Modification of Discounting Rules for Insurance Companies, 27947-27952 [2019-12172]

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[FR Doc. 2019–12723 Filed 6–14–19; 8:45 am] BILLING CODE 4410–09–P Paperwork Reduction Act of 1995 This action does not impose a new collection of information requirement under the Paperwork Reduction Act of 1995. 44 U.S.C. 3501–3521. This action does not impose recordkeeping or reporting requirements on State or local governments, individuals, businesses, or organizations. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number. Congressional Review Act This rule is not a major rule as defined by the Congressional Review Act (CRA), 5 U.S.C. 804. 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PO 00000 Frm 00041 Fmt 4700 Sfmt 4700 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [TD 9863] RIN 1545–BO50 Modification of Discounting Rules for Insurance Companies Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. AGENCY: This document contains final regulations on discounting rules for unpaid losses and estimated salvage recoverable of insurance companies for Federal income tax purposes. The final regulations update and replace existing regulations to implement recent legislative changes to the Internal Revenue Code (Code) and make a technical improvement to the derivation of loss payment patterns used for discounting. The final regulations affect entities taxable as insurance companies. DATES: Effective Date: These regulations are effective June 17, 2019. Applicability Date: For dates of applicability, see § 1.846–1(e)(2). FOR FURTHER INFORMATION CONTACT: Kathryn M. Sneade, (202) 317–6995 (not a toll-free number). SUPPLEMENTARY INFORMATION: SUMMARY: Background This document contains amendments to 26 CFR part 1 under section 846 of the Code. Section 846 was added to the Code by section 1023(c) of the Tax Reform Act of 1986, Public Law 99–514 (100 Stat. 2085, 2399). Final regulations under section 846 were published in the Federal Register (57 FR 40841) on E:\FR\FM\17JNR1.SGM 17JNR1 khammond on DSKBBV9HB2PROD with RULES 27948 Federal Register / Vol. 84, No. 116 / Monday, June 17, 2019 / Rules and Regulations September 8, 1992 (T.D. 8433). See §§ 1.846–0 through 1.846–4 (1992 Final Regulations). The discounting rules under section 846 were amended for taxable years beginning after December 31, 2017, by section 13523 of the Tax Cuts and Jobs Act, Public Law 115–97 (131 Stat. 2054, 2152) (TCJA). The discounting rules of section 846, both prior to and after amendment by the TCJA, are used to determine discounted unpaid losses and estimated salvage recoverable of property and casualty (P&C) insurance companies and discounted unearned premiums of title insurance companies for Federal income tax purposes under section 832, as well as discounted unpaid losses of life insurance companies for Federal income tax purposes under sections 805(a)(1) and 807(c)(2). The Department of the Treasury (Treasury Department) and the IRS published proposed regulations under section 846 (REG–103163–18) in the Federal Register (83 FR 55646) on November 7, 2018 (Proposed Regulations). The Treasury Department and the IRS received public comments on the Proposed Regulations and held a public hearing on December 20, 2018. On January 7, 2019, the Treasury Department and the IRS published Rev. Proc. 2019–06, 2019–02 I.R.B. 284, which prescribes unpaid loss discount factors for the 2018 accident year and earlier accident years for use in computing discounted unpaid losses under section 846. The unpaid loss discount factors also serve as salvage discount factors for the 2018 accident year and earlier accident years for use in computing discounted estimated salvage recoverable under section 832. The discount factors prescribed in Rev. Proc. 2019–06 were determined under section 846, as amended by section 13523 of the TCJA, and the Proposed Regulations. In Rev. Proc. 2019–06, the Treasury Department and the IRS announced the intent to publish revised unpaid loss discount factors, if necessary, following the publication of the Proposed Regulations as final regulations. The Treasury Department and the IRS also announced the intent to issue guidance on the use of revised discount factors, including the adjustment to be taken into account by certain taxpayers that used the discount factors prescribed in Rev. Proc. 2019–06 in a taxable year ending before the date of publication of final regulations. The Treasury Department and the IRS requested and received public comments on Rev. Proc. 2019–06. After consideration of all of the comments on the Proposed Regulations and Rev. Proc. 2019–06, the Proposed VerDate Sep<11>2014 15:54 Jun 14, 2019 Jkt 247001 Regulations are adopted as amended by this Treasury decision (Final Regulations). Summary of Comments and Explanation of Revisions This section discusses the public comments received on the Proposed Regulations and Rev. Proc. 2019–06, explains the revisions adopted by the Final Regulations in response to those comments, and describes guidance the Treasury Department and the IRS intend to issue following publication of the Final Regulations in the Federal Register. 1. Determination of Applicable Interest Rate Under section 846(a)(2) and (c)(1), the ‘‘applicable interest rate’’ used to determine the discount factors associated with any accident year and line of business is the ‘‘annual rate’’ determined under section 846(c)(2). Before amendment by section 13523(a) of the TCJA, section 846(c)(2) provided that the annual rate for any calendar year was a rate equal to the average of the applicable Federal midterm rates (as defined in section 1274(d) but based on annual compounding) effective as of the beginning of each of the calendar months in the most recent 60-month period ending before the beginning of the calendar year for which the determination is made. The applicable Federal mid-term rate is determined by the Secretary based on the average market yield on outstanding marketable obligations of the United States with remaining periods of over three years but not over nine years. See section 1274(d)(1). As amended by section 13523(a) of the TCJA, section 846(c)(2) provides that the annual rate for any calendar year will be determined by the Secretary based on the corporate bond yield curve (as defined in section 430(h)(2)(D)(i), determined by substituting ‘‘60-month period’’ for ‘‘24-month period’’ therein). The corporate bond yield curve, commonly referred to as the high quality market (HQM) corporate bond yield curve, is published on a monthly basis by the Treasury Department and the IRS. It reflects the average of monthly yields on investment grade corporate bonds with varying maturities that are in the top three quality levels available, and it consists of spot interest rates for each stated time to maturity. See, for example, Notice 2019–13, 2019– 8 I.R.B. 580. The spot rate for a given time to maturity represents the yield on a bond that gives a single payment at that maturity. For the stated yield curve, times to maturity are specified at half- PO 00000 Frm 00042 Fmt 4700 Sfmt 4700 year intervals from one-half year through 100 years. Section 846(c)(2) does not specify how the Secretary is to determine the annual rate for any calendar year based on the corporate bond yield curve. Section 1.846–1(c) of the Proposed Regulations provides that the ‘‘applicable interest rate’’ used to determine the discount factors associated with any accident year and line of business is the ‘‘annual rate’’ determined by the Secretary for any calendar year on the basis of the corporate bond yield curve (as defined in section 430(h)(2)(D)(i), determined by substituting ‘‘60-month period’’ for ‘‘24month period’’ therein). The annual rate for any calendar year is the average of the corporate bond yield curve’s monthly spot rates with times to maturity of not more than seventeen and one-half years (that is, when applied to the HQM corporate bond yield curve, times to maturity from one-half year to seventeen and one-half years), computed using the most recent 60month period ending before the beginning of the calendar year for which the determination is made. Consistent with the text of section 846, as amended by the TCJA, and the statutory structure as a whole, the Proposed Regulations provide for the use of a single annual rate applicable to all lines of business, as was the case under section 846 prior to amendment by the TCJA. Commenters agreed with this approach. One commenter asserted that a single rate approach continues to be mandated by the statutory language and Congressional intent. This commenter also noted that the use of a single rate is a continuance of longstanding practice related to the discounting of insurance loss reserves, and the TCJA did not specify a change to this practice. The preamble to the Proposed Regulations states that the change from a rate based on the applicable Federal mid-term rates to a rate based on the corporate bond yield curve indicates that the annual rate should be determined in a manner that more closely matches the investments in bonds used to fund the undiscounted losses to be paid in the future by insurance companies. Several commenters agreed that the annual rate should be determined in a manner that more closely matches the investments of insurance companies. The maturity range in