4. What types of changes in the TCJA should be reflected in the 2017 financials?

Transcription

1 Tax Cuts and Jobs Act (TCJA) Insurance Company Q&A Tax Reserves 1. Is percent applied to the Statutory Reserve as reported in the Annual Statement? 2. What valuation interest rate or mortality table should be utilized in the determination of life and annuity tax reserves beginning in 2018? 3. How do due and deferred premiums impact tax reserves? Is 92.81% multiplied by NAIC reserve method after reduction of due and deferred premiums or is 92.81% multiplied by the gross NAIC reserve? 4. What types of changes in the TCJA should be reflected in the 2017 financials? Alternative Minimum Tax 5. Can Booke provide an example of how the AMT credit carryforward will be handled for tax years 2018 through 2021? SSAP 101 Admissibility Text Impacts 6. What is the impact of tax reform on the admissibility tests for 12/31/2017? 7. Can Booke provide an example(s) of how the 80% net operating loss limitation would be applied in the SSAP 11b With and Without Adjusted Gross DTA admission determination? Asset Valuation Reserve (AVR) 8. Should the tax rate differential related to prior years cumulative unrealized gains/losses be included in the determination of AVR for 2017? Disclosure in Note 9 9. Disclosure of the impact of the rate change in Note 9? Deferred Tax Reporting in Surplus 10. Where are the changes in deferred tax due to tax reform reported on Page 4? Specifically the impact related to the rate change?

2 Tax reserves: 1. Question: Is percent applied to the Statutory Reserve as reported in the Annual Statement? Response: New IRC Section 807(d) addresses the method of computing tax reserves. 807(d)(1) states that the amount of reserve which will be multiplied by percent is the applicable tax reserve method as described in 807(d)(3). 807(d)(3) states that the tax reserve method for life insurance contracts is CRVM (Commissioner s Reserve Valuation Method) and for annuity contracts is CARVM (Commissioner s Annuity Reserve Valuation Method). Code section 807(d)(3)(B) provides the definition of CRVM and CARVM. CRVM means the Commissioners' Reserve Valuation Method prescribed by the National Association of Insurance Commissioners which is applicable to the contract and in effect as of the date the reserve is determined and CARVM means the Commissioners' Annuities Reserve Valuation Method prescribed by the National Association of Insurance Commissioners which is applicable to the contract and in effect as of the date the reserve is determined. If the Net Level reserve method is used to calculate the Statutory reserve for life contracts then the reserves would need to be recalculated using CRVM. 2. Question: What valuation interest rate or mortality table should be utilized in the determination of life and annuity tax reserves beginning in 2018? Response: Valuation interest rate The Tax Cut and Jobs Act (TCJA) deleted the greater of the applicable federal interest rate or state assumed interest rate provisions of the 1984 Tax Reform Act. As a result, the new 807 is silent on the valuation interest rate. We believe that life insurers should follow use the valuation interest rate required for calculating contract reserves in accordance with Statutory reserve accounting guidance. Mortality table The TCJA also deleted the provisions requiring the use of the prevailing commissioners standard tables in calculating tax reserves. We believe that life insurers should follow use the appropriate mortality table required for calculating contract reserves in accordance with Statutory reserve accounting guidance. 3. Question: How do due and deferred premiums impact tax reserves? Is 92.81% multiplied by NAIC reserve method after reduction of due and deferred premiums or is 92.81% multiplied by the gross NAIC reserve? Response: The exclusion of deferred and uncollected (due) premiums from the determination of tax reserves did not change under the provisions of the Tax Cut and Jobs Act (TCJA). Prior to enactment of the TCJA, the exclusion provision could be found at IRC Section 807(d)(6); the exclusion is now IRC Section 807(d)(4). IRC Section 807(d)(3) states that the tax reserve method for life contracts is CRVM and CARVM for annuity contracts. The 92.81% will be multiplied by these tax reserve methods.

