Deferred Tax Asset Bridge Group Report September 2010 capitalization that can be used to determine an appropriate charge to be applied to the DTA for the company. There is such a measure already in use that can be used for this purpose. Throughout the remainder of the report, we will refer to this ratio as the “Ex DTA RBC ratio.” B. DTA Impact on Surplus If a company experiences operating or capital losses to such a magnitude as to render it insolvent, it is likely that a significant portion of the DTA would be unrealizable. The nature of the DTA is such that this is an escalating risk as losses increase – operating and capital losses generate increasing DTAs, making the DTA an even larger portion of a weakened company’s balance sheet, before considering the impact of the admissibility rules. The DTA, without safeguards, could continue increasing in value as a company’s performance worsens up until the point the company’s situation makes the asset unrealizable; forcing a writeoff of what has become an ever more significant portion of the company’s surplus and assets. However, under statutory accounting principles, the reporting company must make a determination at every reporting date as to the realizability of the DTA through the valuation allowance determination, that is, is the DTA more likely than not to be realized. To illustrate the impact of the DTA on a company’s balance sheet relative to its financial strength, we aggregated data for companies from the statutory annual statements filed with the NAIC and grouped individual companies (e.g., looking at individual NAIC companies, not group level results) based on their ratios of Total Adjusted Capital to Risk-Based Capital. The reported gross DTA in the annual statement is before the valuation allowance. We grouped companies into four categories: • Below 100% of ACL - Companies whose Total Adjusted Capital is less than their Authorized Control Level Risk-Based Capital • Between 100% And 200% of ACL - Companies whose Total Adjusted Capital is less than their Company Action Level but above their Authorized Control Level Risk-Based Capital • Between 200% and 300% of ACL – Companies whose Total Adjusted Capital is less than 150% of the Company Action Level (300% of the Authorized Control Level) but above their Company Action Level • Above 300% of ACL – Companies whose Total Adjusted Capital is greater than 150% of the Company Action Level (300% of the Authorized Control Level) The 300% level was selected to correspond with the level noted in the NAIC P&C Trend Test for RBC. C. Property and Casualty Insurance Companies This table shows the average of the DTA as a percentage of surplus, treating all P&C companies equally regardless of size for each level of capitalization noted above. Note that only the admitted portion of the DTA is included in surplus. Note also that companies with negative surplus are excluded here as the averages as calculated would be distorted. 1850 M Street NW Suite 300
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