The National Association of Insurance Commissioners (NAIC) recently re-exposed Statement of Statutory Accounting Principles No. 101, Income Taxes, A Replacement of SSAP No. 10R and SSAP No. 10 (SSAP No. 101) on July 28, 2011. If adopted, SSAP No. 101 would become effective January 1, 2012.

SSAP No. 101 was previously exposed on March 22, 2011. The re-exposure of SSAP No. 101 brings the following changes from the previous exposure draft:

• Tax-loss contingency model is based on SSAP No. 5R, Liabilities, Contingencies and Impairments of Assets (SSAP No. 5R) using a more-likely-than-not and reasonably estimated criterion;
• Three-component admissibility calculation is modified; and
• Additional tax planning strategy language is retained, but slightly modified.

The NAIC has indicated that SSAP No. 10 Implementation Questions and Answers will be updated to reflect the guidance included in re-exposed SSAP No. 101.

Tax-loss contingency model
Similar to SSAP No. 10, re-exposed SSAP No. 101 bases tax-loss contingencies on a SSAP No. 5R model unlike the initial exposure of SSAP No. 101, which based tax-loss contingencies on Accounting Standards Codification (ASC) Topic 740, formerly known as FASB Interpretation No. 48, Accounting for Income Taxes (FIN 48). However, rather than using a probable and reasonably estimated criterion as in SSAP No. 10, SSAP No. 101 uses a more-likely-than-not and reasonably estimated criterion. A tax benefit is recognized with a liability recorded if the related tax-loss contingency is more-likely-than-not and can be reasonably estimated. A presumption is made that the reporting entity will be examined by the relevant taxing authority, who is assumed to have full knowledge of all relevant information. If the estimated tax-loss contingency is greater than 50% of the tax benefit originally recognized, then the
tax-loss contingency recorded shall be equal to 100% of the original tax benefit recognized.

Three-component admissibility calculation
Under the first component of the admissibility calculation, re-exposed SSAP No. 101 allows admissibility of deferred tax assets (DTAs) up to the amount of federal income taxes paid in prior years that can be recovered through loss carrybacks for existing temporary differences that reverse during a timeframe corresponding with Internal Revenue Service (IRS) tax-loss carryback provisions, not to exceed three years. This is similar to the initial exposure of SSAP No. 101; however, the re-exposure also includes accruals for tax-loss contingencies along with income taxes paid in prior years in the determination.

Re-exposed SSAP No. 101 keeps the Realization Threshold Limitation Tables as provided for under the initial exposure of SSAP No. 101 under the second admissibility component, however DTA admissibility is based upon Authorized Control Level risk-based capital at the end of the reporting period only, and not the ratio of adjusted gross DTAs to adjusted capital and surplus. Mortgage and financial guaranty insurers also have a new table based on the ratio of surplus over policyholder and contingency reserves. Non-RBC reporting entities that are not mortgage or financial guaranty insurers have a third table, based on the percentage of adjusted gross deferred tax assets to adjusted capital and surplus.

Under the third component of the admissibility calculation, re-exposed SSAP No. 101 eliminates the scheduling of reversals to determine if the reversal period between the applicable DTA and DTL under consideration for offset differs by greater than five years, as provided for under the initial exposure of SSAP No. 101. Rather, estimates of the pattern and timing of the reversal of temporary differences shall be considered, similar to what is required in determining the need for a valuation allowance under ASC 740.

Tax planning strategies
Re-exposed SSAP No. 101 maintains the guidance around tax-planning strategies, as provided under the initial exposure of SSAP No. 101, but also requires application of the tax-loss contingency guidance based on SSAP No. 5R to any tax-loss contingencies that would be created as part of the tax-planning strategy.

Disclosure requirements
Re-exposed SSAP No. 101 also modifies the disclosure requirements related to tax-loss contingencies and tax-planning strategies as follows:

• FIN 48 disclosures are removed from re-exposed SSAP No. 101, with the exception of the disclosure of tax-loss contingencies for which it is reasonably possible that the total liability will significantly increase within twelve months of the reporting date; an estimate of the range of the reasonably possible increase or statement that an estimate of the range cannot be made must also be disclosed; and
• Reinsurance-related tax planning strategies impacting the determination of adjusted gross DTAs and the determination of net admitted DTAs must be disclosed.

Connect with us for questions regarding the re-exposure of SSAP No. 101 or the additional disclosure requirements around tax-planning strategies.