the Proposed Regulations (that is, times to maturity from one-half year to seventeen and one-half years) was selected to produce a single discount rate that would provide approximately the same present E:\FR\FM\17JNR1.SGM 17JNR1 khammond on DSKBBV9HB2PROD with RULES Federal Register / Vol. 84, No. 116 / Monday, June 17, 2019 / Rules and Regulations value of taxable income, in the aggregate, as would be obtained by applying the 60-month average corporate bond yield curve (forecast through 2028) directly to the future loss payments expected for each line of business (determined using the loss payment patterns applicable to the 2018 accident year). That is, the selected maturity range approximates, in terms of the present value of taxable income, the overall result of discounting each projected loss payment using the spot rate from the corporate bond yield curve with a time to maturity that matches the time between the end of the accident year and the middle of the year of the projected loss payment. Several commenters expressed concern with the selection of the maturity range used to determine the single rate applicable to all unpaid losses for all lines of business under the Proposed Regulations. A commenter addressing the application of the Proposed Regulations to certain non-life insurance reserves held by life insurance companies requested a single section 846 discount rate determined by reference to shorter maturities than those specified in the Proposed Regulations to more clearly reflect the income of life insurance companies related to these reserves. Several commenters addressing the application of the Proposed Regulations to P&C insurance companies requested that the discount rate instead be determined by reference to the maturity range of three and one-half to nine years that was used under section 846 prior to amendment by the TCJA. Some of the commenters asserted a lack of clear congressional intent to use a different maturity range than the maturity range used under section 846 prior to amendment by the TCJA. The commenters also asserted that the shorter range with a lower average maturity would more closely match the maturity of the P&C insurance industry’s investments and offered alternative approaches to selecting a maturity range should a different maturity range be selected. Some of the commenters addressing the application of the Proposed Regulations to P&C insurance companies acknowledged that the annual rate calculated under the Proposed Regulations approximates the P&C industry’s current investment yield in the current bond market. However, the commenters generally asserted that an annual rate based on the maturity range in the Proposed Regulations would overstate the industry’s investment yield in other interest rate environments because the average maturity and average duration of the VerDate Sep<11>2014 15:54 Jun 14, 2019 Jkt 247001 bonds reflected in that segment of the HQM corporate bond yield curve are longer than both the average maturity and average duration of the industry’s actual bond investments. The commenters asserted that the weighted average maturities of bonds held by P&C insurance companies are notably lower than the nine-year average of the maturity range suggested in the Proposed Regulations. According to one commenter, the weighted average maturities of bonds held by P&C insurance companies have ranged between 6.4 and 7.1 years since 2008. The commenters asserted that P&C companies generally do not seek to match the maturities of their investments with the expected payment dates of their liabilities. One commenter stated that P&C insurers’ bond portfolios are more skewed to the short end of the curve to ensure sufficient liquidity to pay claims, especially for catastrophic events. The commenters also explained that the average duration of bond payments held by P&C insurance companies (five to six years, according to data from one commenter) is shorter than the nineyear average payment duration of the bonds underlying the maturity range in the Proposed Regulations because P&C insurance companies typically invest in coupon bonds. Unlike the zero-coupon bonds reflected in the HQM corporate bond yield curve, coupon bonds have an average payment duration that is less than their maturity because of the periodic interest payments. Commenters asserted that the duration difference between coupon bonds and zero-coupon bonds is more pronounced in an environment with higher interest rates and a steeper yield curve. One of the commenters requesting the use of a shorter maturity range (three and one-half to nine years) suggested that the annual rate should be determined in a manner that more closely matches the P&C insurance industry’s investment yield. The commenter asserted that, in a rising rate environment, especially if there is a larger spread between the short-term and long-term rates, the longer maturity range in the Proposed Regulations would overstate the P&C insurance industry’s investment yield. The commenter also asserted that the shorter maturity range would result in a better approximation of the P&C insurance industry’s investment yield over a longer period of time and in different interest rate environments. The commenter suggested that if the shorter maturity range is not adopted, another approach would be to periodically adjust the maturity range. Under this PO 00000 Frm 00043 Fmt 4700 Sfmt 4700 27949 approach, every five years (that is, for each determination year under section 846(d)(4)), the Secretary would select the maturity range that best approximates the industry’s investment yield based on publicly available P&C insurance industry aggregate investment yield data. However, other commenters expressed a preference for a fixed range. Two of the commenters requesting the use of a shorter maturity range (three and one-half to nine years) suggested that the maturity range selected should more closely match the average maturity of the P&C insurance industry’s bond investments. The commenters asserted that the average maturity of a range consisting of three and one-half to nine years more closely matches the six to seven-year average maturity of the industry’s bond investments over the past decade than the nine-year average of the longer range in the Proposed Regulations. One commenter suggested that if the shorter maturity range is not adopted, an alternative could be to use the maturity range from one-half to thirteen years because that range also reflects average maturities that more closely match the investments in bonds used to fund the undiscounted losses of P&C insurance companies. Both commenters suggested that if the range in the Proposed Regulations is retained, a ‘‘guardrail’’ should place an upper limit on the maturities that are used when the bond yield curve is unusually steep. The commenters assert that use of the maturity range in the Proposed Regulations in such conditions would result in an annual rate that overstates the P&C insurance industry’s investment yield due to the duration and maturity differences between the industry’s bond investments and the bonds reflected in the HQM corporate bond yield curve segment selected in the Proposed Regulations. The commenters expressed particular concern that use of the maturity range in the Proposed Regulations would pose a threat to the industry’s financial viability in times of economic stress because steep yield curves historically have occurred during or immediately after a recession and often coincide with a downturn in the underwriting cycle. One commenter provided recommendations regarding the ‘‘guardrail’’ adjustment to be made to the annual rate and the circumstances in which it would apply. The commenter suggested that a guardrail adjustment should be made when the spread between the HQM corporate bond yields at the lower end (one-half year to maturity) and upper end (seventeen and one-half years to maturity) of the maturity range proposed in the E:\FR\FM\17JNR1.SGM 17JNR1 khammond on DSKBBV9HB2PROD with RULES 27950 Federal Register / Vol. 84, No. 116 / Monday, June 17, 2019 / Rules and Regulations Proposed Regulations, measured on the basis of the 12-month average, is greater than 2.75 percentage points. The commenter explained that this ‘‘trigger’’ was selected because, compared to the other possible triggers considered by the commenter, it has the highest correlation to recession-related stress periods, it is simple to implement, and it does not result in undue volatility. The commenter suggested that the ‘‘guardrail’’ be an annual interest rate based on the 60-month average of a narrower range of bond maturities of one-half year to thirteen years. The commenter asserted that this trigger and guardrail adjustment proposal is reasonably simple, easily administrable, and predictable (for both the IRS and taxpayers) in its application. After consideration of the comments received on the Proposed Regulations, the Treasury Department and the IRS have determined to use a single annual rate based on a narrower range of maturities. Specifically, the annual rate for any calendar year is the average of the corporate bond yield curve’s monthly spot rates with times to maturity from four and one-half years to ten years, computed using the most recent 60-month period ending before the beginning of the calendar year for which the determination is made. In