# ASC 805-944-05: Business Combinations — Financial Services—Insurance — 05 Overview and Background Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/805/944/#05-overview-and-background) Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective. Tables and mathematical or amendment markup are retained as HTML where Markdown would lose structure. Source downloaded (UTC): 2026-09-10T01:26:43.337Z to 2026-09-10T01:26:43.337Z Record version: sha256:7ea40fd3740af08ccb98dcaca3197c3757a97c632fdecd67425d01253700d11e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 805-944-05: 05 Overview and Background [Read section](https://asc.understandingaccounting.org/asc/805/944/#05-overview-and-background) SEC content: no ##### [805-944-05-1](https://asc.understandingaccounting.org/asc/805/944/#805-944-05-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:26:43.337Z to 2026-09-10T01:26:43.337Z Record version: sha256:f77b8e6ab5d67f831a5d0d9b54241afc4127194d1570cf7ffe3ddd841a790899 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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: 1. a General 2. b Demutualizations. ##### [805-944-05-2](https://asc.understandingaccounting.org/asc/805/944/#805-944-05-2) Pending content: no Source downloaded (UTC): 2026-09-10T01:26:43.337Z to 2026-09-10T01:26:43.337Z Record version: sha256:fb52a303bfc30db6302310d98ba9ec34560421fad9f5f38fc10796be9a893738 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The General Subsections of this Subtopic provide guidance to insurance entities on accounting for and financial reporting of insurance and [reinsurance](https://asc.understandingaccounting.org/glossary/r/#reinsurance "A transaction in which a reinsurer (assuming entity), for a consideration (premium), assumes all or part of a risk undertaken originally by another insurer (ceding entity). For indemnity reinsurance, the legal rights of the insured are not affected by the reinsurance transaction and the insurance entity issuing the insurance contract remains liable to the insured for payment of policy benefits. Assumption or novation reinsurance contracts that are legal replacements of one insurer by another extinguish the ceding entity's liability to the policyholder.") contracts acquired in a business combination. ### Demutualizations ##### [805-944-05-3](https://asc.understandingaccounting.org/asc/805/944/#805-944-05-3) Pending content: no Source downloaded (UTC): 2026-09-10T01:26:43.337Z to 2026-09-10T01:26:43.337Z Record version: sha256:6bfc6051dc7313c64cf544f99e5dab2108f92fcd2cf30482bf3491365a6dde87 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The Demutualizations Subsections of this Subtopic provide guidance to insurance entities on accounting for and financial reporting of [demutualizations](https://asc.understandingaccounting.org/glossary/d/#demutualization "The conversion of a mutual insurance entity to a stock insurance entity."). ##### [805-944-05-4](https://asc.understandingaccounting.org/asc/805/944/#805-944-05-4) Pending content: no Source downloaded (UTC): 2026-09-10T01:26:43.337Z to 2026-09-10T01:26:43.337Z Record version: sha256:19c337f85f94e70e7a5f47262a7e14aeaeb0bf3855ee5e211ab95853b3e30ce3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Subsection is organized as follows: 1. a The demutualization process 2. b Formation of a mutual insurance holding entity 3. c Closed blocks for certain participating life insurance contracts 4. d Alternative mechanisms to closed blocks. #### The Demutualization Process ##### [805-944-05-5](https://asc.understandingaccounting.org/asc/805/944/#805-944-05-5) Pending content: no Source downloaded (UTC): 2026-09-10T01:26:43.337Z to 2026-09-10T01:26:43.337Z Record version: sha256:0e5f3723efdaf65b551de5c4054b820f0a619a99680fd4c939d97d1321ea4ebb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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. ##### [805-944-05-6](https://asc.understandingaccounting.org/asc/805/944/#805-944-05-6) Pending content: no Source downloaded (UTC): 2026-09-10T01:26:43.337Z to 2026-09-10T01:26:43.337Z Record version: sha256:e950dd7ed4967a47547e900c157162299d9182314c06b2929a64bde24b0fd62f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The process of demutualization or formation of a mutual insurance holding entity is subject to scrutiny and approval by state insurance regulatory authorities. Most states have some form of demutualization statute. A range of demutualization statutes and regulations exist for insurance entities. Typically, those laws contemplate a direct and full reorganization of the mutual insurer to a stock form. In accordance with some demutualization statutes, eligible policyholders receive stock, [policy credits](https://asc.understandingaccounting.org/glossary/p/#policy-credits "Additional values applied to a policy through dividends, increases in fund values, accumulation values or accumulation account values or extensions of coverages."), policyholder benefits, cash, or subscription rights as consideration for their membership interest. ##### [805-944-05-7](https://asc.understandingaccounting.org/asc/805/944/#805-944-05-7) Pending content: no Source downloaded (UTC): 2026-09-10T01:26:43.337Z to 2026-09-10T01:26:43.337Z Record version: sha256:b4e5d52141fef3818e3d222702469d09080aa577e488ab49d6816e8825ef7d24 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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. ##### [805-944-05-8](https://asc.understandingaccounting.org/asc/805/944/#805-944-05-8) Pending content: no Source downloaded (UTC): 2026-09-10T01:26:43.337Z to 2026-09-10T01:26:43.337Z Record version: sha256:c36353abc0fc598f97bb04c794772156906515a28b63c45b6f5fd96e6a1ce74e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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). ##### [805-944-05-9](https://asc.understandingaccounting.org/asc/805/944/#805-944-05-9) Pending content: no Source downloaded (UTC): 