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Sun Life's (SLF) Tax, Q4 Net Income to Lower on Tax Reform

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Canadian life insurer Sun Life Financial Inc. (SLF - Free Report) estimates a reduction of $130 million in tax expenses owing to the new tax law. This will further boost the company’s net margin.

President Donald Trump has signed the Tax Cuts and Jobs Act into law on Dec 22, 2017. The tax reform policy, an overhaul of the tax code after 31 years, lowers the corporate tax burden to 21% from 35% this New Year onward. The $1.5 trillion tax cut will likely be conducive to economic growth. The tax reform, inclusive of the lower domestic tax rates on repatriation of income stashed offshore, will serve the foreign insurers well, who had earlier moved abroad  to avoid the high US taxation. Now the same companies might opt to return to the home turf courtesy of the new amended tax policy.

However, due to reduced tax rates, insurers are writing down deferred tax assets that in turn will adversely impact their risk-based capitalization levels and also lower net income. Sun Life estimates a $200-million charge for the fourth quarter of 2017 due to U.S. corporate tax reform on actuarial liabilities, deferred tax assets and deferred tax liabilities plus a one-time tax charge on deemed repatriation of foreign earnings.

Recently, Arch Capital Group Ltd. (ACGL - Free Report) expected to write down a portion of its deferred tax asset by about $15-$20 million in the fourth quarter of 2017. Hartford Financial Services Group, Inc. (HIG - Free Report) announced that this rate cut is anticipated to affect its net deferred tax asset position and expects fourth-quarter results to witness a reduction of nearly $850 million. RenaissanceRe Holdings Ltd.’s (RNR - Free Report) write-down of its deferred tax assets will lower the net income by $40 million during the period wherein the tax bill will be enacted.

Though this is an initial blow to be borne by the companies, the long-term effect however, remains attractive. This is because a lower tax rate will always lessen a company’s tax burden, aiding its margin expansion in the process as well as boosting the bottom line.  

Shares of Sun Life have outperformed the industry in the last three months.  While the stock has gained 6.3%, the industry has increased 5.3%. The stock has also seen he Zacks Consensus Estimate for 2018 earnings being moved 1.7% north in the last 60 days.

Sun Life is scheduled to report fourth-quarter earnings on Feb 14. Though its favorable Zacks Rank #2 (Buy) increases the predictive power of ESP, its Earnings ESP of -1.24% makes surprise prediction inconclusive per our proven model as we always need a positive ESP to be confident about an earnings surprise. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Nonetheless, the company’s concerted efforts to expand globally and thus intensifying its approach toward the Asian market, business mix changes and expansion of the Global Asset Management business should help it post solid numbers in the to-be-reported quarter.

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