response to comments expressing a preference for a fixed range, the Final Regulations do not provide for periodic redetermination of the maturity range used to determine the annual rate. The maturity range of four and onehalf years to ten years was selected in response to comments requesting the adoption of a narrower maturity range with an average maturity that more closely matches the six- to seven-year average maturity of the P&C insurance industry’s bond investments. Commenters expressed concern about the inclusion of the times-to-maturity at the upper end of the range in the Proposed Regulations, particularly when the bond yield curve is unusually steep. Therefore, the Final Regulations provide for a narrower maturity range than in the Proposed Regulations (from one-half year to seventeen and one-half years). Use of the narrower range eliminates yields for times-to-maturity at the lower and upper ends of the range in the Proposed Regulations from the calculation of an average annual rate. The selected maturity range has an average maturity of seven and onequarter years, which is closer to the average maturity of the industry’s bond investments than the nine-year average maturity of the maturity range in the Proposed Regulations. The Final Regulations do not adopt either of the VerDate Sep<11>2014 15:54 Jun 14, 2019 Jkt 247001 maturity ranges suggested by commenters (three and one-half to nine years and one-half to thirteen years) because the suggested ranges would typically understate the P&C industry’s investment yield as compared to the range adopted in the Final Regulations. P&C industry investment portfolios include assets other than high quality bonds, and the higher returns on those other assets typically result in the industry earning a higher rate of return. Therefore, the Final Regulations adopt a maturity range that has an average maturity that is slightly greater than the average maturity of the industry’s bond investments. The Treasury Department and the IRS intend to publish guidance in the Internal Revenue Bulletin that will provide revised unpaid loss discount factors based on the Final Regulations for each property and casualty line of business for all accident years ending with or before calendar year 2018. The guidance will also provide that taxpayers may use either the revised discount factors or the discount factors published in Rev. Proc. 2019–06 for taxable years beginning after December 31, 2017, and ending before June 17, 2019. The guidance will describe the adjustment to be taken into account by any taxpayer that uses the discount factors prescribed in Rev. Proc. 2019–06 in a taxable year. See Rev. Proc. 2019– 06. Taxpayers must use the revised discount factors in taxable years ending on or after June 17, 2019. 2. Discontinuance of Composite Method The Treasury Department and the IRS proposed, in the preamble to the Proposed Regulations, to discontinue the use of the ‘‘composite method’’ described in section 3.01 of Rev. Proc. 2002–74, 2002–2 C.B. 980, and section V of Notice 88–100, 1988–2 C.B. 439. Commenters suggested that the current rules permitting use of the composite method should be retained. The commenters explained that if the composite method were discontinued, compiling the data required to compute discounted unpaid losses with respect to accident years not separately reported on the National Association of Insurance Commissioners (NAIC) annual statement would prove to be difficult for some insurers given the limitations of company data for older accident years and legacy information technology systems. One of the commenters added that discontinuance of the composite method would cause burdensome reporting requirements for insurers. In response to these comments, the Treasury Department and the IRS have PO 00000 Frm 00044 Fmt 4700 Sfmt 4700 determined to continue to permit the use of the composite method and to continue to publish composite discount factors annually. 3. Smoothing Adjustments Section 1.846–1(d)(1) of the Proposed Regulations provides that the loss payment pattern determined by the Secretary for each line of business generally is determined by reference to the historical loss payment pattern applicable to such line of business. However, under § 1.846–1(d)(1) and (2) of the Proposed Regulations, the Secretary may adjust the loss payment pattern for any line of business using a methodology described by the Secretary in other published guidance if necessary to avoid negative payment amounts and otherwise produce a stable pattern of positive discount factors less than one. As explained in section 2.03(4) of Rev. Proc. 2019–06, for the 2017 determination year, one line of business required adjustments under the Proposed Regulations. Commenters expressed support for the smoothing adjustments described in the Proposed Regulations and Rev. Proc. 2019–06. Accordingly, the Final Regulations adopt § 1.846–1(d) as proposed. 4. Determination of Estimated Discounted Salvage Recoverable Section 1.832–4(c) provides that, except as otherwise provided in guidance published by the Commissioner of Internal Revenue (Commissioner) in the Internal Revenue Bulletin, estimated salvage recoverable must be discounted either (1) by using the applicable discount factors published by the Commissioner for estimated salvage recoverable; or (2) by using the loss payment pattern for a line of business as the salvage recovery pattern for that line of business and by using the applicable interest rate for calculating unpaid losses under section 846(c). The Treasury Department and the IRS proposed, in the preamble to the Proposed Regulations, that estimated salvage recoverable be discounted by using the published discount factors applicable to unpaid losses. Section 4.02 of Rev. Proc. 2019–06 provides that the unpaid loss discount factors set forth therein also serve as salvage discount factors for the 2018 accident year and all prior accident years for use in computing discounted estimated salvage recoverable under section 832. Commenters expressed support for the proposed use of the discount factors applicable to unpaid losses as the discount factors for salvage. This method is permitted under section E:\FR\FM\17JNR1.SGM 17JNR1 Federal Register / Vol. 84, No. 116 / Monday, June 17, 2019 / Rules and Regulations 832(b)(5)(A) and § 1.832–4(c), and it should reduce compliance complexity and costs. Accordingly, future guidance published in the Internal Revenue Bulletin will continue to provide that estimated salvage recoverable is to be discounted using the published discount factors applicable to unpaid losses. In the preamble to the Proposed Regulations, the Treasury Department and the IRS requested comments on whether net payment data (loss payments less salvage recovered) and net losses incurred data (losses incurred less salvage recoverable) should be used to compute loss discount factors. No commenters responded to this request. The Treasury Department and the IRS will continue to use payment data unreduced by salvage recovered and losses incurred data unreduced by salvage recoverable to compute loss discount factors. khammond on DSKBBV9HB2PROD with RULES 5. Reinsurance and International Lines of Business As described in the preamble to the Proposed Regulations, as a result of the repeal of former section 846(d)(3)(E) and (F) by section 13523 of the TCJA, section 846 no longer explicitly provides for the determination of loss payment patterns for non-proportional reinsurance and international lines of business extending beyond three calendar years following the accident year. The Proposed Regulations would remove § 1.846–1(b)(3)(iv) (applicable to non-proportional reinsurance business) and (b)(4) (applicable to international business) of the 1992 Final Regulations due to the repeal of former section 846(d)(3)(E) and (F). The Proposed Regulations would retain § 1.846– 1(b)(3)(i) and (b)(3)(ii)(A) (applicable to proportional and non-proportional reinsurance, respectively) of the 1992 Final Regulations, however, because these rules are not affected by the repeal of former section 846(d)(3)(E) and (F). Commenters agreed that the repeal of former section 846(d)(3)(E) and (F) means that the statute requires nonproportional reinsurance and international lines of business to be treated as short-tail lines of business with three-year loss payment patterns. The treatment of the non-proportional reinsurance and international lines of business as short-tail lines of business in Rev. Proc. 2019–06 is consistent with these comments. Accordingly, § 1.846–1(b)(3)(iv) and (b)(4) of the 1992 Final Regulations are removed as proposed in the Proposed Regulations. VerDate Sep<11>2014 15:54 Jun 14, 2019 Jkt 247001 27951 6. Other Changes Special Analyses The Proposed Regulations would (1) remove § 1.846–1(a)(2) of the 1992 Final Regulations because the examples are no longer relevant; (2) remove § 1.846– 1(b)(3)(ii)(B) and (b)(3)(iii) of the 1992 Final Regulations because these provisions apply only to accident years before 1992; (3) remove § 1.846–2 of the 1992 Final Regulations because section 13523 of the TCJA repealed the section 846(e) election; (4) remove § 1.846–3 because the ‘‘fresh start’’ and reserve strengthening rules therein are no longer applicable; (5) make conforming changes to § 1.846–1(a) and (b) of the 1992 Final Regulations to reflect the