Edition

2022 Tax Legislation May Affect a Number of Large Insurers

By Jean Baxley, Sara Conlon, Art Schneider, and Mark Smith

TAXING TIMES, June 2023

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INTRODUCTION

President Biden signed the Inflation Reduction Act (IRA)[1] into law on Aug. 16, 2022. The IRA includes new business tax provisions—the new Corporate Alternative Minimum Tax (CAMT), an excise tax on the repurchase of corporate stock, and new tax credits relating to renewable energy—which generally are effective beginning in 2023. Although each of the new provisions may affect insurance companies, the CAMT, in particular, is expected to have a potentially significant impact on a number of large life insurance companies.

This article outlines the operation of the CAMT, the IRS's initial guidance under the legislation, and issues that may be the subject of future IRS guidance and TAXING TIMES commentary.

OPERATION OF THE CAMT

Imposition of Tax on Applicable Corporations

The CAMT applies only to "applicable corporations," as defined. More specifically, section 55 of the Internal Revenue Code imposes on an applicable corporation an alternative minimum tax equal to the excess of the tentative minimum tax for the taxable year over the sum of the regular tax for the year plus the Base Erosion and Anti-Abuse Tax (BEAT) imposed by section 59A. Under section 55(b)(2), the tentative minimum tax of an applicable corporation is 15% of the corporation's adjusted financial statement income (AFSI), less the allowable CAMT foreign tax credit. Any CAMT paid is carried forward for an indefinite period and may be used to offset future regular tax in excess of tentative minimum tax. The tentative minimum tax of a corporation that is not an applicable corporation is zero.

In general, section 59(k)(1) defines an applicable corporation as any corporation (other than an S corporation, a regulated investment company, or a real estate investment trust) that meets the average annual AFSI test for one or more prior taxable years ending after Dec. 31, 2021. A company meets this test for a taxable year if its average AFSI exceeds $1 billion for the 3-taxable-year period ending with that year. For 2023, the test is made for 2022 and includes the 3-year period 2020–2022.

The determination is made on a controlled group basis, not entity by entity. That is, if the group meets the average annual AFSI test, all members of the group are applicable corporations for purposes of the CAMT, regardless of whether they are included in the same consolidated Federal income tax return. In general, in the absence of a change of ownership, once a corporation is an applicable corporation, it remains an applicable corporation for subsequent taxable years.

If a corporation is a member of a foreign-parented multinational group, it is an applicable corporation if the entire group meets the same $1 billion 3-year average AFSI test, and the 3-year average AFSI of the U.S. members of the group and foreign members engaged in a U.S. trade or business exceeds $100 million.

Section 59(k) includes special rules for corporations in existence for fewer than three years, short taxable years, and predecessor and successor corporations. It also includes broad regulatory authority for the IRS and Treasury to provide guidance on the determination of applicable corporation status.

Determination of AFSI

A corporation must compute AFSI not only to determine applicable corporation status, but also to determine the CAMT liability itself. These computations are sometimes referred to as the scope determination and the liability determination. Certain differences apply for the computation of AFSI in making these two determinations.

Section 56A defines AFSI for a taxable year to mean a taxpayer’s Net Income or Loss set forth on the applicable financial statement (AFS) for the year, with adjustments. The provision defines AFS according to the hierarchy that appears in section 451(b)(3):

  • A financial statement prepared according to U.S. Generally Accepted Accounting Principles (U.S. GAAP or GAAP), if it is a 10-K, or annual statement to shareholders, required to be filed with the SEC, or is used for certain substantial nontax purposes, or is filed with another Federal agency;
  • A financial statement made on the basis of International Financial Reporting Standards (IFRS) and filed with a foreign agency equivalent to the SEC, but only if there is no GAAP financial statement; or
  • A financial statement filed with a regulator (e.g., for domestic insurers, an NAIC annual statement), but only if there is no GAAP or IFRS statement.

If the financial results of a taxpayer are reported on a consolidated AFS, the taxpayer’s AFS is the consolidated AFS. However, if the taxpayer’s results are also reported on a separate AFS that is of equal or higher priority to the consolidated AFS, the separate AFS takes precedence. As a practical matter, the AFS for an insurance company may be any of these three types—a U.S. GAAP, IFRS, or statutory statement—according to the identity of its owners and regulators and the use it makes of those statements.

