Tax Update for Insurance Companies IASA Central States Conference - 2017

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Tax Reform ReadinessTable of Contents

Topic Slide Number

Outlook of Tax Reform 3

Overview of Tax Reform Proposals 8

Tax Reform Readiness 14

Immediate Tax Reform Planning Considerations 17

Contact Information 20

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Outlook of Tax Reform Proposals

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Tax Outlook Is Uncertain

Impossible to predict possibility of tax reform in 2017Many legislative priorities in addition to tax reform

Unclear if any tax legislation would be retroactive

to January 1, 2017

Substance of any tax reform is uncertain

Details of current proposals

need to be more fully developed

Could require bipartisan support

5

Election Results

Republican Donald J. Trump elected to serve as 45th President of the United States

Republican majority in House of Representatives241 Republican194 Democrat

Republican majority in Senate52 Republican46 Democrat2 Independent

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Important Aspects of Legislative Procedure

All tax legislation must originate in the House

60 votes in Senate are necessary to prevent filibuster

Budget reconciliation bills have procedural protections that facilitate passage

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Federal Budget Process

Congressional Budget & Impoundment Control Act of 1974

Framework for congressional budget process

Starts with President’s budget request

Congressional budget resolution

Authorization & appropriation

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Overview of Tax Reform Proposals

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Evaluation of Proposed Tax Rates and Ongoing Proposals Domestic Income Tax Reform Overview

Corporate Tax Rate Reform

Headline Rate

35% Current Tax Rate

25% Camp II Proposal

20% House GOP Proposal

15% President Trump

Proposal

Base

• Repeal Corporate AMT• Full Expensing of Capital Investments• Retain R&D Credit• Retain LIFO

• Interest Expense Limitation• Repeal Most Business Expenses (President

Trump)• Repeal IRC 199

Taxpayer Unfavorable/Favorable Proposals

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Domestic Reform ProposalsProvision Current Law President Trump House GOP Blueprint Camp II

Top Corporate Rate 35% 15% 20% 25%

Research Credit

Generally allows either a 20%credit for qualifying researchexpenses in excess of a baseamount, or a 14% alternative

simplified credit

Retain research credit, but repeal most other business tax

expenditures

Retain credit; Ways and MeansCommittee will “evaluateoptions” to make it “more

effective and efficient”

Research credit (alternative simplified credit) would be

permanent

IRC §199 Deduction andOther Business Deductions

Up to 9% deduction under IRC §199 for certain income

attributable to domestic production activities

Repeal most business tax expenditures except for the

research creditRepeal IRC §199

Repeal of IRC §199 phased out over two years (6% in year one, 3% in year two); repeal of percentage

depletion

Capital Cost Recovery

Taxpayers generally recovercosts under the Modified

Accelerated Cost RecoverySystem (MACRS)

Firms engaged in US manufacturing may elect todeduct the full cost of theircapital investments in year

one; option revocable withinfirst 36 months*

Full expensing in year one ofall assets, tangible and

intangible, other than land

Depreciation would be computed using straight-line method with

longer recovery periods (similar to ADS)

Net Operating Loss (NOL)** Available for 2-year carryback and 20-year carryforward

No Change Specified*

NOLs carried forward indefinitely, annual future

deduction is limited to 90% of net taxable income. NOL

carrybacks will no longer be permitted

NOL would only be permitted to offset 90% of the corporation’s

taxable income in the carryback or carryforward year

Interest Expense Generally deductible

Businesses that elect full expensing in year one will lose

their ability to deduct netinterest expense

Interest expense deductibleagainst interest income, butno current deduction for net

interest expense; net interest expense may be

carried forward indefinitely

Modifies IRC §163(j) with new thin cap rules; limit for adjusted taxable income reduced from 50% to 40%

* Previously in Trump’s proposal, but not included in the most recent guiding principles

** Please note that HR 2181 – Insurance Company Tax Modernization and Parity Act of 2017 will amend the IRC of 1986 and would repeal limitations related to consolidated returns and non life insurance companies.

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CAMP Proposal – Property & CasualtyP&C Insurance-Specific Provisions

• Modifications include replacing the fixed 15% reduction in the reserve deduction for P&C companies with a special formula.

• Tax exempt income of the company multiplied by a percentage equal to ratio of the tax exempt assets of the company to allthe assets of the company

Modifications to Proration rules for P&C companies

Discounting Rules for P&C insurance companies

• a. Require P&C insurance companies to use higher interest rate for IRC 846 purposes.‒ i. Use corporate bond yield curve to discount unpaid losses

‒ ii. 5 year limitation for special rule extending loss payment patterns for certain lines of business

• b. Repeal IRC 846(e) election to use company specific historical loss payment patterns.

