Obama tax proposals unlikely to cause rating revisions

Ratings are unlikely to be affected in the short term by President Obama’s budget proposal, which calls for taxes on overseas revenues by US companies.

This is according to AM Best, which said that depending on the final outcome, companies are likely to seek operating alternatives to ensure capital efficiency if, and when, the tax benefits for non US companies are eliminated.

The proposal calls for taxes on overseas revenues by US companies and a new approach to taxing foreign profits. The ‘transition tax’ on overseas money imposes a 14 percent tax on US companies with overseas revenue, followed by a 19 percent tax on future profits.

However, AM Best explained that the current administration has tried to eliminate this tax benefit unsuccessfully in previous budget proposals so that any resolution of the issue could be years away.

Opposition has come from many members of Congress, particularly for states that have considerable exposure to natural catastrophes. Their concern is that a tax increase could lead to increased costs for re/insurance coverage or possibly a decrease in allocated re/insurance capacity for less profitable risks.

“Over the past several years, there have been various initiatives to make greater insurance capacity available to catastrophe-prone states, the most recent being the relaxation of collateral requirements in some states for foreign reinsurers operating within those jurisdictions. The imposition of this proposed tax would be in direct opposition to such initiatives,” said AM Best.