Computing Taxable Income for Property-Casualty Insurance Companies

Knowledge of federal income taxes is essential for policy pricing, company valuation, and financial modeling, and actuaries frequently aid tax accountants in preparing the federal tax returns. In the past, some actuaries used rules of thumb to avoid dealing explicitly with taxes, such as grossing up the underwriting profit margin by 1/(1 – 35%) and using after-tax investment yields. These short-cuts ignore significant tax effects and may lead to pricing inaccuracies and valuation errors. For most industries, taxable income is based on the general (GAAP) financial statements, with adjustments for differences between general and taxable income. For insurers, taxable income is based on statutory income with similar adjustments, as covered here.1 This study note has two parts. One part covers regular and alternative minimum taxable income, with sections on tax exempt income, proration, dividends received deduction, revenue offset, and the minimum tax credit. The other part covers loss reserve discounting. Only the basic text of this reading is on the syllabus. The end-notes and appendices have additional information for actuaries using this study note in their company work. The student workbook has practice problems to aid candidates preparing for the exam.