removal of various § 1.846–1 provisions, as well as the removal of §§ 1.846–2 and 1.846–3 of the 1992 Final Regulations; (6) remove § 1.846–4 of the 1992 Final Regulations, which provides applicability dates for §§ 1.846–1 through 1.846–3 of the 1992 Final Regulations, and adopt proposed § 1.846–1(e), which provides applicability dates for § 1.846–1; and (7) remove § 1.846–0 of the 1992 Final Regulations, which provides a list of the headings in §§ 1.846–1 through 1.846–4 of the 1992 Final Regulations. Additionally, the Proposed Regulations would remove §§ 1.846–2T and 1.846–4T from the Code of Federal Regulations (CFR) because they are obsolete. On April 10, 2006, the Treasury Department and the IRS published in the Federal Register (71 FR 17990) a Treasury decision (T.D. 9257) containing §§ 1.846–2T and 1.846–4T. On January 23, 2008, the Treasury Department and the IRS published in the Federal Register (73 FR 3868) a Treasury decision (T.D. 9377) that finalized the rules contained in § 1.846–2T in § 1.846–2 and finalized the rules contained in § 1.846–4T in § 1.846–4. T.D. 9377, however, did not remove §§ 1.846–2T and 1.846–4T from the CFR. No comments were received regarding any of these changes in the Proposed Regulations. Accordingly, these changes are adopted as proposed. I. Regulatory Planning and Review and Regulatory Flexibility Act This regulation is not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations. Under the Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6), it is hereby certified that these final regulations will not have a significant economic impact on a substantial number of small entities that are directly affected by the final regulations. These final regulations update the 1992 Final Regulations to reflect statutory changes made by the TCJA, including the applicable interest rate to be used for purposes of section 846(c) based on a statutorily prescribed corporate bond yield curve. In addition, these final regulations do not impose a collection of information on any taxpayers, including small entities. Accordingly, this rule will not have a significant economic impact on a substantial number of small entities. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding this regulation was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business, and no comments were received. 7. Change in Method of Accounting The Treasury Department and the IRS plan to publish guidance in the Internal Revenue Bulletin that provides simplified procedures under section 446 and § 1.446–1(e) for an insurance company to obtain automatic consent of the Commissioner to change its method of accounting to comply with section 846, as amended by the TCJA, for the first taxable year beginning after December 31, 2017. PO 00000 Frm 00045 Fmt 4700 Sfmt 4700 II. Unfunded Mandates Reform Act Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a state, local, or tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. In 2018, that threshold is approximately $150 million. This rule does not include any Federal mandate that may result in expenditures by state, local, or tribal governments, or by the private sector in excess of that threshold. III. Executive Order 13132: Federalism Executive Order 13132 (titled ‘‘Federalism’’) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on state and local governments, and is not required by statute, or preempts state law, unless the agency meets the consultation and funding requirements E:\FR\FM\17JNR1.SGM 17JNR1 27952 Federal Register / Vol. 84, No. 116 / Monday, June 17, 2019 / Rules and Regulations of section 6 of the Executive Order. This final rule does not have federalism implications and does not impose substantial direct compliance costs on state and local governments or preempt state law within the meaning of the Executive Order. Drafting Information The principal author of these regulations is Kathryn M. Sneade, Office of Associate Chief Counsel (Financial Institutions and Products), IRS. However, other personnel from the Treasury Department and the IRS participated in their development. Statement of Availability of IRS Documents The IRS notices and revenue procedures cited in this preamble are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Adoption of Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by removing the entry for § 1.846–2(d), removing the entry for §§ 1.846–1 through 1.846–4, and adding an entry in numerical order for § 1.846–1. The addition reads in part as follows: ■ Authority: 26 U.S.C. 7805 * * * * * * * * Section 1.846–1 also issued under 26 U.S.C. 846. * * § 1.846–0 * * * [Removed] Par. 2. Section 1.846–0 is removed. ■ Par. 3. Section 1.846–1 is amended by: ■ 1. In the first sentence of paragraph (a)(1) removing ‘‘section 846(f)(3)’’ and adding in its place ‘‘section 846(e)(3)’’. ■ 2. In the third sentence of paragraph (a)(1), removing the phrase ‘‘and § 1.846–3(b) contains guidance relating to discount factors applicable to accident years prior to the 1987 accident year’’. ■ 3. In paragraph (a)(1), removing the last sentence. khammond on DSKBBV9HB2PROD with RULES ■ VerDate Sep<11>2014 15:54 Jun 14, 2019 Jkt 247001 4. Removing paragraph (a)(2) and redesignating paragraphs (a)(3) and (4) as paragraphs (a)(2) and (3), respectively. ■ 5. In the first sentence of paragraph (b)(1), removing ‘‘section 846(f)(6)’’ and adding ‘‘section 846(e)(6)’’ in its place; and removing ‘‘, in § 1.846–2 (relating to a taxpayer’s election to use its own historical loss payment pattern)’’. ■ 6. In paragraph (b)(3)(i), removing ‘‘for accident years after 1987’’ from the heading. ■ 7. In paragraph (b)(3)(ii), removing the designation ‘‘—(A)’’ and the paragraph heading ‘‘Accident years after 1991’’. ■ 8. Removing paragraphs (b)(3)(ii)(B), and (b)(3)(iii) and (iv). ■ 9. Removing paragraph (b)(4) and redesignating paragraph (b)(5) as paragraph (b)(4). ■ 10. Adding paragraphs (c), (d), and (e). The additions read as follows: ■ § 1.846–1 Application of discount factors. * * * * * (c) Determination of annual rate. The applicable interest rate is the annual rate determined by the Secretary for any calendar year on the basis of the corporate bond yield curve (as defined in section 430(h)(2)(D)(i), determined by substituting ‘‘60-month period’’ for ‘‘24month period’’ therein). The annual rate for any calendar year is determined on the basis of a yield curve that reflects the average, for the most recent 60month period ending before the beginning of the calendar year, of monthly yields on corporate bonds described in section 430(h)(2)(D)(i). The annual rate is the average of that yield curve’s monthly spot rates with times to maturity from four and one-half years to ten years. (d) Determination of loss payment pattern—(1) In general. Under section 846(d)(1), the loss payment pattern determined by the Secretary for each line of business is determined by reference to the historical loss payment pattern applicable to such line of business determined in accordance with the method of determination set forth in section 846(d)(2) and the computational rules prescribed in section 846(d)(3) on the basis of the annual statement data from annual statements described in section 846(d)(2)(A) and (B). However, the Secretary may adjust the loss payment pattern for any line of business as provided in paragraph (d)(2) of this section. (2) Smoothing adjustments. The Secretary may adjust the loss payment pattern for any line of business using a methodology described by the Secretary in other published guidance if necessary to avoid negative payment amounts and PO 00000 Frm 00046 Fmt 4700 Sfmt 4700 otherwise produce a stable pattern of positive discount factors less than one. (e) Applicability dates. (1) Except as provided in paragraph (e)(2) of this section, this section applies to taxable years beginning after December 31, 1986. (2) Paragraphs (c) and (d) of this section apply to taxable years beginning after December 31, 2017. § 1.846–2 ■ Par. 4. Section 1.846–2 is removed. § 1.846–2T ■ [Removed] Par. 7. Section 1.846–4 is removed. § 1.846–4T ■ [Removed] Par. 6. Section 1.846–3 is removed. § 1.846–4 ■ [Removed] Par. 5. Section 1.846–2T is removed. § 1.846–3 ■ [Removed] [Removed] Par. 8. Section 1.846–4T is removed. Kirsten Wielobob, Deputy Commissioner for Services and Enforcement. Approved: May 21, 2019. David J. Kautter, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. 2019–12172 Filed 6–13–19; 4:15 pm] BILLING CODE 4830–01–P DEPARTMENT OF LABOR Employee Benefits Security Administration 29 CFR Part 2520 RIN 1210–AB62 Electronic Filing of Notices for Apprenticeship and Training Plans and Statements for Pension Plans for Certain Select Employees Employee Benefits Security Administration, Department of Labor. ACTION: Final rule. AGENCY: This document contains final regulations that revise the procedures for filing apprenticeship and training plan notices and ‘‘top hat’’ plan statements with the Secretary of Labor. The final regulations require electronic submission of these notices and statements, as opposed to paper filings. The final regulations will make filing these notices and statements easier and lower regulatory burdens on these plans. The final regulations also will enable the Department of Labor to make reported data more readily available to participants and beneficiaries and other SUMMARY: E:\FR\FM\17JNR1.SGM 17JNR1

