Mastering Tax Credit Investments (SSAP No. 93 & 94)#
To reduce tax liabilities, US insurance companies invest billions in tax credit programs (LIHTC, renewable energy). Historically, NAIC guidance was a mess, often resulting in immediate artificial accounting losses. To fix this, the NAIC rewrote SSAP 93 and 94.
The Proportional Amortization Method (PAM)#
If an insurer acts purely as a passive financial investor, they must use PAM. The insurer amortizes the initial cost of the investment in proportion to the tax credits and benefits received each year.
- The Massive Benefit: Amortization expense is reported strictly within the income tax line item, directly offsetting tax credits. This prevents the investment from artificially dragging down the core underwriting profit.
SSAP 94: Purchased Credits#
For credits simply purchased on the open market, they are recorded at cost. If a company buys a $100 tax credit for $90, they cannot recognize the $10 profit until the credit is actually utilized to offset their tax bill.