3 4. Question: What types of changes in the TCJA should be reflected in the 2017 financials? Response: GAAP (ASC ) and statutory (101 Q&A 3.2) both require entities to measure deferred taxes consistent with the provisions of the enacted law which means the new tax rate and other changes in the tax law. As such DTAs and DTLs for calendar year reporting entities should be remeasured at a 21% tax rate, the rate that will apply to these reversals in future tax years. Additionally DTAs and DTLs should be recalculated based on the provisions of the enacted tax law even though not effective as of 12/31/17. All items giving rise to book/tax differences should be recalculated based on the enacted tax law and DTAs and DTLs should be adjusted accordingly. For insurance companies this means book/tax differences on reserves will give rise to additional DTAs/DTLs at 12/31/17. The TCJA provides for prospective transition adjustments on several of these new differences such that in many cases the DTAs and DTLs will offset to zero. For statutory reporting the grossing up of DTAs and DTLs will have to flow through the admissibility calculations. It is possible that the reversal patterns will not offset and that some of the incremental DTAs will not be admitted. Companies should consider the guidance in SSAP 101 Q&A 2.9 on grossing versus netting, using a net approach would reduce the exposure to any limit on admissibility in the 11a, 11b and 11c calculations. Lastly items previously not taxed but now subject to tax under TCJA (Life Insurance PSA Account) should give rise to a DTL at 12/31/17. As a final consideration for entities having to estimate the impacts of TCJA, INT (exposed Jan. 30, 2018) includes discussion about SEC Staff Accounting Bulletin (SAB) 118 with respect to the application of GAAP financial reporting standards to the 2017 reporting period specifically to registrants in accounting for the income tax effects of the TCJA and how to handle situations where a company may not be able to include in its financial statements reasonable estimates for these effects. The FASB in a Q&A on Jan. 11, 2018 indicated they would not object to private companies and not for profit companies applying SAB 118. The NAIC (INT Exposed Jan. 30, 2018) indicated that reasonable estimates should be included and updated where possible and excluded if a reasonable estimate cannot be determined in which case the reporting entity shall continue to apply existing guidance based on the tax laws in effect prior to the TCJA. Alternative Minimum Tax (AMT): 5. Question: Can Booke provide an example of how the AMT credit carryforward will be handled for tax years 2018 through 2021? Response: Let assume the following facts Regular tax liability is $200,000 for each year 2018 through The AMT credit carryforward amount at 12/31/17 is $3,500,000. The table

4 below illustrates the AMT credit carryforward offset against each year s regular tax liability and the refund of the 50% excess of remaining AMT credit carryforward amount. You may recall that in 2021 that any remaining AMT credit carryforward amount after offsetting the regular tax liability is 100% refundable. # Description Regular tax 200, , , ,000 AMT Refund: 2 Regular tax offset (200,000) (200,000) (200,000) (200,000) 3 Excess (from Line 6)) (1,650,000) (725,000) (262,500) (62,500) 4 Tax payable (receivable) (1,650,000) (725,000) (262,500) (62,500) AMT Credit Carryforward: 3,500,000 1,650, , ,500 5 Regular tax offset (from Line 2) (200,000) (200,000) (200,000) (200,000) Subtotal 3,300,000 1,450, ,000 62,500 6 Excess offset (1,650,000) (725,000) (262,500) (62,500) Ending Balance 1,650, , ,500 0 SSAP 101 Admissibility Test Impacts 6. Question: What is the impact of tax reform on the admissibility tests for 12/31/2017? Response: The impact will be different for Life Co s and P&C Co s. All companies will need to reevaluate recovery of DTAs and consider the need for valuation allowances. DTA reversal scheduling will need to consider changes due to tax reform. 11a For life companies the 11a calculation will only apply the capital loss carrybacks since the NOL carryback has been eliminated under tax reform. There is no change to the 11a calculation for P&C companies. Temporary differences tax effected at 21% will generate a 35% carryback under 11a, proportionately increasing the DTAs realized in the 11a calculation. AMT will continue to apply in the 2017 and 2016 tax years. 11b For both life and P&C companies the impacts of tax reform need to be reflected in the future projections of taxable income. Future reversals will generate a 21% tax benefit. Additionally AMT will not apply. For life companies the new rules for NOL utilization need to be considered (80% limit). 11c No change, however the impacts of tax reform may require scheduling of reversals in some instances given there are specific transition periods for tax reserves for life and P&C companies 7. Question: Can Booke provide an example(s) of how the 80% net operating loss limitation would be applied in the SSAP 11b With and Without Adjusted Gross DTA admission determination?