Agencies

[Federal Register Volume 84, Number 116 (Monday, June 17, 2019)]
[Rules and Regulations]
[Pages 27947-27952]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-12172]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9863]
RIN 1545-BO50


Modification of Discounting Rules for Insurance Companies

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final regulations on discounting rules 
for unpaid losses and estimated salvage recoverable of insurance 
companies for Federal income tax purposes. The final regulations update 
and replace existing regulations to implement recent legislative 
changes to the Internal Revenue Code (Code) and make a technical 
improvement to the derivation of loss payment patterns used for 
discounting. The final regulations affect entities taxable as insurance 
companies.

DATES: 
    Effective Date: These regulations are effective June 17, 2019.
    Applicability Date: For dates of applicability, see Sec.  1.846-
1(e)(2).

FOR FURTHER INFORMATION CONTACT: Kathryn M. Sneade, (202) 317-6995 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains amendments to 26 CFR part 1 under section 
846 of the Code. Section 846 was added to the Code by section 1023(c) 
of the Tax Reform Act of 1986, Public Law 99-514 (100 Stat. 2085, 
2399). Final regulations under section 846 were published in the 
Federal Register (57 FR 40841) on

[[Page 27948]]

September 8, 1992 (T.D. 8433). See Sec. Sec.  1.846-0 through 1.846-4 
(1992 Final Regulations). The discounting rules under section 846 were 
amended for taxable years beginning after December 31, 2017, by section 
13523 of the Tax Cuts and Jobs Act, Public Law 115-97 (131 Stat. 2054, 
2152) (TCJA). The discounting rules of section 846, both prior to and 
after amendment by the TCJA, are used to determine discounted unpaid 
losses and estimated salvage recoverable of property and casualty (P&C) 
insurance companies and discounted unearned premiums of title insurance 
companies for Federal income tax purposes under section 832, as well as 
discounted unpaid losses of life insurance companies for Federal income 
tax purposes under sections 805(a)(1) and 807(c)(2).
    The Department of the Treasury (Treasury Department) and the IRS 
published proposed regulations under section 846 (REG-103163-18) in the 
Federal Register (83 FR 55646) on November 7, 2018 (Proposed 
Regulations). The Treasury Department and the IRS received public 
comments on the Proposed Regulations and held a public hearing on 
December 20, 2018.
    On January 7, 2019, the Treasury Department and the IRS published 
Rev. Proc. 2019-06, 2019-02 I.R.B. 284, which prescribes unpaid loss 
discount factors for the 2018 accident year and earlier accident years 
for use in computing discounted unpaid losses under section 846. The 
unpaid loss discount factors also serve as salvage discount factors for 
the 2018 accident year and earlier accident years for use in computing 
discounted estimated salvage recoverable under section 832. The 
discount factors prescribed in Rev. Proc. 2019-06 were determined under 
section 846, as amended by section 13523 of the TCJA, and the Proposed 
Regulations. In Rev. Proc. 2019-06, the Treasury Department and the IRS 
announced the intent to publish revised unpaid loss discount factors, 
if necessary, following the publication of the Proposed Regulations as 
final regulations. The Treasury Department and the IRS also announced 
the intent to issue guidance on the use of revised discount factors, 
including the adjustment to be taken into account by certain taxpayers 
that used the discount factors prescribed in Rev. Proc. 2019-06 in a 
taxable year ending before the date of publication of final 
regulations. The Treasury Department and the IRS requested and received 
public comments on Rev. Proc. 2019-06.
    After consideration of all of the comments on the Proposed 
Regulations and Rev. Proc. 2019-06, the Proposed Regulations are 
adopted as amended by this Treasury decision (Final Regulations).

Summary of Comments and Explanation of Revisions

    This section discusses the public comments received on the Proposed 
Regulations and Rev. Proc. 2019-06, explains the revisions adopted by 
the Final Regulations in response to those comments, and describes 
guidance the Treasury Department and the IRS intend to issue following 
publication of the Final Regulations in the Federal Register.

1. Determination of Applicable Interest Rate

    Under section 846(a)(2) and (c)(1), the ``applicable interest 
rate'' used to determine the discount factors associated with any 
accident year and line of business is the ``annual rate'' determined 
under section 846(c)(2).
    Before amendment by section 13523(a) of the TCJA, section 846(c)(2) 
provided that the annual rate for any calendar year was a rate equal to 
the average of the applicable Federal mid-term rates (as defined in 
section 1274(d) but based on annual compounding) effective as of the 
beginning of each of the calendar months in the most recent 60-month 
period ending before the beginning of the calendar year for which the 
determination is made. The applicable Federal mid-term rate is 
determined by the Secretary based on the average market yield on 
outstanding marketable obligations of the United States with remaining 
periods of over three years but not over nine years. See section 
1274(d)(1).
    As amended by section 13523(a) of the TCJA, section 846(c)(2) 
provides that the annual rate for any calendar year will be determined 
by the Secretary based on the corporate bond yield curve (as defined in 
section 430(h)(2)(D)(i), determined by substituting ``60-month period'' 
for ``24-month period'' therein). The corporate bond yield curve, 
commonly referred to as the high quality market (HQM) corporate bond 
yield curve, is published on a monthly basis by the Treasury Department 
and the IRS. It reflects the average of monthly yields on investment 
grade corporate bonds with varying maturities that are in the top three 
quality levels available, and it consists of spot interest rates for 
each stated time to maturity. See, for example, Notice 2019-13, 2019-8 
I.R.B. 580. The spot rate for a given time to maturity represents the 
yield on a bond that gives a single payment at that maturity. For the 
stated yield curve, times to maturity are specified at half-year 
intervals from one-half year through 100 years. Section 846(c)(2) does 
not specify how the Secretary is to determine the annual rate for any 
calendar year based on the corporate bond yield curve.
    Section 1.846-1(c) of the Proposed Regulations provides that the 
``applicable interest rate'' used to determine the discount factors 
associated with any accident year and line of business is the ``annual 
rate'' determined by the Secretary for any calendar year on the basis 
of the corporate bond yield curve (as defined in section 
430(h)(2)(D)(i), determined by substituting ``60-month period'' for 
``24-month period'' therein). The annual rate for any calendar year is 
the average of the corporate bond yield curve's monthly spot rates with 
times to maturity of not more than seventeen and one-half years (that 
is, when applied to the HQM corporate bond yield curve, times to 
maturity from one-half year to seventeen and one-half years), computed 
using the most recent 60-month period ending before the beginning of 
the calendar year for which the determination is made.
    Consistent with the text of section 846, as amended by the TCJA, 
and the statutory structure as a whole, the Proposed Regulations 
provide for the use of a single annual rate applicable to all lines of 
business, as was the case under section 846 prior to amendment by the 
TCJA. Commenters agreed with this approach. One commenter asserted that 
a single rate approach continues to be mandated by the statutory 
language and Congressional intent. This commenter also noted that the 
use of a single rate is a continuance of longstanding practice related 
to the discounting of insurance loss reserves, and the TCJA did not 
specify a change to this practice.
    The preamble to the Proposed Regulations states that the change 
from a rate based on the applicable Federal mid-term rates to a rate 
based on the corporate bond yield curve indicates that the annual rate 
should be determined in a manner that more closely matches the 
investments in bonds used to fund the undiscounted losses to be paid in 
the future by insurance companies. Several commenters agreed that the 
annual rate should be determined in a manner that more closely matches 
the investments of insurance companies.
    The maturity range in the Proposed Regulations (that is, times to 
maturity from one-half year to seventeen and one-half years) was 
selected to produce a single discount rate that would provide 
approximately the same present

