A.M. Best Revisits Tax Law Impacts on Captive Insurer Ratings

In a February 2018 briefing, Best's Briefing, Impact of US Tax Reform on Group Rating Affiliations, A.M. Best observed that anticipated structural changes to certain reinsurance arrangements among affiliated insurance or reinsurance companies, prompted by the recent US tax reform law's enactment, could impact the rating agency's assessment of group rating affiliations.

In a new report, Tax Reform: No Impact on Captive Ratings Anticipated, A.M. Best said that the impact of tax reform is generally a positive for US-domiciled captives and a mixed bag for offshore captive insurance companies, though in some cases, it is a positive for offshore captives that have made the section 953(d) election under the Internal Revenue Code, which allows them to be taxed as a US corporation. However, the report said some parent companies are considering alternative captive strategies because of the sweeping changes.

A.M. Best said this report outlines how certain provisions of the Tax Cuts and Jobs Act may affect captives, with the caveat that the vast differences in corporate formations, the ways in which business is transacted, and the jurisdictions in which the companies operate makes a "one size fits all" assessment as to how tax reform has impacted captives impracticable.

Although the new tax law changes apply to the 2018 tax year, the reduction in the corporate tax rate, along with the repeal of the alternative minimum tax, benefits captives in 2017 as the rate reduction required that captives revalue their deferred taxes at the new lower corporate tax rate of 21 percent.

To date, tax reform has not affected the credit ratings of A.M. Best-rated captives. In many cases, the reduced corporate tax rate has resulted in higher net income, but for others, changes to the business structure may have affected operating performance. US-parented captives in foreign domiciles are working to achieve the most efficient solutions from an operations and cost perspective. Management teams considering strategic alternatives in the wake of tax reform continue to keep A.M. Best abreast as they contemplate changes to existing business or new corporate formations.

A complimentary copy of this briefing is available on the A.M. Best website with site login registration.

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