This Subtopic provides guidance to insurance entities on accounting for and financial reporting of business combinations. The guidance in this Subtopic is presented in the following two Subsections:
- a
General
- b
Demutualizations.
The General Subsections of this Subtopic provide guidance to insurance entities on accounting for and financial reporting of insurance and
reinsurance contracts acquired in a business combination.
The Demutualizations Subsections of this Subtopic provide guidance to insurance entities on accounting for and financial reporting of
demutualizations.
This Subsection is organized as follows:
- a
The demutualization process
- b
Formation of a mutual insurance holding entity
- c
Closed blocks for certain participating life insurance contracts
- d
Alternative mechanisms to closed blocks.
Mutual insurance entities differ from stock insurance entities in that they do not have stockholders. A mutual insurance entity is considered to be owned by policyholders whose insurance contracts embody their rights as insureds and as members of the mutual insurance entity.
The process for allocating the aggregate consideration among eligible policyholders varies based on individual entity circumstances and applicable regulatory statutes. The allocation process generally consists of a fixed and a variable component.
The fixed component represents consideration for eligible policyholders' membership interest in the mutual insurer and consists of a given number of shares per policyholder (or sometimes, per policy).
The variable component represents consideration for eligible policyholders' contribution to the value of the insurer. The variable component of the aggregate compensation is allocated to policyholders in proportion to the actuarial contributions of their eligible policies, if positive. A policy's actuarial contribution consists of its historical equity share (the policy's past contribution to entity equity) and, in most cases, the prospective equity share; that is, the present value of the policy's expected future contributions to entity equity.
Most of the past demutualizations and at least one of the past mutual insurance holding entity conversions have been accompanied or followed by an initial public offering of the stock of a demutualized insurance entity or an intermediate holding entity of the mutual insurance holding entity.
The specific policyholder contracts designated for inclusion in the closed block are part of the negotiation process with the insurance regulators.
If cash flows from the closed block assets and experience of the closed block are, in the aggregate, more or less favorable than assumed in the funding of the closed block, total dividends paid to closed block policyholders could differ from the original dividend assumptions. Net favorable deviations in closed block performance, unless reversed by subsequent unfavorable experience, will be available for distribution over time only to closed block policyholders and will not be available to the insurance entity or its stockholders. Net unfavorable deviations could result in reduced dividends to closed block policyholders, unless reversed by future favorable experience or ultimately funded from assets outside of the closed block.
Regardless of the closed block's performance, the insurance entity is obligated to pay guaranteed benefits under the policies in accordance with their terms. If the cash flows from the assets allocated to the closed block and the policies included in the closed block prove to be insufficient to pay the benefits guaranteed under the policies included in the closed block, the insurance entity will be required to make those payments from assets outside of the closed block.