[[Page 27949]]

value of taxable income, in the aggregate, as would be obtained by 
applying the 60-month average corporate bond yield curve (forecast 
through 2028) directly to the future loss payments expected for each 
line of business (determined using the loss payment patterns applicable 
to the 2018 accident year). That is, the selected maturity range 
approximates, in terms of the present value of taxable income, the 
overall result of discounting each projected loss payment using the 
spot rate from the corporate bond yield curve with a time to maturity 
that matches the time between the end of the accident year and the 
middle of the year of the projected loss payment.
    Several commenters expressed concern with the selection of the 
maturity range used to determine the single rate applicable to all 
unpaid losses for all lines of business under the Proposed Regulations. 
A commenter addressing the application of the Proposed Regulations to 
certain non-life insurance reserves held by life insurance companies 
requested a single section 846 discount rate determined by reference to 
shorter maturities than those specified in the Proposed Regulations to 
more clearly reflect the income of life insurance companies related to 
these reserves. Several commenters addressing the application of the 
Proposed Regulations to P&C insurance companies requested that the 
discount rate instead be determined by reference to the maturity range 
of three and one-half to nine years that was used under section 846 
prior to amendment by the TCJA. Some of the commenters asserted a lack 
of clear congressional intent to use a different maturity range than 
the maturity range used under section 846 prior to amendment by the 
TCJA. The commenters also asserted that the shorter range with a lower 
average maturity would more closely match the maturity of the P&C 
insurance industry's investments and offered alternative approaches to 
selecting a maturity range should a different maturity range be 
selected.
    Some of the commenters addressing the application of the Proposed 
Regulations to P&C insurance companies acknowledged that the annual 
rate calculated under the Proposed Regulations approximates the P&C 
industry's current investment yield in the current bond market. 
However, the commenters generally asserted that an annual rate based on 
the maturity range in the Proposed Regulations would overstate the 
industry's investment yield in other interest rate environments because 
the average maturity and average duration of the bonds reflected in 
that segment of the HQM corporate bond yield curve are longer than both 
the average maturity and average duration of the industry's actual bond 
investments. The commenters asserted that the weighted average 
maturities of bonds held by P&C insurance companies are notably lower 
than the nine-year average of the maturity range suggested in the 
Proposed Regulations. According to one commenter, the weighted average 
maturities of bonds held by P&C insurance companies have ranged between 
6.4 and 7.1 years since 2008. The commenters asserted that P&C 
companies generally do not seek to match the maturities of their 
investments with the expected payment dates of their liabilities. One 
commenter stated that P&C insurers' bond portfolios are more skewed to 
the short end of the curve to ensure sufficient liquidity to pay 
claims, especially for catastrophic events.
    The commenters also explained that the average duration of bond 
payments held by P&C insurance companies (five to six years, according 
to data from one commenter) is shorter than the nine-year average 
payment duration of the bonds underlying the maturity range in the 
Proposed Regulations because P&C insurance companies typically invest 
in coupon bonds. Unlike the zero-coupon bonds reflected in the HQM 
corporate bond yield curve, coupon bonds have an average payment 
duration that is less than their maturity because of the periodic 
interest payments. Commenters asserted that the duration difference 
between coupon bonds and zero-coupon bonds is more pronounced in an 
environment with higher interest rates and a steeper yield curve.
    One of the commenters requesting the use of a shorter maturity 
range (three and one-half to nine years) suggested that the annual rate 
should be determined in a manner that more closely matches the P&C 
insurance industry's investment yield. The commenter asserted that, in 
a rising rate environment, especially if there is a larger spread 
between the short-term and long-term rates, the longer maturity range 
in the Proposed Regulations would overstate the P&C insurance 
industry's investment yield. The commenter also asserted that the 
shorter maturity range would result in a better approximation of the 
P&C insurance industry's investment yield over a longer period of time 
and in different interest rate environments. The commenter suggested 
that if the shorter maturity range is not adopted, another approach 
would be to periodically adjust the maturity range. Under this 
approach, every five years (that is, for each determination year under 
section 846(d)(4)), the Secretary would select the maturity range that 
best approximates the industry's investment yield based on publicly 
available P&C insurance industry aggregate investment yield data. 
However, other commenters expressed a preference for a fixed range.
    Two of the commenters requesting the use of a shorter maturity 
range (three and one-half to nine years) suggested that the maturity 
range selected should more closely match the average maturity of the 
P&C insurance industry's bond investments. The commenters asserted that 
the average maturity of a range consisting of three and one-half to 
nine years more closely matches the six to seven-year average maturity 
of the industry's bond investments over the past decade than the nine-
year average of the longer range in the Proposed Regulations. One 
commenter suggested that if the shorter maturity range is not adopted, 
an alternative could be to use the maturity range from one-half to 
thirteen years because that range also reflects average maturities that 
more closely match the investments in bonds used to fund the 
undiscounted losses of P&C insurance companies. Both commenters 
suggested that if the range in the Proposed Regulations is retained, a 
``guardrail'' should place an upper limit on the maturities that are 
used when the bond yield curve is unusually steep. The commenters 
assert that use of the maturity range in the Proposed Regulations in 
such conditions would result in an annual rate that overstates the P&C 
insurance industry's investment yield due to the duration and maturity 
differences between the industry's bond investments and the bonds 
reflected in the HQM corporate bond yield curve segment selected in the 
Proposed Regulations. The commenters expressed particular concern that 
use of the maturity range in the Proposed Regulations would pose a 
threat to the industry's financial viability in times of economic 
stress because steep yield curves historically have occurred during or 
immediately after a recession and often coincide with a downturn in the 
underwriting cycle.
    One commenter provided recommendations regarding the ``guardrail'' 
adjustment to be made to the annual rate and the circumstances in which 
it would apply. The commenter suggested that a guardrail adjustment 
should be made when the spread between the HQM corporate bond yields at 
the lower end (one-half year to maturity) and upper end (seventeen and 
one-half years to maturity) of the maturity range proposed in the

[[Page 27950]]

Proposed Regulations, measured on the basis of the 12-month average, is 
greater than 2.75 percentage points. The commenter explained that this 
``trigger'' was selected because, compared to the other possible 
triggers considered by the commenter, it has the highest correlation to 
recession-related stress periods, it is simple to implement, and it 
does not result in undue volatility. The commenter suggested that the 
``guardrail'' be an annual interest rate based on the 60-month average 
of a narrower range of bond maturities of one-half year to thirteen 
years. The commenter asserted that this trigger and guardrail 
adjustment proposal is reasonably simple, easily administrable, and 
predictable (for both the IRS and taxpayers) in its application.
    After consideration of the comments received on the Proposed 
Regulations, the Treasury Department and the IRS have determined to use 
a single annual rate based on a narrower range of maturities. 
Specifically, the annual rate for any calendar year is the average of 
the corporate bond yield curve's monthly spot rates with times to 
maturity from four and one-half years to ten years, computed using the 
most recent 60-month period ending before the beginning of the calendar 
year for which the determination is made. In response to comments 
expressing a preference for a fixed range, the Final Regulations do not 
provide for periodic redetermination of the maturity range used to 
determine the annual rate.
    The maturity range of four and one-half years to ten years was 
selected in response to comments requesting the adoption of a narrower 
maturity range with an average maturity that more closely matches the 
six- to seven-year average maturity of the P&C insurance industry's 
bond investments. Commenters expressed concern about the inclusion of 
the times-to-maturity at the upper end of the range in the Proposed 
Regulations, particularly when the bond yield curve is unusually steep. 
Therefore, the Final Regulations provide for a narrower maturity range 
than in the Proposed Regulations (from one-half year to seventeen and 
one-half years). Use of the narrower range eliminates yields for times-
to-maturity at the lower and upper ends of the range in the Proposed 
Regulations from the calculation of an average annual rate.
    The selected maturity range has an average maturity of seven and 
one-quarter years, which is closer to the average maturity of the 
industry's bond investments than the nine-year average maturity of the 
maturity range in the Proposed Regulations. The Final Regulations do 
not adopt either of the maturity ranges suggested by commenters (three 
and one-half to nine years and one-half to thirteen years) because the 
suggested ranges would typically understate the P&C industry's 
investment yield as compared to the range adopted in the Final 
Regulations. P&C industry investment portfolios include assets other 
than high quality bonds, and the higher returns on those other assets 
typically result in the industry earning a higher rate of return. 
Therefore, the Final Regulations adopt a maturity range that has an 
average maturity that is slightly greater than the average maturity of 
the industry's bond investments.
    The Treasury Department and the IRS intend to publish guidance in 
the Internal Revenue Bulletin that will provide revised unpaid loss 
discount factors based on the Final Regulations for each property and 
casualty line of business for all accident years ending with or before 
calendar year 2018. The guidance will also provide that taxpayers may 
use either the revised discount factors or the discount factors 
published in Rev. Proc. 2019-06 for taxable years beginning after 
December 31, 2017, and ending before June 17, 2019. The guidance will 
describe the adjustment to be taken into account by any taxpayer that 
uses the discount factors prescribed in Rev. Proc. 2019-06 in a taxable 
year. See Rev. Proc. 2019-06. Taxpayers must use the revised discount 
factors in taxable years ending on or after June 17, 2019.