2026-09-10T01:26:43.337Z to 2026-09-10T01:26:43.337Z Record version: sha256:ff8ba80fc898943fe9d203faed8e98303290ee3c832c68670fb1f01bba73533a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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. #### Formation of a Mutual Insurance Holding Entity ##### [805-944-05-10](https://asc.understandingaccounting.org/asc/805/944/#805-944-05-10) Pending content: no Source downloaded (UTC): 2026-09-10T01:26:43.337Z to 2026-09-10T01:26:43.337Z Record version: sha256:e88641bbcc9a48c9fc2179de696b687d057e62f081fc032e44d18e45e96539af Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An alternative to demutualization, in the jurisdictions where it is permitted, is for a mutual insurance entity to form a mutual insurance holding entity. The mutual insurer is converted to a stock insurance entity and becomes a stockholder-owned entity that operates as a subsidiary of the newly formed mutual insurance holding entity. All the initial stock of the reorganized entity is issued to the mutual insurance holding entity. Governance of the mutual insurance holding entity is established by the former mutual insurance entity's board of directors. The converted stock insurer may generate additional capital through an initial or subsequent public offering; however, most statutes specify that the mutual insurance holding entity must own greater than 50 percent of the voting rights of the converted insurer to ensure that the mutual insurance holding entity maintains effective control. The policyholders of the converted insurer become members of the mutual insurance holding entity through the transfer of their mutual membership interests to the mutual insurance holding entity, retaining the same voting rights they had previously. Policyholders with [participating insurance](https://asc.understandingaccounting.org/glossary/p/#participating-insurance "Insurance in which the policyholder is entitled to participate in the earnings or surplus of the insurance entity. The participation occurs through the distribution of dividends to policyholders.") contracts retain their participating contract in the converted stock insurer, but unlike in a demutualization, there is no distribution of equity or subscription rights to policyholders. ##### [805-944-05-11](https://asc.understandingaccounting.org/asc/805/944/#805-944-05-11) Pending content: no Source downloaded (UTC): 2026-09-10T01:26:43.337Z to 2026-09-10T01:26:43.337Z Record version: sha256:aa506335d84b21e2352b0e9a38678542bcffa071f54d91d8ac8d65242454b52c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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. #### Closed Blocks for Certain Participating Life Insurance Contracts ##### [805-944-05-12](https://asc.understandingaccounting.org/asc/805/944/#805-944-05-12) Pending content: no Source downloaded (UTC): 2026-09-10T01:26:43.337Z to 2026-09-10T01:26:43.337Z Record version: sha256:68422b68ee0fe9961b9e48f464c19c9d518831a839229d6c8634a9291a89fc6f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In connection with a demutualization or the formation of a mutual insurance holding entity, some state insurance departments require that a [closed block](https://asc.understandingaccounting.org/glossary/c/#closed-block "A mechanism to preserve, over time, the reasonable dividend expectations of individual policyholders with individual life, health, or annuity policies for which dividends are currently being paid or are expected to be paid under the current dividend scale. A closed block comprises a defined, limited group of policies and a defined set of assets, and is governed by a set of operating rules.") or alternative mechanism be established for certain participating life insurance contracts to protect the adjustable policy features and dividend expectations of participating life insurance policyholders from the competing interests of stockholders. Typically, the [plan of demutualization](https://asc.understandingaccounting.org/glossary/p/#plan-of-demutualization "The plan of reorganization, including all exhibits and schedules thereto, as it may be amended from time to time, that is adopted by the board of directors of the demutualizing entity, pursuant to which the entity demutualizes.") describes how the closed block will operate. ##### [805-944-05-13](https://asc.understandingaccounting.org/asc/805/944/#805-944-05-13) Pending content: no Source downloaded (UTC): 2026-09-10T01:26:43.337Z to 2026-09-10T01:26:43.337Z Record version: sha256:8884f7a5e61456660f910bec50b3cf2f4e4e9b03649fb9ecdab9ec8f8298b37d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The closed block assets and cash flows provided by those assets (see paragraph [944-805-05-15](https://asc.understandingaccounting.org/asc/805/944/#805-944-05-15)) will not inure to the stockholders of the demutualized entity; instead, all cash flows from those assets will be used to benefit the closed block policyholders (absent regulatory approval to the contrary or insolvency of the insurer). Because the insurance entity remains obligated to provide for minimum guarantees under the participating policy, it is consequently possible under certain circumstances that funds from outside the closed block will have to be used to meet the contractual benefits of the closed block policyholders. The assets designated to the closed block are subject to the same liabilities, with the same priority in the case of insolvency or in liquidation, as assets outside the closed block. In many situations, commissions and other expenses (including management expenses) of operating and administering the closed block will not be charged to the closed block. Unless the state insurance department consents to an earlier [termination](https://asc.understandingaccounting.org/glossary/t/#termination "In general, the failure to renew an insurance contract. Involuntary terminations include death, expirations, and maturities of