Tax Cuts and Jobs Act considerations for life actuaries 22 May 2018

Presenters Jeff Stabach, FSA, MAAA Manager Insurance and Actuarial Advisory Services Ernst & Young LLP

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Background H.R. 1 introduced in the House on November 2, 2017 House version of bill passed November 16, 2017 Senate version of bill passed December 2, 2017 Conference Report filed December 15, 2017 House and Senate passed H.R. 1 on December 20, 2017 Tax Cuts & Jobs Act (TCJA) signed into law by president Trump on December 22, 2017 Changes to Internal Revenue Code (IRC) include modifications to corporate tax rate and insurance provisions that go into effect for taxable years beginning after December 31, 2017

Corporate tax rate 21% effective for taxable years beginning after December 31, 2017 Actuaries should be considering impact on: Product pricing Asset adequacy analysis Solvency requirements Deferred tax asset development

Reserve calculation changes Highlights of Items changed or removed under IRC section 807 Changed calculation of “life insurance reserves” Changed interest rate used to calculate amounts under insurance and annuity contracts that don’t involve life, accident or health contingencies For purposes of determining life insurance reserves, removed requirements to utilize: Applicable Federal interest rate Prevailing state assumed interest rate Prevailing commissioners’ standard tables

Reserve calculation changes Additional items changed or removed under IRC section 807 Changed reserve method selection as of the issue date of contract Removed reference to two-year full preliminary term method for noncancellable accident & health (A&H) contracts Removed supplemental benefit reserve references to National Association of Insurance Commissioners (NAIC) annual statement reserves Removed qualified substandard risk rules Changed 10-year spread under IRC section 807(f)

Life insurance reserve calculation Life insurance reserve for non-variable contracts is the greater of: The net surrender value of the contract 92.81% of the reserve determined using the tax reserve method Life insurance reserve for variable contracts: The greater of the net surrender value or the portion of reserve separately accounted for under IRC section 817, plus 92.81% of the excess of the reserve using the tax reserve method over the amount determined in 1)

Tax reserve method Tax reserve method: Commissioners’ Reserve Valuation Method (CRVM) prescribed by the NAIC for contracts covered by CRVM Commissioners’ Annuities Reserve Valuation Method (CARVM) prescribed by the NAIC for contracts covered by CARVM NAIC prescribed method for noncancellable A&H contracts NAIC prescribed method for other contracts or a method that is consistent with the methods above if no NAIC method prescribed Reserve calculated using the tax reserve method, “which is applicable to the contract and in effect as of the date the reserve is determined”

Life insurance reserve calculation Additional observations: Deficiency reserves and asset adequacy reserves are not allowed Deferred and uncollected premiums are excluded Net surrender value floor applies Statutory reserve cap applies No double-counting of items to determine reserves

Other reserves IRC section 807(c)(2) – unearned premiums and unpaid losses IRC section 807(c)(3) – insurance and annuity contracts not involving life, accident or health contingencies IRC section 807(c)(4) – dividend accumulations and amounts held at interest IRC section 807(c)(5) – premiums received in advance and premium deposit funds IRC section 807(c)(6) – reasonable special contingency reserves (e.g., premium stabilization) Only change was to 807(c)(3), reserve calculations

Reserves for insurance and annuity contract amounts that don’t involve contingencies Applies to amounts under insurance and annuity contracts that don’t involve life, accident or health contingencies Amounts discounted at interest only Interest is highest rate or rates permitted to be used to discount obligations by the NAIC Net surrender value floor applies

Transition rule for reserves The difference between reserves that are calculated under the new method and the old method must be determined as of the close of the current tax year. The difference between reserves must be taken into account pro rata over the following eight years.

Other reserve considerations New reporting rules with respect to reserve balances and the method of computing reserves “(at such time and in such manner as the Secretary shall prescribe)” Change in computing reserves under IRC section 807(f) treated as a change in method of accounting (effect spread over a maximum of four years)

Other impacts to life insurance companies DAC tax changes under IRC section 848: Amortization period increased to 180 months (was 120) Capitalization percentages increased as follows: Specified annuity contracts = 2.09% (was 1.75%) Specified group life insurance contracts = 2.45% (was 2.05%) Other specified contracts = 9.20% (was 7.70%)

Questions ?

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