2. Discontinuance of Composite Method

    The Treasury Department and the IRS proposed, in the preamble to 
the Proposed Regulations, to discontinue the use of the ``composite 
method'' described in section 3.01 of Rev. Proc. 2002-74, 2002-2 C.B. 
980, and section V of Notice 88-100, 1988-2 C.B. 439.
    Commenters suggested that the current rules permitting use of the 
composite method should be retained. The commenters explained that if 
the composite method were discontinued, compiling the data required to 
compute discounted unpaid losses with respect to accident years not 
separately reported on the National Association of Insurance 
Commissioners (NAIC) annual statement would prove to be difficult for 
some insurers given the limitations of company data for older accident 
years and legacy information technology systems. One of the commenters 
added that discontinuance of the composite method would cause 
burdensome reporting requirements for insurers.
    In response to these comments, the Treasury Department and the IRS 
have determined to continue to permit the use of the composite method 
and to continue to publish composite discount factors annually.

3. Smoothing Adjustments

    Section 1.846-1(d)(1) of the Proposed Regulations provides that the 
loss payment pattern determined by the Secretary for each line of 
business generally is determined by reference to the historical loss 
payment pattern applicable to such line of business. However, under 
Sec.  1.846-1(d)(1) and (2) of the Proposed Regulations, the Secretary 
may adjust the loss payment pattern for any line of business using a 
methodology described by the Secretary in other published guidance if 
necessary to avoid negative payment amounts and otherwise produce a 
stable pattern of positive discount factors less than one. As explained 
in section 2.03(4) of Rev. Proc. 2019-06, for the 2017 determination 
year, one line of business required adjustments under the Proposed 
Regulations.
    Commenters expressed support for the smoothing adjustments 
described in the Proposed Regulations and Rev. Proc. 2019-06. 
Accordingly, the Final Regulations adopt Sec.  1.846-1(d) as proposed.

4. Determination of Estimated Discounted Salvage Recoverable

    Section 1.832-4(c) provides that, except as otherwise provided in 
guidance published by the Commissioner of Internal Revenue 
(Commissioner) in the Internal Revenue Bulletin, estimated salvage 
recoverable must be discounted either (1) by using the applicable 
discount factors published by the Commissioner for estimated salvage 
recoverable; or (2) by using the loss payment pattern for a line of 
business as the salvage recovery pattern for that line of business and 
by using the applicable interest rate for calculating unpaid losses 
under section 846(c). The Treasury Department and the IRS proposed, in 
the preamble to the Proposed Regulations, that estimated salvage 
recoverable be discounted by using the published discount factors 
applicable to unpaid losses. Section 4.02 of Rev. Proc. 2019-06 
provides that the unpaid loss discount factors set forth therein also 
serve as salvage discount factors for the 2018 accident year and all 
prior accident years for use in computing discounted estimated salvage 
recoverable under section 832.
    Commenters expressed support for the proposed use of the discount 
factors applicable to unpaid losses as the discount factors for 
salvage. This method is permitted under section

[[Page 27951]]

832(b)(5)(A) and Sec.  1.832-4(c), and it should reduce compliance 
complexity and costs. Accordingly, future guidance published in the 
Internal Revenue Bulletin will continue to provide that estimated 
salvage recoverable is to be discounted using the published discount 
factors applicable to unpaid losses.
    In the preamble to the Proposed Regulations, the Treasury 
Department and the IRS requested comments on whether net payment data 
(loss payments less salvage recovered) and net losses incurred data 
(losses incurred less salvage recoverable) should be used to compute 
loss discount factors. No commenters responded to this request. The 
Treasury Department and the IRS will continue to use payment data 
unreduced by salvage recovered and losses incurred data unreduced by 
salvage recoverable to compute loss discount factors.

5. Reinsurance and International Lines of Business

    As described in the preamble to the Proposed Regulations, as a 
result of the repeal of former section 846(d)(3)(E) and (F) by section 
13523 of the TCJA, section 846 no longer explicitly provides for the 
determination of loss payment patterns for non-proportional reinsurance 
and international lines of business extending beyond three calendar 
years following the accident year. The Proposed Regulations would 
remove Sec.  1.846-1(b)(3)(iv) (applicable to non-proportional 
reinsurance business) and (b)(4) (applicable to international business) 
of the 1992 Final Regulations due to the repeal of former section 
846(d)(3)(E) and (F). The Proposed Regulations would retain Sec.  
1.846-1(b)(3)(i) and (b)(3)(ii)(A) (applicable to proportional and non-
proportional reinsurance, respectively) of the 1992 Final Regulations, 
however, because these rules are not affected by the repeal of former 
section 846(d)(3)(E) and (F).
    Commenters agreed that the repeal of former section 846(d)(3)(E) 
and (F) means that the statute requires non-proportional reinsurance 
and international lines of business to be treated as short-tail lines 
of business with three-year loss payment patterns. The treatment of the 
non-proportional reinsurance and international lines of business as 
short-tail lines of business in Rev. Proc. 2019-06 is consistent with 
these comments.
    Accordingly, Sec.  1.846-1(b)(3)(iv) and (b)(4) of the 1992 Final 
Regulations are removed as proposed in the Proposed Regulations.