“Net income” is an accounting term of art that refers to income per the income statement that is used to determine earnings per share.[2] In a Senate floor colloquy with Senator Ben Cardin (D-MD), Senate Finance Committee Chairman Ron Wyden (D-OR) clarified that "for purposes of the corporate alternative minimum tax, Other Comprehensive Income is not included in financial statement income."[3] Issues remain, however, due to the breadth of Treasury's regulatory authority, and the IRS and Treasury have requested comments on the need for further guidance.

Once a company has identified its AFS, it must make adjustments to the Net Income in that AFS. Section 56A(c) enumerates more than a dozen adjustments. Adjustments in the following circumstances are likely to be particularly impactful to insurance companies:

  • Adjustments for consolidated financial statements whose members may not correspond to those included in consolidated federal income tax returns, and vice versa (section 56A(c)(2)(A) and (B));
  • Exclusion of income other than dividends with regard to corporations not included in the company's consolidated return (section 56A(c)(2)(C));
  • Inclusion of only the company's distributive share of the AFSI of a partnership (section 56A(c)(2)(D)), applicable only for determining the tax, not for status as an applicable corporation);
  • Adjustment to disregard Federal and certain foreign income taxes (section 56A(c)(5));
  • Adjustment to use tax pension expense rather than book pension expense (section 56A(c)(11)); and
  • Adjustment to use tax, rather than book, depreciation (section 56A(c)(13)).

Section 56A(d) allows a deduction in determining AFSI for carryforward of post-2019 financial statement net operating losses (NOLs), subject to a limitation of 80% of AFSI computed without regard to this deduction. No carryback is allowed. Post-2019 financial statement NOLs carry forward indefinitely.

The IRS and Treasury have authority to provide guidance on many aspects of the enumerated adjustments. In addition, broad regulatory authority applies under section 56A(c)(15) to provide further adjustments to AFSI, including those to prevent omission or duplication of items, and to carry out the principles of Subchapters C (relating to corporate liquidations, organizations, and reorganizations) and K (relating to partnership contributions and distributions).

INSURANCE INDUSTRY COMMENTS

Life Insurers

The American Council of Life Insurers (ACLI) has submitted wide-ranging comments on a variety of CAMT issues affecting life insurance companies. A summary of those comments appears elsewhere in this issue, in "ACLI Update," and will not be repeated here.

Property and Casualty Insurers

Also, shortly after the IRA was signed, three other insurance industry trade associations (the American Property Casualty Insurance Association (APCIA), the National Association of Mutual Insurance Companies (NAMIC), and the Reinsurance Association of America (RAA)) submitted a joint comment letter to identify and request guidance on issues of particular importance to nonlife insurance companies, including:

  • Exclusion of unrealized gains and losses from AFSI;
  • Exclusion of other items of OCI from AFSI;
  • Treatment of partnerships in which a nonlife insurer is a partner;
  • NOL and capital loss carrybacks;
  • International issues (including guidance to avoid double counting of dividends received by or from a controlled foreign corporation, and guidance on the treatment of participants in Lloyd's syndicates); and
  • Guidance on the hierarchy of financial statements that are the starting point for computing AFSI.

Foreign-Parented Multi-National Insurers

A group of foreign-parented multi-national insurers submitted comments on the definition of “applicable financial statement” and adjustments related to those statements. This group made two recommendations:

  • That a taxpayer must use its separate AFS when a separate company financial statement prepared for external purposes exists. The adoption of this approach generally would mean that an insurance company’s AFS would be the statutory financial statement filed with the insurance regulator.

  • That an adjustment to AFSI be allowed to spread the retrospective adjustment to IFRS retained earnings relating to the adoption of IFRS 17 and IFRS 9 over a 10-year period to prevent the potential duplication of previously reported IFRS income that will be reported again subsequent to adoption of the new accounting standards. This adjustment would not apply to the extent the first recommendation is adopted.

Other Comments

Other comment letters requested guidance on issues that, although not insurance-specific, could apply to insurance companies. For example, the American Institute of Certified Public Accountants (AICPA) identified five partnership-specific items for which guidance is needed.

Many insurance companies have significant investments in partnerships. In some cases, these are portfolio investments, representing a small percentage ownership of the partnership. In other cases, the insurer may control the partnership, or own a larger percentage, or may hold the investment to support its obligations under variable life insurance or annuity contracts. In all cases, it is important that the rules provide an appropriate measurement of income based on the intent of the CAMT.