• Deferral of tax deductions for reinsurance premiums paid to foreign based affiliates of domestic insurers until the actualinsured event occurs.

• In addition, ceding commissions received and recovered reinsurance will be excluded from income in situations where thepremium deduction has been disallowed.

Reinsurance-Specific ProvisionsNeal Reinsurance Bill

Prevention of arbitrage of deductible interest expense and tax-exempt interest income• Modifications to rules under IRC 265.

‒ i. C corporations, including insurance companies, would be required to calculate the amount of interest disallowed under IRC265 based on single method

‒ ii. Disallows interest deduction based on the percentage of the taxpayer’s assets comprised of tax–exempt obligations

‒ iii. Repeal special rule for qualified small issuer tax exempt obligations

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Health Insurance-Specific Provisions

• Eliminates net interest expense for businesses

• Eliminate Corporate AMT - Treatment of AMT credits accumulated not specified

• Repeal PPACA and all related business taxes enacted as part of that legislation, including:‒ The 2.3% excise tax on covered medical devices, which was suspended for 2016 and 2017 (after originally

becoming effective in 2013) and is now scheduled to take effect again in 2018, and ‒ The so-called “Cadillac” tax on high-cost employer-provided health plans, which, after being delayed for two

years, is currently set to take effect in 2020.

• Repeal Patient Protection and Affordable Care Act (“PPACA”) and the business taxes enacted as part of that legislation.

• Transition into a territorial system of taxation

Trump Administration Tax Proposal

House GOP Proposal

• Special Treatment of BCBS: Repeal special rules for Blue Cross Blue Shield and certain other health organizations.

‒ i.e., the 25 percent deduction, the exception from the application of the 20 percent unearned premium haircut, and treatment as stock insurance companies

• Repeal of exemption from tax for certain insurance companies and co-op health insurance issuers

• Repeal of credit for employee health insurance expenses of small employers

CAMP Proposal

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Global Insurance Company Considerations

Inbound – Do foreign parented insurance companies lose some of their competitive advantage over US parented entities?

• If a territorial tax regime is enacted, would one of the provisions defer the deduction of outbound premium similar to the Neal Bill?

• If a cash-flow border adjustable tax is adopted, how does it apply to outbound reinsurance contracts?

• Could the impact of US tax reform on entities domiciled in low tax jurisdictions drive certain re-domestication to the US?

• Will we see an uptick in M&A activity in the industry as the value of certain offshore entities is impacted?

• How will the changes to taxation of foreign insurers doing business in the US (FDAP, ECI, FET, withholding taxes, etc.) impact operating models, structuring, and intercompany cash flows?

• Will the benefit of risk distribution to the overall insurance marketplace be diminished if outbound reinsurance is not tax-advantaged? Will diversifying risk cost more and drive insurance prices higher?

Outbound – How will US parented entities react to potentially beneficial tax reform?

• Will the benefit of a lower US tax rate and the shift to a territorial system offset the loss of certain tax credits, deductions, and the cost of a one-time deemed repatriation of accumulated earnings?

• How will insurers plan for a one time deemed repatriation? Will companies take advantage of existing repatriation opportunities (e.g. repatriating PTI, triggering basis collector structures)?

• What will happen to existing foreign tax credit carryforwards?

• Will declining US corporate tax rates cause outbound insurers to evaluate global reinsurance arrangements?

• How will cash-flow the border-adjustable tax impact operating models, structuring, and intercompany cash flows?

• How will US owned, offshore captive insurers be impacted?

Insurance Industry

Landscape

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Reform Readiness

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With the possibility of tax reform on the horizon,companies will need to accurately analyze andassess the potential impact of the anticipated taxproposals.

Establish aplan forcommunicating ona regular basiswith keystakeholders inthis process

Prioritize thoseprovisions that aremost important tothe company andimplementaccordingly

Identify those taxexpenditures thatprovide importanttax benefits to thecompany

Measure the impactof provisions thatbroaden the tax baseand provideterritorial exemptions

Uncertainty around taxreform may lead to inaction,however, there is ...

Therefore, US companiesmay wish to consider ...

* President Trump, House GOP and Camp proposals

As tax reform proposals undoubtedly evolve throughout 2017, it will be important to have an agile approach to analyzing the tax effects of new proposals on business operations.

