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Credit Suisse Weighs in on Obama Budget

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The insurance revenue raisers in the Obama 2012 budget proposal law are unlikely to become law, but, if they do, they could cause a noticeable hit to some insurers’ earnings, securities analysts say.

The analysts, at Credit Suisse Securities (USA) L.L.C., New York, say they think a proposed dividends-received deduction (DRD) change could cut earnings as much as 10% at one large, publicly traded insurer, and that another proposal, to change the treatment of corporate-owned life insurance (COLI) policies, could cut earnings between 1% and 5% at two large, publicly traded insurers.

Federal fiscal year 2012 starts Oct. 1.

The Obama administration’s fiscal year 2012 budget proposal calls for the government to spend $3.7 trillion in 2012 and generate a $1 trillion deficit.

The DRD provision in the proposal would reduce a deduction that life insurers use to protect themselves against double taxation on dividend income.

Another “revenue raiser” provision would expand the

“pro-rata interest expense disallowance” for 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 could cancel out the benefits from inside buildup for COLI insureds who are officers, directors or employees.

Analysts in the Hartford office of Keefe Bruyette Woods Inc. suggested the effects of the changes would be manageable.

At Credit Suisse, the analysts say they think the DRD proposal is the one with the most potential to have a material impact.

But, like the Keefe Bruyette Woods analysts, the Credit Suisse analysts say they are skeptical about the idea of any bill that includes significant new taxes passing.

- Allison Bell