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SSAP 101 and SSAP 10R: Are Insurance Companies Leaving Surplus on the Table?

There have been constant changes in the area of tax accounting for insurance companies over the last several years. These changes have required insurers to evaluate all of the changes made by Statement of Statutory Accounting Principles (SSAP) 10R and now by SSAP 101 – Income Taxes, effective January 1, 2012. Unfortunately, many insurance companies have not captured enough information to maximize the admitted Deferred Tax Asset (DTA), and as a result, are not maximizing their surplus.

Why would a company adopt such an approach? Is it a lack of in-house expertise to perform complex calculations? Is it a concern about what an auditor or regulator would accept? Is it just a lack of time to dedicate to the topic? In addition to providing a summary of the most critical changes that SSAP 101 will require, we have first listed a few helpful hints in maximizing your deferred tax asset, and hopefully we can help simplify a complex issue.

  • Is your admitted deferred tax asset being limited by your surplus? If so, make sure you have first applied Part 1 of the admissibility test related to federal income taxes paid in prior years that can be recovered through loss carrybacks. If you have incurred taxes in the current or prior year then you can first apply your reversing DTAs against those taxes that are not subject to the adjusted capital and surplus limitation. Remember, actual loss carryback claims are not required to utilize the Part 1 calculation.
  • DTAs related to net operating loss carryforwards can be admitted if the company can document future projected taxable income (after consideration of other current reversing DTAs) within the reversal period, which will now be extended to three years for many companies.
  • For determining the reversal timing for the loss reserve discount DTA, make sure you have evaluated your recent loss payout pattern. Your historical loss development triangles can support your calculation of what is expected to be realized over a one-year or three-year period.
  • Determining the reversal of unrealized capital losses can also be tricky since there is not a “scheduled” reversal period. Has management evaluated its historical turnover of its investment securities? This analysis may support a certain percentage of reversal for unrealized capital losses. Tax planning strategies may also be used here.
  • When analyzing when the temporary items will reverse, it’s important not to group items together that actually have different patterns of reversal.
  • Impairments (such as other-than-temporary impaired investments) should be included as a deferred tax asset. Tax planning strategies may be considered in determining the expected realization of these DTAs.
  • Once a tax free methodology for liquidating an affiliated entity has been discovered, it is no longer appropriate to include a deferred tax liability related to the ownership of that affiliated entity’s stock.
  • For an insurance company in a consolidated group, a current year loss that will be offset by income from other group members results in a current recoverable to the company that is a component of the current income tax provision, instead of a DTA subject to the admissibility calculation.
  • Tax credits are DTAs, for example, an AMT or Foreign Tax Credit.
  • Finally, don’t assume that the company must intend to actually take an action suggested in the tax planning strategies; in actuality, the company must only have the ability to do so.

SSAP 101 was fully adopted in November 2011, with an effective date of January 1, 2012. It replaced SSAP 10 and SSAP 10R. Below is a highlight of the changes made by the new SSAP.

  • The three-part test for admissibility was not drastically changed; however, the calculation was altered. A summary of the three-part test is as follows:
    • Part 1 – For federal income taxes paid in prior years, the new guidance clarifies that the carryback period corresponds with IRS tax loss carryback provisions, not to exceed three years.
    • Part 2 – For risk based capital (RBC) reporting entities, a company’s RBC ratio will be used to determine the admissibility calculation. The key benchmarks are 200% and 300% of authorized control level (ACL). For 2012 quarterly reporting, the numerator is total adjusted capital without net DTAs, and the denominator is prior year ACL.
      • Current period RBC ratio determines reversal period (0, 1, or 3 years)
      • Current period RBC ratio determines surplus limitation (0%, 10%, or 15%)
    • Part 3 – Character and pattern of reversal are considered but additional scheduling is not required.
  • The implementation of SSAP 101 and any resulting financial statement impact should be accounted for as a change in accounting principle in accordance with SSAP No 3. This may require an additional calculation as of December 31, 2011 to determine the impact.
  • The capital and surplus limitation of Part 2 will now use ending capital and surplus as of the reporting period end date, as opposed to the SSAP 10R calculation that used the prior period ending capital and surplus. 
  • SSAP 5R was modified in relation to tax contingencies to a standard of "more likely than not." 
  • Disclosure of impact of expanded admissibility is no longer required, as expanded admissibility from SSAP 10R is no longer elective.
  • New guidance was issued regarding tax planning strategies, and disclosures related to tax-planning strategies involving reinsurance are now required.

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