NOTICE 2023-7

The IRS and Treasury published the first formal guidance under the CAMT in Notice 2023-7.[4] Notice 2023-7 announced that the IRS and Treasury intend to issue proposed regulations addressing the application of the CAMT; provided interim guidance on a limited number of time-sensitive issues intended to be addressed in the forthcoming proposed regulations; and requested comments on 20 issues intended to be addressed in the forthcoming regulations, including those on which it provided interim guidance.

The interim guidance under Notice 2023-7 falls into five broad categories, set forth in sections 3 through 7:

  • Section 3 provides guidance on the CAMT treatment of certain corporate and partnership transactions. For example, with respect to transactions that qualify for nonrecognition treatment for regular Federal income tax purposes, the guidance provides for adjustment of financial accounting gain or loss to conform financial accounting treatment to tax treatment, and also to make corresponding adjustments to the basis of transferred property. The guidance also addresses the AFSI of a party for the 3-year period used in the scope determination. Section 3 does not give specific consideration to reinsurance transactions, which frequently are used in acquisitions and dispositions of insurance business.
  • Section 4 addresses depreciation issues. Broadly, section 56A(c)(13) requires that tax depreciation be substituted for book depreciation in the determination of AFSI. This sounds straightforward in concept but is complicated by considerations such as the definition of property to which tax depreciation applies, and whether expenditures have been capitalized or expensed for book or tax purposes.
  • Section 5 provides a safe-harbor method for determining whether a taxpayer is an applicable corporation. Under the safe harbor, a taxpayer may choose to apply the average annual AFSI tests using lower dollar thresholds ($500 million rather than $1 billion, and $50 million rather than $100 million) and disregarding certain adjustments.
  • Section 6 describes rules for Federal income tax credits. Under this guidance, AFSI is adjusted to disregard certain credits that are treated as payments against tax for Federal income tax purposes.
  • Section 7 provides that the section 56A(c)(2)(D)(i) adjustment to AFSI (to only take into account the taxpayer’s distributive share of AFSI of a partnership) is inapplicable in all circumstances in determining applicable corporation status.

Notice 2023-7 states that companies may rely on the rules in the Notice until proposed regulations are issued. When regulations are issued, they are expected to apply for years beginning after Dec. 31, 2022.

In addition to the interim guidance described, Notice 2023-7 requested comments on 20 issues not included in the Notice, some of which could be impactful to insurers. Broadly, section 9 of the Notice asked about:

  • Accounting for partnerships and partnership income (some life insurers own interests in 1,000 or more partnerships, making the administration of the new CAMT rules particularly difficult);
  • Circumstances under which an applicable corporation should be treated as losing its status;
  • Issues that may arise in the context of acquisitions and dispositions (for life insurers, such transactions frequently take the form of reinsurance);
  • Items of OCI that may appropriately be included in AFSI;
  • Treatment of NOLs;
  • Allocation of CAMT liability, financial statement NOLs, and CAMT credits among members of a single consolidated group;
  • Reinsurance contracts the accounting for which includes embedded derivatives that may result in mismatches; and
  • Treatment of unrealized gains and losses (life insurers have special issues in connection with the accounting for variable contracts, which may, in turn, affect the determination of life insurance reserves).

Notice 2023-7 includes the following promise of additional guidance before the issuance of proposed regulations:

Such additional guidance is expected to address, among other issues, certain issues related to the treatment under the CAMT of items that are marked-to-market for financial statement purposes (such as life insurance company separate account assets and certain financial products), the treatment of certain items reported in other comprehensive income (OCI), and the treatment of embedded derivatives arising from certain reinsurance contracts. This additional interim guidance would be intended to help avoid substantial unintended adverse consequences to the insurance industry and certain other industries.

The promised insurance-specific guidance was published a few weeks later in Notice 2023-20.

NOTICE 2023-20

As described above, AFSI is the Net Income or Loss per the AFS, adjusted as provided in section 56A. In some circumstances, this approach may unintentionally result in distortions.

