How will the new tax overhaul affect annuities?

President Donald Trump signed the new Tax Cuts and Jobs Act (TCJA) into existence last month. How will the new tax overhaul affect annuities?Financial experts Ryan Krueger, a securities analyst at Keefe, Bruyette & Woods Inc., and Sean Dargan, an analyst at Wells Fargo researched and reported the following ideas about the effects of TCJA provisions on annuity issuers:

1. Annuity issuers' finances will look different. Dargan's team at Wells Fargo predicts that many issuers will end up with lower capitalization levels because the TCJA will reduce life insurers' ability to deduct reserves from taxable income. The Walls Fargo team predicts that the rating agencies and state insurance regulators will adjust their risk-based capital rules and formulas to reflect the new tax rules.

2. The issuers' profits could be a lot higher. Krueger estimates average life insurance effective tax rates will fall to 19%, from 21%.

3. Issuers that avoided getting into big trouble during the Great Recession-era could do even better than the others. Some life insurers have large "deferred tax assets," or the ability to take huge, stored-up tax deductions, because of giant losses they suffered in 2009 and 2010.By reducing corporate tax rates, the TCJA will reduce the value of those deferred tax assets. Krueger cites American Equity Investment Life Holding as an example of the kind of the annuity issuer that could benefit from all of the TCJA tax cuts without having to write down the value of its capacity to take tax deductions.

4. Issuers could be a little tighter with cash. The TCJA includes complicated tax rules that affect accounting for "deferred acquisition costs," or the expenses associated with acquiring new life and annuity customers.The new rules should have no effect on life insurers' overall tax payments, in the long run, but the rules could make issuers pay some taxes sooner, Krueger writes.
The change could make cash flow generation "modestly worse over the intermediate term" at some large annuity issuers, Krueger writes.

5. Consumers could get better deals. Krueger predicts that insurers will pass at least some of their tax savings on to customers through new business pricing. "Competitive pressures and growth will likely drive this over time," he writes.
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