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last updated on February 18, 2009

TAXATION OF SMALL PROPERTY/CASUALTY COMPANIES

THE ISSUE

To increase the small property/casualty insurance company investment income election (Internal Revenue Code Section 831(b)(2)) to reflect the inflationary impact since its enactment in 1986.

IT IS IMPORTANT BECAUSE

There are many small property/casualty insurers organized as mutual companies. These companies were originally formed to offer insurance coverage to specific groups, often in rural areas, that may not have otherwise been able to obtain affordable coverage. Many of these small mutual companies serve farming communities. These companies rely on the tax benefits currently offered to small property/casualty insurers to provide additional surplus and cash flow so that all available financial resources of the companies can be used solely for paying claims.

Since the Tax Reform Act of 1986, Section 831(b) of the Internal Revenue Code has allowed property/casualty insurance companies with direct or net written annual premiums not exceeding $1.2 million to elect to be taxed on their net investment income. This election level has not been adjusted to reflect that last 23 years of inflation. If it were indexed in order to account for inflationary changes since 1986, the investment income election would be $2,028,000.

LEGISLATIVE HISTORY

NAMIC has led the legislative effort to increase the Section 831(b) level. During the 108th Congress, NAMIC was successful in getting this provision included in the FSC/ETI “JOBS” bill that was passed by both the House and Senate. Unfortunately, in order to achieve revenue neutrality, many provisions were ultimately removed from the final package including the 831(b) provision, and the issue carried over to the 109th Congress.

During the 109th Congress, NAMIC succeeded in getting legislation introduced to increase the Section 831(b) investment income election from the current $1.2 million to $1,971,000 with an annual cost-of-living adjustment. H.R. 3360 was introduced by Rep. Jim Nussle, R-Iowa, and its companion bill, S. 1553, was introduced by Sen. Christopher “Kit” Bond, R-Mo. Although there was no movement on the legislation, NAMIC worked tirelessly to gain further support and educate members of Congress about the importance of this legislation.

During the 110th Congress, NAMIC was successful in having legislation introduced again. Sens. Blanche Lincoln, D-Ark., and Bond introduced S. 2040, and Reps. Earl Pomeroy, D-N.D., and Paul Ryan, R-Wisc., introduced H.R. 6755. Both pieces of legislation would increase the Section 831(b) investment income election from the current $1.2 million to $1,971,000 with an annual cost-of-living adjustment. Through the NAMIC’s Congressional Contact Program, NAMIC and its member companies discussed the importance of this legislation with 340 Representatives and Senators.

NAMIC has been successful in increasing awareness and garnering bipartisan support for adjusting this important provision. The primary obstacle has been an appropriate legislative vehicle on which we can attach the provision. As Congress continues to address tax legislation during the 111th Congress, NAMIC will actively pursue a potential vehicle for its amendment.

This remains a top legislative priority for NAMIC during 2009.

NAMIC POSITION

NAMIC strongly supports the expansion of Internal Revenue code Section 831(b)(2) to reflect the inflationary impact since its enactment in 1986. The modification of this section is very important to the communities that depend on small property/casualty insurance companies to provide them with affordable property insurance. Many small companies are approaching the current $1.2 million limit and both they and their customers will be adversely impacted if it is not raised. With the increased election level tied to an annual adjustment in the cost-of-living, these insurance companies can continue to keep premiums low in rural areas where consumers may not have otherwise been able to obtain affordable coverage.

CONTACT INFORMATION

For more information please contact Marliss McManus, senior federal affairs director, at (202) 628-1558 or mmcmanus@namic.org.