contracts. Voluntary terminations of life insurance contracts include lapses with or without cash surrender value and contract modifications that reduce paid-up whole-life benefits or term-life benefits."), the closed block will continue in effect until the date on which none of the policies in the closed block remains [in force](https://asc.understandingaccounting.org/glossary/i/#in-force "Policies and contracts written and recorded on the books of an insurance carrier that are unexpired as of a given date."). ##### [805-944-05-14](https://asc.understandingaccounting.org/asc/805/944/#805-944-05-14) Pending content: no Source downloaded (UTC): 2026-09-10T01:26:43.337Z to 2026-09-10T01:26:43.337Z Record version: sha256:6576eddb169dd2b601d867d322e6e7d9ba4375e8c4ef7be66410c41fa8ffc179 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The process of formation of the closed block is negotiated between the insurance entity and the applicable state insurance regulators. Estimated future cash flows are considered in determining the nature and amount of assets designated to the closed block. The assets that are designated to the closed block are expected to produce cash flows sufficient to satisfy the obligations of the closed block, as well as the continuation of policyholder [dividend scales](https://asc.understandingaccounting.org/glossary/d/#dividend-scales "The actuarial formulas used by life insurance entities to determine amounts payable as dividends on participating policies based on experience factors relating, among other things, to investment results, mortality, lapse rates, expenses, premium taxes, and policy loan interest.") and policy credits before the demutualization, if the underlying experience continues. Actual policy dividends paid may be increased or decreased based on the effect of future events, such as investment experience, [mortality](https://asc.understandingaccounting.org/glossary/m/#mortality "The relative incidence of death in a given time or place.") gains or losses, and [persistency](https://asc.understandingaccounting.org/glossary/p/#persistency "The complement of the termination rate, persistency is the renewal quality of insurance contracts, that is, the number of insureds that keep their insurance in force during a period. Persistency varies by plan of insurance, age at issue, year of issue, frequency of premium payment, and other factors.") of the closed block policies. ##### [805-944-05-15](https://asc.understandingaccounting.org/asc/805/944/#805-944-05-15) Pending content: no Source downloaded (UTC): 2026-09-10T01:26:43.337Z to 2026-09-10T01:26:43.337Z Record version: sha256:5b14a3d2105fb8d576c38ec4aaa841e2b9f863f83a24c2d012a76c3ab04e46e2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The specific policyholder contracts designated for inclusion in the closed block are part of the negotiation process with the insurance regulators. ##### [805-944-05-16](https://asc.understandingaccounting.org/asc/805/944/#805-944-05-16) Pending content: no Source downloaded (UTC): 2026-09-10T01:26:43.337Z to 2026-09-10T01:26:43.337Z Record version: sha256:8e65653e08fe4bb04b547225076db25af18424ab2fd61c2937045470d609b3f9 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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. ##### [805-944-05-17](https://asc.understandingaccounting.org/asc/805/944/#805-944-05-17) Pending content: no Source downloaded (UTC): 2026-09-10T01:26:43.337Z to 2026-09-10T01:26:43.337Z Record version: sha256:3f7cce2c47c285d1cd1ba5accd5471d2866a2c16d424fcbf6adceda8f746cf08 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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. #### Alternative Mechanisms to Closed Blocks ##### [805-944-05-18](https://asc.understandingaccounting.org/asc/805/944/#805-944-05-18) Pending content: no Source downloaded (UTC): 2026-09-10T01:26:43.337Z to 2026-09-10T01:26:43.337Z Record version: sha256:8ff07d2b3ecd98312bce103cc6558425eef14c526440b920a0828c7809fae6e0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Alternatives to the closed block have arisen in practice encompassing, for a number of types of contracts, various mechanisms believed by the insurance entities and state insurance regulators to be appropriate in the specific circumstances. Closed block alternative mechanisms have been used in lieu of closed blocks for certain participating life insurance contracts to commit to the insurance regulator that the insurance entity will continue to follow its established dividend practices. Closed block alternative mechanisms also have been used to protect nonguaranteed elements of participating and [nonparticipating insurance contracts](https://asc.understandingaccounting.org/glossary/n/#nonparticipating-insurance-contract "Insurance contracts that are not entitled to dividends. Usually issued by a stock life insurance entity at premium rates that are usually lower than those charged if dividends are payable. Mutual entities may issue nonparticipating contracts.") such as interest credits on deferred annuities and adjustable premiums on adjustable premium term business. In some instances, the methodology and limitations defined in the agreements with the state insurance regulators have considered only specific profit components, such as mortality experience on a block of term insurance or investment spreads on a block of annuities, and in other instances have considered virtually all components of product profitability. If there is a limitation on the profits that may inure to the stockholders, there is an agreement between the insurance entity and the insurance regulators that defines all of the following: 1. a The contracts covered by the limitation 2. b The profit limitation calculation 3. c The timing and manner (for example, as policy dividends, reduced premiums, or additional benefits) in which amounts that may not be distributed to stockholders are to be distributed to policyholders.