Navigating the UncertaintyTax Reform Readiness

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ASC 740 / SSAP 101 Considerations

SSAP 101 Considerations:

• Potential for reduced surplus due to DTA haircut

• Paragraph 11.a. admissibility if NOL carryback rules change

• Risk Based Capital (RBC) calculation

• Transition rules?

Other considerations:

• State tax conformity

• Disclosures

Evaluate the impact on:

• Deferred taxes – unfavorable impact for net DTA position, favorable impact for net DTL position

• Inventory of temporary differences – e.g., DTA for interest could be eliminated

• DTAs for specific tax attributes – foreign tax credits (i.e., future availability), AMT credits

• Valuation allowance implications

‒ Change in net deferred tax position

‒ Future projections of income

• Future effective tax rate (ETR)

‒ Unfavorable impact for proration of TEI, Section 833(b), Section 199, interest or other business expenses

‒ Favorable impact for ACA fee, exempt foreign sales, dividends received and non-passive Subpart F income

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Immediate Tax Reform Planning Considerations

Convert to Fiscal Year end to Avoid “Transition” Year

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Tax Reform Proposals Include a Reduction in Corporate Rates Between 10 – 20%

Accounting Method Planning Implemented Prior to Rate Reform May Result in Permanent Rate Reduction for Taxpayers

Current Gross DTA Cash Tax Reduction if Deduct in 2017 at 35% Rate

Cash Tax Reduction if Deduct in 2018 at 25% Rate

Permanent Benefit of Accelerating Deduction into 2017

$100,000,000 $35,000,000 $25,000,000 $10,000,000

Rate Reduction Planning – Permanent Cash Savings

Generally, a taxpayer changing its method ofaccounting for an item of income or expenseonly shifts the recognition of such itemsbetween deferred and current tax expense.The change would typically produce cash taxsavings but rarely creates a permanent taxbenefit.

In taxable years bordering a change infederal corporate tax rates, however,taxpayers can capitalize on a permanent taxsavings opportunity by decreasing current taxexpense as much as possible in years wherea decrease in rates is anticipated.

Tax Reform has provided Companieswith an opportunity to use accountingmethod changes which may result incash tax savings as well as permanentrate savings.

• Unbilled revenue on professional services

• Deferred revenue

• Disputed revenue

• Defer advanced payments

• Prepaid expenditures

• Accruals and reserves review

• Rebate methods• Recurring Item

Exception• Inventory and

UNICAP analysis

• Repair analysis• Dispositions /

Casualty loss• Indirect cost

analysis for self-constructed property

• Bonus depreciation

• I.R.C. § 174 costs

• Ready and available/lag

• Asset reclasses

• I.R.C. §199 enhancement

• Lobbying reviews

• Meals and entertainment

• Tax basis reviews (federal and state)

• Federal Credits and Excise Taxes

• Consider captive insurance co:

o Workers compo Environmental o FAS 106 o Other Risk• Consider

prefunding VEBA:

o Severanceo Trainingo Vacation

Fixed Assets

Deductions & Credits

Revenue Recognition

Captive Insurance & VEBA

Permanent Attribute Planning

Federal Tax Planning

Considerations

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Expense Acceleration and Revenue DeferralInsurance Specific

Insurance / Health

Premiums: Income inclusion review under Treas. Reg. §1.832-4 that could include Advanced, Multiyear, Fluctuating Risk and Retrospectively Rated contracts

Premiums: Unearned premium of life insurance products issued by Property and Casualty companies taxed under section 807

Premiums: Deficiency Reserves review for convertible features in the contract

Premiums: Deferred and uncollected life premiums review

Premiums: Deferred Acquisition Cost Review

Investments: Impairments – Dispositions / Worthlessness and loss position review

Investments: Separate Account Company Share Percentage, Dividend efficiency review

Reserves: Review of inefficiencies, methodologies, principles based reserving, redundant, disputed claims and previous adjustments

Health Insurer: Administrative Services Contract revenue recognition review and IBNR review

Health Insurer: Health Insurer Fee review of underlying policies feeding into SHCE for exclusions

Health Insurer: Intangible deduction for provider networks, subscriber groups and software

Health Insurer: Pharmacy Rebate revenue accrual review to determine if fixed and determinable

International: Foreign Currency reviews under Sections 985, 987 and 988

International: Subpart F / E&P / FTC / Section 954(i) reviews

Mutual: Policyholder dividend program review

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Contact Information Convert to Fiscal Year end to Avoid “Transition”

Year

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Contact Information

Thomas F. Wheeland Partner, BKDSt. Louis 314.802.0213twheeland@bkd.com

Brandy L. ShyDirector, BKD St. Louis314.236.5181 bshy@bkd.com