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Analysts: Obama Budget Not That Bad for Life Insurers

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If the life insurance revenue raisers in the Obama administration’s 2012 budget proposal somehow become law, they may have only a small effect on company profits, securities analysts predict.

Jeff Schuman and other analysts in the Hartford office of Keefe Bruyette Woods Inc. have come to that conclusion in a commentary on the 2012 Obama administration budget proposal.

Federal fiscal year 2012 starts Oct. 1.

The Obama administration says it wants to spend $3.7 trillion in 2012 and White Houseexpects to produce a budget deficit of about $1 trillion.

If implemented as written, one of the “revenue raiser” provisions in the proposal would expand the “pro-rata interest expense disallowance” for corporate-owned life insurance (COLI).

This provision would limit a company’s ability to take interest deductions except in cases in which the insured was a 20% owner of the business.

The provision would cancel out the inside buildup for COLI insureds who were officers, directors or employees, according to an analysis prepared by tax policy specialists at the American Council of Life Insurers (ACLI), Washington, and distributed in May 2010 by the Society of Actuaries, Schaumburg, Ill.

The Obama administration is hoping the COLI change would raise $7.7 billion between now and 2021.

Another provision would reduce the dividends-received deduction (DRD), which is supposed to change the rules life insurers use when calculating a deduction that is supposed to protect them against double taxation.

The Keefe Bruyette analysts suggest that the COLI and DRD changes may not

make it into the tax code.

“Several times, going back at least as far as 1998, Democratic administrations have sought to disallow, on a pro rata basis, the deductibility of interest expense for companies with COLI programs,” the analysts say. “Given the numerous failed attempts, we’re skeptical that this will pass.”

The change might depress sales of one type of life insurance, but it should not cause a huge effect on life insurance companies as a whole, the analysts say.

The DRD change is highly technical in nature, and the Obama administration is estimating it could raise $465 million in 2013, the analysts say.

“Although general account DRD is discussed, our initial reading is that the proposal, like last year, would primarily affect separate account DRD,” the analysts say. “As a result, it appears the impact would fall primarily on companies with material separate account business.”

A quick analysis suggests that a DRD change would translate into hit of less than 10 cents per share even for the publicly traded life companies that seem as if they could be most affected by the change, the analysts say.