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Life Health > Life Insurance

Top 50 Owe The Tax Man More

By Staff Writer

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Taxes in 2004 for this group rose 77% over 2003

by Jim Connolly

Life and health insurers are incurring more in federal and foreign income taxes, according to 2004 data from the National Association of Insurance Commissioners annual database compiled as of March 15 by National Underwriter Insurance Data Services/Highline Data. The findings do not include taxes on capital gains.

These top 50 companies reported incurring $9.27 billion in taxes in 2004, a 77% increase from 2003s $5.25 billion. That increase follows a 113% rise in 2003 from 2002s $2.46 billion. The last decline in taxes paid was 9% in 2002 over 2001s $2.72 billion.

There are many different reasons why taxes incurred could have increased in 2004, says John Latham, an insurance tax practice partner with Ernst & Young, New York. But he also cautions that there is a big difference between taxes incurred and taxes actually paid.

Latham notes that corporate America has become more cautious in establishing contingency reserves for possible exposures and this could result in accruing reserves for additional liabilities. In general, there is a greater sensitivity as a result of recent events such as implementation of the Sarbanes-Oxley Act of 2002, he says.

Feedback from a sampling of four member companies of the American Council of Life Insurers, Washington, suggests a number of possible reasons for the increase, according to Laurie Lewis, ACLI senior vice presidenttaxes and retirement security.

The simplest is that companies are more profitable, she adds.

In part, this is borne out by increases in net gain from operations. The top 50 in taxes incurred also reported increases in net gain of 16%, 53% and 11% in 2004, 2003 and 2002, respectively. And, net gains closely tracked increases in taxes for 17 of 50 companies.

Another possibility, Lewis says, is a change in reserves. One member company, she continues, indicated it had sold a lot of annuities with guarantees and when the stock market bottomed in 2002, those guarantees became liabilities that required higher reserves. When the market rebounded in 2004, Lewis says, those reserves were released, reducing expenses and increasing taxable income.

The financial statements from these top 50 companies support this possibility. In 2002, reserves increased 53% over 2001. And, percent changes for reserves posted by these top 50 inversely relate, to some degree, percent changes in net gain. For instance, in 2002, when reserves increased 53%, net gain for these companies increased 11%. In 2003, when reserves dropped 14%, net gains from operations increased 53%, and, when reserves increased again in 2004 by 7%, the increase in net gains was a more modest 16%.

None of the companies indicated that any major changes in tax law responsible for boosting taxes paid, Lewis says.

Companies with large year-over-year changes were contacted by National Underwriter to see if there were company-specific reasons for changes to taxes incurred or paid. Companies that responded offered reasons for the change, many of which concurred with what Lewis said.

An 81% increase in net gain in 2004 over 2003 largely was responsible for the jump in taxes paid by MetLife, according to Chris Breslin, a spokesman. Metropolitan Tower Lifes 112% increase in earnings was affected by a release of reserves, he adds.

Responding to an inquiry regarding TIAAs 3,324% increase in federal taxes in 2004, TIAA spokesperson Stephanie Cohen Glass notes that although 2003 and 2004 were taxable years, the referenced amounts represent federal income taxes accrued but not paid by TIAA during 2004. TIAA established a contingent liability during 2004 to reserve against federal income tax exposures relating to years 1998-2004, she continues. TIAA first became taxable in 1998, Cohen Glass adds.

In the case of Pacific Life Insurance Company, the 592% increase in tax in 2004 over 2003 is largely attributable to the reduction in Pacific Lifes interest in PIMCO, according to Tennyson Oyler, a company spokesperson.

Three reasons were given for Lincoln National Life Insurance Companys higher tax payment in spite of a decrease in net gains from operation, according to spokesman Tom Johnson.

They include: true-ups, a larger gap between statutory and tax reserves, and an increased deferred acquisition cost.

Because tax return preparation occurs after statutory tax expense calculations, the statutory information contains some preliminary information, he says. In 2003, the true-up resulted in an overpayment of taxes in 2002, which reduced taxes paid in 2003. In 2004, the true-up resulted in additional payments for 2003 and prior periods.

The gap between statutory and tax reserves grew, increasing statutory reserves without generating an increase in tax reserves, thus generating a book to tax difference and an additional tax expense, he adds.

Finally, Johnson explains, the increase in tax DAC in excess of the prior years amount amortized in the current year, created an additional tax expense.

Union Fidelity Life Insurance Co. experienced a 3,176% increase in taxes paid in 2004. The company is part of GE Insurance Solutions, a unit of GE. UFLIC experienced the increase because it retained business in the Genworth Financial spin-off, says Dean Davison, a spokesperson for GE Insurance Solutions, Overlook Park, Kansas office. As part of that retention, there were taxes that had to be paid, he explains.

At Aegons Transamerica Life Insurance and Annuity Company, an increase in net gain to $173 million in 2004 from $27 million in 2003 explains the increase in taxes, according to Todd Bergen, corporate initiatives manager.

Reproduced from National Underwriter Edition, April 8, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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