Deferred Tax Asset Bridge Group Report September 2010 •
If the parent is unable to meet its obligations under the tax sharing agreement or has no intention to comply with the tax sharing agreement, the portion of the gross DTA that is dependent upon the parent’s payment would no longer be considered a good asset and would be treated as a reduction from stockholders equity. This has the same effect on equity as a valuation allowance against the DTA.
Summary In summary, insurance companies that are members of a consolidated group admit DTAs based on: • The amount reasonably expected to be refunded by its parent in accordance with the tax sharing agreement but no greater than the amount they previously paid. This is conservative since the insurance company could reasonably expect to have refunded an amount greater than what they previously paid in certain situations. • The amount expected to be realized within one year (three years under SSAP 10R) based on a separate company analysis. This is also conservative since the insurance company could reasonably expect to realize additional amounts from its parent in accordance with the tax sharing agreement in certain situations. Minimal risk is added by tax sharing agreements. As documented above, DTAs would not be admitted if the parent was not complying with the terms of the tax sharing agreement. Current tax receivables and DTAs admitted in accordance with the tax sharing agreement are intercompany receivables. The NAIC recognizes the lack of risk in intercompany receivables by not requiring any risk-based capital charge for receivables from parents, subsidiaries and affiliates. Therefore, special considerations for tax sharing agreements are not needed in the determination of an RBC amount for DTAs. B. Relationship of RBC Tax Adjustment and RBC on DTA There exists a regulatory concern that has been expressed as follows: “Since the purpose of the RBC formula is to trigger action for a weakly capitalized company, the RBC formula should be appropriate for a weakly capitalized company (e.g., trigger the action of developing a capital plan when the capital level relative to risk is weak). If a company at this level often cannot make use of tax credits, then tax credits should be minimal in the RBC formula.” For purposes of this statement, the term, “tax credits” is assumed to mean the explicit tax offset factors in the current life insurance company RBC formula. This concern is related to the major risk associated with the admitted DTAs, i.e., that there may not be sufficient future taxable income in the insurance company to take advantage of the tax deductions inherent in those reported DTAs. However, this issue differs in concept and application from the subject of the charge to our group, i.e., the recommended impact of DTAs on the RBC formula. The tax offset factors in the 1850 M Street NW Suite 300
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