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.