Shortly after enactment of the IRA, the life insurance industry identified two such situations—one related to variable contracts and other similar contracts, the other related to funds withheld coinsurance (FWH co) and modified coinsurance (modco). The industry brought these situations to the attention of the IRS and Treasury and, ultimately, the IRS and Treasury addressed them in Notice 2023-20.[5]

As promised in Notice 2023-7, Notice 2023-20 explains that the guidance in the Notice “is intended to help avoid substantial unintended adverse consequences to the insurance industry” from the application of the CAMT. Notice 2023-20 states that taxpayers may rely on the guidance in the Notice until the issuance of proposed regulations further addressing these issues.

In general, the guidance addresses the industry’s concerns. The Notice requests general comments on the guidance, as well as comments on a number of specific questions relating to the guidance. The life insurance industry’s response to the Notice’s request for comments will be the subject of a follow-up article in a future issue of TAXING TIMES.

AFSI Adjustments for Covered Variable Contracts

The guidance in section 3 of the Notice applies to Covered Variable Contracts, which are variable contracts (as defined in section 817(d)) and similar contracts. The Notice defines “similar contracts” to include only “closed block contracts”[6] and “other similar contracts.”[7] For ease of discussion, this article focuses on variable contracts accounted for under section 817.

A variable contract accounted for under section 817 often is referred to as a separate account product because the assets supporting the contract are maintained in a separate (or segregated asset) account and, for regular Federal income tax purposes, the income, deduction, asset, reserve, and other liability items related to such contracts are accounted for separately from those items of the life insurance company’s general account. More specifically, a section 817 variable contract (1) provides for allocation of all or part of the amounts received under the contract to an account which, pursuant to State law or regulation, is segregated from the general account assets of the company; (2) is a life insurance contract or provides for the payment of annuities or funding of insurance on retired lives; and (3) provides for payment of policy benefits which reflect the investment return and the market value of the segregated asset account.

Section 817 variable contracts are “separate account arrangements” that get summary accounting treatment in the AFS. For example, for U.S. GAAP purposes, separate account assets are reported at fair value as a summary total in the financial statements of the insurance company that owns the assets and is contractually obligated to pay the liabilities, with an equivalent summary total reported for related liabilities.[8] The related investment performance—including interest, dividends, realized gains and losses, and changes in unrealized gains and losses—and the corresponding amount credited to the contract holder are offset within the same income statement line item netting to zero.[9] IFRS and Statutory Accounting Principles also provide for summary balance sheet reporting and offsetting of items within the income statement.

The issue addressed in section 3 of Notice 2023-20 arises because section 56A(c)(2)(C) provides, in effect, that unrealized gains and losses with respect to equity investments in non-consolidated corporations are not included in AFSI. A similar effect can arise under section 56A(c)(2)(D) with respect to partnership interests. As applied to variable contracts, these adjustments would create significant distortion by eliminating the income statement effect of unrealized gains and losses on assets, without a corresponding adjustment to liabilities to contract holders.

Section 3.02(1) addresses this result for purposes of determining the AFSI of a Covered Insurance Company[10] issuing Covered Variable Contracts to the extent (1) a change in value of the Covered Investment Pool[11] for such contracts results in a change to the amount of the company’s obligations to the holders of the Covered Variable Contracts (by reason of law, regulation, or the terms of the contracts), and (2) such change is reflected in the amount of the Covered Obligations.[12] In that case, the change in the Covered Obligations is disregarded in determining AFSI to the extent of the section 56A(c)(2) exclusion amount. In effect, the equilibrium provided in the financial statement accounting would be restored.

Example: Company A is subject to U.S. tax as a life insurance company and uses U.S. GAAP to prepare its AFS. A issues a variable life insurance contract to individual X. A holds the assets (stock in unrelated corporations) supporting its contractual obligation to X in a separate account segregated from A’s general asset accounts. At the end of Year 1, the fair market value of the assets has increased by $10x, as has A’s contractual obligation to X, pursuant to the terms of the variable contract. On A’s GAAP AFS, the $10x increase in the value of assets is included in Net Income and offsets the $10x increase in A’s contractual obligation to X which reduces A’s Net Income.

The $10x unrealized gain is not included in A’s AFSI. Pursuant to section 3.02(1) of the Notice, the change in the amount of Covered Obligations is disregarded for purposes of determining A’s AFSI to the extent of this exclusion of the $10x unrealized gain. Accordingly, both the unrealized gain and the offsetting change in the Covered Obligations are disregarded for purposes of determining A’s AFSI.

