Property/casualty insurers should see their domestic earnings grow by approximately 14 percent on average in 2018, thanks to the lower U.S. tax rate, according to a Morgan Stanley research note.

Morgan Stanley assumes that larger insurers including American International Group, W.R. Berkley Corp., Brown & Brown, Progressive and Allstate stand to be the “largest beneficiaries” of the tax Congress passed at the end of 2017.

The property/casualty insurance industry’s average effective tax rate in the U.S. had been in the low 30 percent range, and it will drop to 21 percent, thanks to the controversial new tax cut law. (Morgan Stanley estimates an effective tax rate for U.S. P/C companies it covers will range between 16 percent and 25 percent.)

Still, there are nuances, as Morgan Stanley notes, with the tax law’s potential impact on deferred tax assets or liabilities. For example, Morgan Stanley estimates that W.R. Berkley’s book value will grow by 11 percent or more, due to a $35 billion benefit from the new tax law. At the same time, while the law could help AIG overall, it might leave it with an initial hit of about $7 billion (10 percent of book value). The Hartford could see an approximate hit of $700 million, or 5 percent of its book value, Morgan Stanley said.

The Hartford’s own estimates went a step further on Jan. 8, with the property/casualty insurer disclosing that the new U.S. tax law will reduce its Q4 2017 financial results by about $850 million, due to the law’s effects on its net deferred tax assets.

One potential barrier to higher earnings after the new tax law: if companies decide to share the wealth or reinvest.

Morgan Stanley said it expects some companies “in a competitive marketplace” to reinvest some of the tax savings into their operations, “including hiring talent, improving platforms or sharing with customers in the form of lower pricing.” This trend, Morgan Stanley added, “could erode” the potential earnings upside.

Source: Morgan Stanley