6. Other Changes

    The Proposed Regulations would (1) remove Sec.  1.846-1(a)(2) of 
the 1992 Final Regulations because the examples are no longer relevant; 
(2) remove Sec.  1.846-1(b)(3)(ii)(B) and (b)(3)(iii) of the 1992 Final 
Regulations because these provisions apply only to accident years 
before 1992; (3) remove Sec.  1.846-2 of the 1992 Final Regulations 
because section 13523 of the TCJA repealed the section 846(e) election; 
(4) remove Sec.  1.846-3 because the ``fresh start'' and reserve 
strengthening rules therein are no longer applicable; (5) make 
conforming changes to Sec.  1.846-1(a) and (b) of the 1992 Final 
Regulations to reflect the removal of various Sec.  1.846-1 provisions, 
as well as the removal of Sec. Sec.  1.846-2 and 1.846-3 of the 1992 
Final Regulations; (6) remove Sec.  1.846-4 of the 1992 Final 
Regulations, which provides applicability dates for Sec. Sec.  1.846-1 
through 1.846-3 of the 1992 Final Regulations, and adopt proposed Sec.  
1.846-1(e), which provides applicability dates for Sec.  1.846-1; and 
(7) remove Sec.  1.846-0 of the 1992 Final Regulations, which provides 
a list of the headings in Sec. Sec.  1.846-1 through 1.846-4 of the 
1992 Final Regulations.
    Additionally, the Proposed Regulations would remove Sec. Sec.  
1.846-2T and 1.846-4T from the Code of Federal Regulations (CFR) 
because they are obsolete. On April 10, 2006, the Treasury Department 
and the IRS published in the Federal Register (71 FR 17990) a Treasury 
decision (T.D. 9257) containing Sec. Sec.  1.846-2T and 1.846-4T. On 
January 23, 2008, the Treasury Department and the IRS published in the 
Federal Register (73 FR 3868) a Treasury decision (T.D. 9377) that 
finalized the rules contained in Sec.  1.846-2T in Sec.  1.846-2 and 
finalized the rules contained in Sec.  1.846-4T in Sec.  1.846-4. T.D. 
9377, however, did not remove Sec. Sec.  1.846-2T and 1.846-4T from the 
CFR.
    No comments were received regarding any of these changes in the 
Proposed Regulations. Accordingly, these changes are adopted as 
proposed.

7. Change in Method of Accounting

    The Treasury Department and the IRS plan to publish guidance in the 
Internal Revenue Bulletin that provides simplified procedures under 
section 446 and Sec.  1.446-1(e) for an insurance company to obtain 
automatic consent of the Commissioner to change its method of 
accounting to comply with section 846, as amended by the TCJA, for the 
first taxable year beginning after December 31, 2017.

Special Analyses

I. Regulatory Planning and Review and Regulatory Flexibility Act

    This regulation is not subject to review under section 6(b) of 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Treasury Department and the Office of Management 
and Budget regarding review of tax regulations.
    Under the Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6), it 
is hereby certified that these final regulations will not have a 
significant economic impact on a substantial number of small entities 
that are directly affected by the final regulations. These final 
regulations update the 1992 Final Regulations to reflect statutory 
changes made by the TCJA, including the applicable interest rate to be 
used for purposes of section 846(c) based on a statutorily prescribed 
corporate bond yield curve. In addition, these final regulations do not 
impose a collection of information on any taxpayers, including small 
entities. Accordingly, this rule will not have a significant economic 
impact on a substantial number of small entities.
    Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding this regulation was submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business, and no comments were received.

II. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
state, local, or tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. In 2018, that threshold is approximately $150 million. This 
rule does not include any Federal mandate that may result in 
expenditures by state, local, or tribal governments, or by the private 
sector in excess of that threshold.

III. Executive Order 13132: Federalism

    Executive Order 13132 (titled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial, direct compliance costs on state and local 
governments, and is not required by statute, or preempts state law, 
unless the agency meets the consultation and funding requirements

[[Page 27952]]

of section 6 of the Executive Order. This final rule does not have 
federalism implications and does not impose substantial direct 
compliance costs on state and local governments or preempt state law 
within the meaning of the Executive Order.

Drafting Information

    The principal author of these regulations is Kathryn M. Sneade, 
Office of Associate Chief Counsel (Financial Institutions and 
Products), IRS. However, other personnel from the Treasury Department 
and the IRS participated in their development.

Statement of Availability of IRS Documents

    The IRS notices and revenue procedures cited in this preamble are 
published in the Internal Revenue Bulletin (or Cumulative Bulletin) and 
are available from the Superintendent of Documents, U.S. Government 
Publishing Office, Washington, DC 20402, or by visiting the IRS website 
at http://www.irs.gov.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by removing 
the entry for Sec.  1.846-2(d), removing the entry for Sec. Sec.  
1.846-1 through 1.846-4, and adding an entry in numerical order for 
Sec.  1.846-1. The addition reads in part as follows:

    Authority:  26 U.S.C. 7805 * * *
* * * * *
    Section 1.846-1 also issued under 26 U.S.C. 846.
* * * * *


Sec.  1.846-0   [Removed]

0
Par. 2. Section 1.846-0 is removed.

0
Par. 3. Section 1.846-1 is amended by:
0
1. In the first sentence of paragraph (a)(1) removing ``section 
846(f)(3)'' and adding in its place ``section 846(e)(3)''.
0
2. In the third sentence of paragraph (a)(1), removing the phrase ``and 
Sec.  1.846-3(b) contains guidance relating to discount factors 
applicable to accident years prior to the 1987 accident year''.
0
3. In paragraph (a)(1), removing the last sentence.
0
4. Removing paragraph (a)(2) and redesignating paragraphs (a)(3) and 
(4) as paragraphs (a)(2) and (3), respectively.
0
5. In the first sentence of paragraph (b)(1), removing ``section 
846(f)(6)'' and adding ``section 846(e)(6)'' in its place; and removing 
``, in Sec.  1.846-2 (relating to a taxpayer's election to use its own 
historical loss payment pattern)''.
0
6. In paragraph (b)(3)(i), removing ``for accident years after 1987'' 
from the heading.
0
7. In paragraph (b)(3)(ii), removing the designation ``--(A)'' and the 
paragraph heading ``Accident years after 1991''.
0
8. Removing paragraphs (b)(3)(ii)(B), and (b)(3)(iii) and (iv).
0
9. Removing paragraph (b)(4) and redesignating paragraph (b)(5) as 
paragraph (b)(4).
0
10. Adding paragraphs (c), (d), and (e).
    The additions read as follows:


Sec.  1.846-1   Application of discount factors.

* * * * *
    (c) Determination of annual rate. The applicable interest rate is 
the annual rate determined by the Secretary for any calendar year on 
the basis of the corporate bond yield curve (as defined in section 
430(h)(2)(D)(i), determined by substituting ``60-month period'' for 
``24-month period'' therein). The annual rate for any calendar year is 
determined on the basis of a yield curve that reflects the average, for 
the most recent 60-month period ending before the beginning of the 
calendar year, of monthly yields on corporate bonds described in 
section 430(h)(2)(D)(i). The annual rate is the average of that yield 
curve's monthly spot rates with times to maturity from four and one-
half years to ten years.
    (d) Determination of loss payment pattern--(1) In general. Under 
section 846(d)(1), the loss payment pattern determined by the Secretary 
for each line of business is determined by reference to the historical 
loss payment pattern applicable to such line of business determined in 
accordance with the method of determination set forth in section 
846(d)(2) and the computational rules prescribed in section 846(d)(3) 
on the basis of the annual statement data from annual statements 
described in section 846(d)(2)(A) and (B). However, the Secretary may 
adjust the loss payment pattern for any line of business as provided in 
paragraph (d)(2) of this section.
    (2) Smoothing adjustments. The Secretary may adjust the loss 
payment pattern for any line of business using a methodology described 
by the Secretary in other published guidance if necessary to avoid 
negative payment amounts and otherwise produce a stable pattern of 
positive discount factors less than one.
    (e) Applicability dates. (1) Except as provided in paragraph (e)(2) 
of this section, this section applies to taxable years beginning after 
December 31, 1986.
    (2) Paragraphs (c) and (d) of this section apply to taxable years 
beginning after December 31, 2017.


Sec.  1.846-2   [Removed]

0
Par. 4. Section 1.846-2 is removed.


Sec.  1.846-2T   [Removed]

0
Par. 5. Section 1.846-2T is removed.


Sec.  1.846-3   [Removed]

0
Par. 6. Section 1.846-3 is removed.


Sec.  1.846-4   [Removed]

0
Par. 7. Section 1.846-4 is removed.


Sec.  1.846-4T   [Removed]

0
Par. 8. Section 1.846-4T is removed.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.

    Approved: May 21, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-12172 Filed 6-13-19; 4:15 pm]
BILLING CODE 4830-01-P