The specific questions relating to the guidance on variable contracts for which the Notice requested comments include whether the guidance should apply to any contracts other than the 3 types of contracts specifically described in the Notice, and whether the result of the guidance provided could be achieved in a more easily administrable manner.

AFSI Adjustments for Covered Reinsurance Agreements

The CAMT issue relating to FWH co and modco—referred to in the Notice as Covered Reinsurance Agreements—arises not because of a required adjustment to AFSI, but because of the geography on the financial statement reporting of unrealized gains and losses on available-for-sale debt securities[13] supporting the contractual obligations to policyholders that are withheld or retained by the ceding company in those types of reinsurance transactions.

If a direct writer of life insurance or annuity contracts does not reinsure the business, the direct writer accounts for the available-for-sale debt securities supporting the policy obligations in its U.S. GAAP or IFRS balance sheet at market value; the offsetting change in unrealized gain or loss is a component of OCI. OCI is a component of Comprehensive Income separate from Net Income or Loss per the income statement. Because the determination of AFSI begins with Net Income or Loss per the AFS, AFSI generally excludes items of OCI.

If the direct writer cedes business to a reinsurer on a conventional coinsurance basis, it transfers assets supporting the policy obligations to the assuming company, and its U.S. GAAP or IFRS accounting essentially is the same as if the business had been directly written. That is, any unrealized gain or loss on the available-for-sale debt securities is recognized in OCI on the reinsurer’s GAAP or IFRS financial statements and excluded from the company’s AFSI.

In contrast, the accounting is different for reinsurance on a FWH co or modco basis. Because the ceding company retains the assets, unrealized gain or loss on available-for-sale debt securities continues to be reflected in the ceding company’s OCI. The ceding company establishes a payable to the reinsurer for the withheld assets, and the reinsurer establishes a corresponding receivable. As a result, the reinsurance contract is considered for GAAP financial accounting purposes as including an embedded derivative under which the investment return on the assets is passed through to the reinsurer. The ceding company increases (or decreases) its payable to the assuming company in an amount corresponding to the unrealized gain (or loss), with an offsetting entry to embedded derivative gain or loss in the income statement. Similarly, the assuming company recognizes embedded derivative gain or loss in its income statement.

In its Statement of Comprehensive Income, the ceding company has OCI for the change in unrealized gain or loss on available-for-sale debt securities offset by income statement gain or loss. On the other hand, the reinsurer has income statement gain or loss that effectively is attributable to unrealized gain or loss on available-for-sale debt securities. Because the determination of AFSI begins with Net Income or Loss per the AFS (excluding items of OCI), both the ceding and assuming companies potentially would have significant distortions in AFSI stemming from the reinsurance accounting that would not exist if there was no reinsurance, or in the case of conventional coinsurance.[14] This is the issue addressed in section 4 of Notice 2023-20.

Section 4.02(1) of the Notice provides that a Covered Insurance Company that is a party to a Covered Reinsurance Agreement should exclude from AFSI the following changes accounted for separately in the AFS:

  • For the ceding company, changes in Net Income as a result of changes in the amount of withheld assets payable to the reinsurer that correspond to the unrealized gains and losses in the withheld assets, to the extent such unrealized gains and losses are not included in AFSI.
  • For the reinsurer, changes in Net Income as a result of changes in the amount of the withheld assets receivable from the ceding company that correspond to the unrealized gains and losses in the withheld assets, reduced to the extent the accounting results are reduced for any retrocession of the reinsured risk.

The exclusion does not apply to a company to the extent (1) the company elects to account for one or more items relevant to the Covered Reinsurance Agreement at fair value on its AFS, and (2) the election results in (a) changes in the fair value of the Withheld Assets Payable or Receivable and (b) changes in the fair value of the offsetting item both being accounted for either through Net Income or through OCI on the company’s AFS.

Example: A and B are subject to U.S. tax as life insurance companies and each uses U.S. GAAP in preparing its AFS. A, the ceding company, enters into a FWH co agreement with B, the reinsurer. B does not retrocede any risk covered by the agreement. On its AFS, A reflects all the unrealized gains in the Withheld Assets in OCI, and the corresponding changes in the Withheld Assets Payable as part of Net Income. B records a Withheld Assets Receivable that corresponds to A’s Withheld Assets Payable, and accounts for changes in the receivable as part of its Net Income.

