to less use of affiliated offshore reinsurance as base erosion provisions in the tax act are expected to reduce the associated tax benefit.…One concrete effect of the Tax Reforms has been expressed by the Construction industry. Seventy-five percent of construction firms plan to expand their payrolls in 2018 as contractors are optimistic that economic conditions will remain strong as tax rates and regulatory burdens fall, according to survey results released today by the Associated General Contractors of America and Sage Construction and Real Estate. Despite the general optimism outlined in Expecting Growth to Continue: The 2018 Construction Industry Hiring and Business Outlook, many firms report they remain worried about workforce shortages and infrastructure funding.” Construction firms appear to be very optimistic about 2018 as they expect demand for all types of construction services to continue to expand,” said Stephen E. Sandherr, the association’s chief executive officer. “This optimism is likely based on current economic conditions, an increasingly business-friendly regulatory environment and expectations the Trump administration will boost infrastructure investments. “Respondents are very optimistic about demand for all types of construction services as measured by the net positive reading – the percentage of respondents who expect a market segment to expand vs. the percentage who expect a market segment to contract. The net positive reading for all types of construction is 44 percent, the highest yet recorded in the association’s Outlook survey series. Broken down by market segment, contractors nationwide are most optimistic about the private office market segment, with a 22 percent net positive reading. This is followed by the other transportation and retail, warehouse & lodging segments, both of which had a 21 percent net positive reading. Water & sewer construction had a net positive reading of 20 percent; K-12 construction had a net positive reading of 18 percent and highway and hospitality construction both had a 17 percent net positive reading. Respondents were only slightly less optimistic about growing demand in other segments. There is a 16 percent net positive for both multifamily residential and public building segments, followed by a 13 percent net positive reading for power construction, an 11 percent net positive for higher education construction and an 8 percent net positive for federal construction. Association officials noted that 75 percent of firms say they will increase their headcount in 2018, up slightly from 73 percent last year. Most of the hiring will only expand head counts by a slight percentage per firm, however. Half of firms report their expansion plans will only increase the size of their firm by 10 percent or less. Meanwhile, only five percent of firms report plans to expand their headcount by more than 25 percent above their current size. Only three percent of respondents expect to reduce headcount, down from six percent last year. Association officials noted that firms in many parts of the country are already adding to their head counts. According to a new analysis of Labor Department data the association is releasing today, construction employment increased in 255 out of 359 metro areas between November 2016 and November 2017. Among the fastest growing metro areas are Riverside-San Bernardino-Ontario, California; New York City and Cheyenne, Wyoming.