Example 3.(i) A life insurance company (L1) is both a direct issuer and a reinsurer of life insurance and annuity contracts. For 1993, L1's net premiums under section 848 (d)(1) for directly issued individual life insurance and annuity contracts are as follows: Category | Net premiums |
Life insurance contracts | $17,000,000 |
Annuity contracts | 8,000,000 |
(ii) L1's general deductions for 1993 are $1,500,000.(iii) For 1993, L1 is a reinsurer under four separate indemnity reinsurance agreements with unrelated insurance companies (L2, L3, L4, and L5). The agreements with L2, L3, and L4 cover life insurance contracts issued by those companies. The agreement with L5 covers annuity contracts issued by L5, The parties to the reinsurance agreements have not made the election under paragraph (g)(8) of this section to capitalize specified policy acquisition expenses with respect to these agreements without regard to the general deductions limitation.(iv) L1's net consideration for 1993 with respect to its reinsurance agreements is as follows: Agreement | Net consideration |
L2 | $1,200,000 |
L3 | (350,000) |
L4 | 300,000 |
L5 | 600,000 |
(v) To determine whether a reduction under paragraph (g)(3) of this section applies with respect to these reinsurance agreements, L1 must determine the required capitalization amounts for its reinsurance agreements and the amount of its general deductions allocable to these agreements.(vi) Pursuant to paragraph (g)(5) of this section, the required capitalization amount for each reinsurance agreement is determined as follows: L2$1,200,000 * .077 = $92,400
L3($350,000) * .077 = ($26,950)
L4$300,000 * .077 = $23,100
L5$600,000 * .0175 = $10,500
(vii) Thus, the sum of L1's required capitalization amounts on its reinsurance agreements equals $99,050.(viii) Pursuant to paragraph (g)(6) of this section, L1 determines its general deductions allocable to its reinsurance agreements. The amount determined under section 848(c)(1) on its directly issued contracts is: Required capitalization amount
Category: | | |
Annuity contracts | $8,000,000 * .0175 = | $140,000 |
Life insurance contracts | $17,000,000 * .077 = | 1,309,000 |
| | $1,449,000 |
(ix) L1's general deductions allocable to its reinsurance agreements are $51,000 ($1,500,000-$1,449,000).(x) Pursuant to paragraph (g)(4) of this section, L1's capitalization shortfall equals $48,050, reflecting the excess of L1's required capitalization amounts for its reinsurance agreements ($99,050) over the general deductions allocable to its reinsurance agreements ($51,000).(xi) Pursuant to paragraph (g)(7) of this section, the capitalization shortfall of $48,050 must be allocated between each of L1's reinsurance agreements with net positive consideration in proportion to their respective required capitalization amounts. The allocation of the shortfall between L1's reinsurance agreements is determined as follows: L2 = $35,237 ($48,050 * 92,400 / 126,000)
L4 = $8,809 ($48,050 * 23,100 / 126,000)
L5 = $4,004 ($48,050 * 10,500 / 126,000)
(xii) Accordingly, the reduction under paragraph (g)(3) of this section that applies to the amount of net negative consideration that may be taken into account by L2, L4, and L5 under paragraph (a)(1)(ii)(B) of this section is determined as follows: L2 = $457,623 ($35,237/.077)
L4 = $114,403 ($8,809/.077)
L5 = $228,800 ($4,004/.0175)