At the end of Year 1, the fair market value of the Withheld Assets has increased by $10x. A records the $10x unrealized gain in its OCI and the effect of the $10x increase in its Withheld Assets Payable in Net Income. B records the corresponding $10x increase in its Withheld Assets Receivable in Net Income.

Pursuant to section 4.02(1) of the Notice, to the extent the $10x of unrealized gain is not included in A’s AFSI, A also excludes the reduction in A’s Net Income resulting from the increase in A’s Withheld Assets Payable. The amount included in B’s Net Income as a result of the $10x increase in B’s Withheld Assets Receivable is excluded from B’s AFSI.

As with the guidance on variable contracts, the Notice requests general comments on the guidance on FWH co and modco as well as comments on certain specific questions.

CONCLUSION

Notices 2023-7 and 2023-20 will not be the last word from the IRS and Treasury on the CAMT, nor will they be the last CAMT items discussed in TAXING TIMES. Looking ahead, it remains to be seen what changes, if any, the IRS and Treasury will make to the existing interim guidance on variable contracts and on funds withheld and modco reinsurance. It also remains to be seen what CAMT guidance the IRS and Treasury will provide in connection with the upcoming adoption of GAAP (Targeted Improvements to the Accounting for Long-Duration Contracts (LDTI)) and IFRS (IFRS 17) changes to insurance contract accounting, and in connection with other insurance-specific issues such as the life-nonlife consolidated return regulations and insurance-specific rules for net operating losses.

In addition to technical issues under the CAMT, insurers will need to consider the non-tax accounting for CAMT under GAAP, IFRS, and NAIC statutory accounting. Watch these pages for coverage of industry comments on these notices, and for other future developments as more specific guidance (and new issues) emerge.

The views expressed herein are solely those of the authors. Any errors are those of the authors and should not be ascribed to any other person. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the editors, or the respective authors’ employers.

Jean Baxley is a managing director with Deloitte Tax, LLP, and may be reached at jebaxley@deloitte.com.

Sara Conlon is a tax consultant with Deloitte Tax, LLP, and may be reached at sconlon@deloitte.com.

Art Schneider is a consultant for the American Council of Life Insurers and may be reached at artschneider7661@gmail.com.

Mark Smith is a managing director with PricewaterhouseCoopers, LLP, and may be reached at mark.s.smith@pwc.com.

 

[1] P.L. 117-169.

[2] Other Comprehensive Income (OCI) includes items such as foreign currency translation adjustments and unrealized gains or losses on available-for-sale debt securities. It is reported as a separate component of Comprehensive Income, and accumulated OCI is a separate component of equity.

[3] A colloquy is a formal conversation on the floor of the House or Senate that is intended to clarify the meaning of a term associated with a provision that otherwise might be viewed as ambiguous.

[4] 2023-3 I.R.B. 390 (Jan. 17, 2023).

[5] 2023-10 I.R.B. 523 (March 6, 2023). Notice 2023-20 provides CAMT guidance on a third insurance industry issue relating to a “fresh start” on the adjusted tax basis of assets when certain previously tax-exempt organizations became subject to Federal income taxation.

[6] Closed blocks typically occur when a mutual insurance company converts to stock insurance company status. Generally, when a closed block is created, assets are allocated to the closed block, which, together with future revenue from the closed block, are expected to be sufficient to fund future policy benefits, expenses, and policyholder dividends determined in a manner consistent with their determination prior to demutualization. The closed block assets benefit only the holders of policies in the closed block.

[7] A foreign insurance company may issue contracts similar to variable contracts accounted for under section 817.

[8] Accounting Standards Codification (ASC) paragraphs 944-80-25-2 and -3.

[9] ASC paragraph 944-80-45-3.

[10] A company taxed as an insurance company for U.S. Federal income tax purposes, or a foreign company regulated as an insurance company by its home country.

[11] A pool of assets designated to support Covered Variable Contracts.

[12] The financial accounting liabilities, including reserves and claims or benefits payable, under Covered Variable Contracts.

[13] For U.S. GAAP and IFRS purposes, debt securities are categorized as being held to maturity, available for sale, or trading. The vast majority of debt securities owned by life insurance companies reporting on a GAAP or IFRS basis are categorized as available for sale.

[14] This mismatch issue may be mitigated or eliminated if a fair value election is made for financial statement purposes. However, there are a number of considerations involved in making such an election, and fair value accounting is comparatively rare.