5 Response: See the illustration below for 2017 SSAP 11b determination: Line Description Without With Without With Without With Income b4 reversals (9,000,000) (9,000,000) 13,000,000 13,000,000 15,000,000 15,000,000 Ordinary reversals (1,000,000) (1,000,000) (1,000,000) Tentative LICTI (9,000,000) (10,000,000) 13,000,000 12,000,000 15,000,000 14,000,000 NOL CF ,000,000 10,000,000 (9,000,000) (9,600,000) (400,000) NOL CF 2019 NOL CF 2020 LICTI 0 0 4,000,000 2,400,000 15,000,000 13,600,000 80% of Tentative LICTI limitation 10,400,000 9,600,000 12,000,000 11,200,000 Observations: The NOL carryforward offset cannot exceed 80% of Tentative LICTI. As illustrated above, the 2018 NOL carryforward to 2019 in the Without column to 9,000,000 as that amount was all that was available for carryforward; it is less that the maximum NOL carryforward offset of 10,400,000. As illustrated above, the 2018 NOL carryforward to 2019 in the With column was limited to 80% of Tentative LICTI (9,600,000); the difference, 400,000, between the NOL carryforward amount of 10,000,000 and the 80% limitation amount of 9,600,000 is eligible to be utilized in the 2020 With column. Asset Valuation Reserve (AVR) 8. Question: Should the tax rate differential related to prior years cumulative unrealized gains/losses be included in the determination of AVR for 2017? Response: Booke reached out to NAIC staff on this issue and received the following response: I m speaking to the specific AVR question and not attempting to give you the thinking of any NAIC group. The Statutory Accounting Principles (E) Working Group has a current exposure addressing tax changes which speaks for itself. The unrealized gains and losses included in the AVR at the beginning of 2017 would have been net of a tax effect at 35%. In the event that any remain unrealized at yearend 2017, they would be revalued and reflect the new tax for that which will apply which is 21%. To that extent, the impact of the tax change will be reflected in the AVR for They will also be reflected in the Capital and Surplus section on page 4 of the annual statement.

6 Disclosure in Note 9 9. Question: Disclosure of the impact of the rate change in Note 9? Response: SSAP 101 and the Annual Statement Instructions call for disclosure of the changes in tax laws or rates. Specifically, the Instructions for Note 9C states the following: Disclose the significant components of income taxes incurred (i.e., current income tax expenses) and the changes in DTAs and DTLs. These components would include, for example: Current tax expense or benefit; The change in DTAs and DTLs (exclusive of the effects of other components listed below); Investment tax credits; The benefits of operating loss carry forwards; Adjustments of a DTA or DTL for enacted changes in tax laws or rates or a change in the tax status of the reporting entity; and Adjustments to gross deferred tax assets because of a change in circumstances that causes a change in judgment about the realizability of the related deferred tax asset, and the reason for the adjustment and change in judgment. Note 9C is electronically data captured and therefore has a prescribed format. The DTAs and DTLs at 12/31/2017 should be shown at the 21% tax rate. The exact impact of the rate change is not shown separately in the table but could be calculated from the data presented (except for any impact on non admitted due to TCJA (see below)). The Instructions allow companies to include a narrative before or after the table shown in 9C. A statement could be added below the table indicating the impact of the rate change and changes in tax laws. The impact of the rate change on operations will be separately identified and disclosed in the rate reconciliation shown in Note 9D. The impact of the rate change booked through the unrealized gain/loss line is not included in the rate reconciliation and therefore not separately disclosed anywhere else in Note 9. If a company grosses up DTAs and DTLs that are based on enacted but prospective changes in tax law (see Q&A 4 above) then a portion of the incremental DTA could end up being nonadmitted in the 11a, 11b and 11c calculations. As such this would be a quantifiable impact of change in tax law. Our recommendation is to add a statement below the tabular disclosure in Note 9C that discloses the impact of the rate change on operations, unrealized and the impact of the tax law change on nonadmitted (if applicable) as well as any other quantifiable impacts of changes in tax law.

7 Deferred Tax Reporting in Surplus 10. Question: Where are the changes in deferred tax due to tax reform reported on Page 4? Specifically the impact related to the rate change? Response: There is no separate reporting for statutory on page 4, tax effects of the TCJA will flow through the existing lines for deferred tax changes. SSAP 101 par. 8 and par. 18 discusses the statutory reporting and states that Changes in DTAs and DTLs, including changes attributable to changes in tax rates and changes in tax status, if any, shall be recognized as a separate component of gains and losses in unassigned funds (surplus). Separate component is not specifically identified however normal changes in DTAs/DTLs are reported on two lines, operations and unrealized based on what the DTAs and DTLs relate to. Par. 18 states that unrealized shall be recorded net of any allocated DTA or DTL. INT (exposed Jan. 30, 2018) clarifies that tax effects related to the TCJA shall be updated in the lines to which the items relate, ie tax effects previously reflected in unrealized shall be updated in the same reporting line and the line reporting the change in net deferred tax (operations) represents the gross change in deferred tax, excluding any change reflected in unrealized.