Deferred Tax Asset Bridge Group Report September 2010 the total DTA within the life industry was non-admitted. The comparable number for P/C companies was 49%; for health insurers, 74%. In 2007, the last year when the new limits were not available to any company, the non-admitted portion for the life industry was almost 70%. The comparable number for P/C companies was 57%; for health insurers, 78% (see Appendices 3 through 5). From a risk to capital and liquidity perspective, capping the admitted portion of the DTA as currently codified essentially serves the same function as would a capital charge in the RBC calculation. While a capital charge in the RBC calculation increases the Authorized Control Level (ACL) Risk-Based Capital (the denominator in the RBC calculation), the capping of admissibility reduces the Adjusted Capital (the numerator in the RBC calculation). Either approach serves to reduce the RBC ratio for companies with DTAs. By looking at the aggregate industry numbers as of December 31, 2009, we can estimate the RBC charge that would be required to duplicate the effect of the current cap as shown in Appendix 2. For the life insurance industry, the RBC charge that would be required to duplicate the effect of the current cap is about 14%, outside of any covariance. 8 However, when the RBC ratio is higher, it takes more capital to cover a smaller amount of RBC, making the implied charge lower. If the Life RBC ratio was 200% of ACL, for example, the equivalent charge is around 50%. For the P&C industry, the RBC charge that would be required to duplicate the effect of the current cap is about 13%, outside of any covariance. For the health insurance industry, the RBC charge that would be required to duplicate the effect of the current cap is about 24%, outside of any covariance. The presence of the surplus caps also creates volatility in statutory surplus for companies that have DTAs in excess of the surplus cap. This volatility is not due to any risk to the insurer, but rather it is due to the application of statutory accounting rules. Thus, we do not think it appropriate to include consideration of this volatility in developing an RBC charge. The following hypothetical example illustrates the impact of capping by assuming a static balance sheet with the exception of unrealized gains and losses. Consider what happens with unrealized losses on an investment. These represent a source of DTAs for insurance companies as the tax rules do not recognize the loss until realized either through a sale or if the security is determined to be worthless. On the other hand, statutory accounting recognizes the impact on surplus of the decline in value without such events occurring.
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Note that this is understated as we did not have the ability to remove the current RBC charge for the admitted DTA from the data with respect to the Authorized Control Level capital requirement available to us.
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