Schedule F - Increase (Decrease) in Reserves and Company/Policyholder Share

Schedule F is used to compute:

1. The company's share percentage used in determining the company's share of the dividends-received deduction under section 805(a)(4);
2. The policyholders' share percentage used in determining the policyholders' share of tax-exempt interest for determining the increase or decrease in reserves under section 807 (and the increase in policy cash value of section 264(f) policies as defined in section 805(a)(4)(F)); and
3. To determine if, under section 807, certain reserves decreased or increased for the tax year. A net decrease will be includible in gross income, while a net increase will be a deduction in computing LICTI.

The net increase or net decrease in reserves is figured by comparing the opening balance for reserves to the closing balance for reserves reduced by the policyholders' share of tax-exempt interest (and the increase in policy cash value of section 264(f) policies as defined in section 805(a)(4)(F)).

For rules on how to compute reserves on contracts when interest is guaranteed beyond the end of the tax year, see section 811(d).

Reserve adjustments are not treated as interest expenses for allocation purposes under section 864(c). See section 818(f).

There are special rules for computing reserves of unearned premiums of certain nonlife contracts. See section 807(e)(7)(A).

Note.   If the basis for determining the amount of any item referred to in section 807(c) (life insurance reserves, etc.) at the end of the tax year differs from the basis for the determination at the beginning of the tax year, see section 807(f).

Line 1. Life insurance reserves.   For rules on how to compute life insurance reserves, see sections 807(d) and (e). Section 807(d)(2)(B) provides that the interest rate used to compute life insurance reserves is the greater of the applicable Federal interest rate (AFIR) or the prevailing State assumed interest rate (SAIR). See Rev. Rul. 2002-12, 2002-11 I.R.B. 624. For modified guaranteed contracts described in section 817A, see Notice 97-32, 1997-1 C.B. 420.

Note.   A change in a life insurance company's computation of existing life insurance reserves for annuity contracts to take into account specific factors issued by the NAIC is a change in basis subject to section 807(f). See Rev. Rul. 2002-6, 2002-6 I.R.B. 460.

Line 2. Unearned premiums and unpaid losses.   For sections 807 and 805(a)(1), the amount of the unpaid losses (other than losses on life insurance contracts) must be the amount of the discounted unpaid losses determined under section 846.

Section 846 provides that the amount of the discounted unpaid losses must be computed separately by each line of business (multiple peril lines must be treated as a single line of business) and by each accident year and must be equal to the present value of those losses determined by using the:

1. Amount of the undiscounted unpaid losses,
2. Applicable interest rate, and
3. Applicable loss payment pattern.

Special rules apply with respect to unpaid losses related to disability insurance (other than credit disability insurance), noncancelable accident and health insurance, cancelable accident and health insurance, and to the international and reinsurance lines of business. With regard to the special rules for discounting unpaid losses on accident and health insurance (other than disability income insurance), unpaid losses are assumed to be paid in the middle of the year following the accident year.

Generally, the amount of undiscounted unpaid losses means the unpaid losses shown in the annual statement. The amount of discounted unpaid losses with respect to any line of business for an accident year cannot exceed the total amount of unpaid losses with respect to any line of business for an accident year as reported on the annual statement.

The applicable interest rate for each calendar year and the applicable loss payment patterns for each accident year for each line of business are determined by the IRS. The applicable interest rate and loss payment patterns for 2002 will be published in the Internal Revenue Bulletin when available. The applicable interest rate and loss payment patterns for 2000 and 2001 are published in Rev. Proc. 2000-44, 2000-43 I.R.B. 409 and Rev. Proc. 2001-60, 2001-53 I.R.B. 643.

Section 846(e) allows corporations having sufficient historical experience to determine a loss payment pattern to elect under certain circumstances to use their own historical experience. If this election is made, the loss payment patterns will be based on the most recent calendar year for which an annual statement was filed before the beginning of the accident year. The election will not apply to any international or reinsurance line of business. If the corporation makes this election, check the Yes column for question 9 in Schedule M, Other Information. For more information, see section 846(e), Regulations section 1.846-2, and Rev. Proc. 92-76, 1992-2 C.B. 453.

Section 807(d)(4)(A)(ii) permits an election to recompute the Federal interest rate every 5 years. In general, a life insurance company would apply the greater of the AFIR or the prevailing SAIR for the calendar year in which the contract is issued and the following 4 calendar years. In the 5th calendar year after the calendar year in which the contract was issued, the life insurance company would begin using the AFIR in effect for that 5th calendar year or the prevailing SAIR for the calendar year in which the contract was issued, whichever is greater. This rate would then remain in effect for the 4 subsequent years. For each subsequent 5-year period, a similar recomputation would be required. Once made, the election is effective for contracts issued during that calendar year and any subsequent years, and may only be revoked with the consent of the IRS.

Line 3. Supplementary contracts.   Enter the amount (discounted at the appropriate rate of interest) necessary to satisfy the obligations under insurance and annuity contracts, but only if the obligations do not involve (at the time the computation is made) life, accident, or health contingencies.

For this item, the appropriate rate of interest is the higher of the prevailing SAIR at the time the obligation first did not involve life, accident, or health contingencies or the rate of interest assumed by the corporation (at that time) in determining the guaranteed benefit. However, the amount of any contract may not be less than the net surrender value of the contract.

Line 4. Dividend accumulations and other amounts.   Enter the total dividend accumulations and other amounts held at interest in connection with insurance and annuity contracts.

Line 5. Advance premiums.   Enter the total premiums received in advance and liabilities for premium deposit funds. See section 807(e)(7)(A) for special rules for treatment of certain nonlife reserves.

Line 6. Special contingency reserves.   Enter the total reasonable special contingency reserves under contracts of group term life insurance or group accident and health insurance which are established and maintained for the provision of insurance on retired lives, premium stabilization, or for a combination thereof.

Line 8. Increase (decrease) in reserves.   In figuring the amount on line 8, any decrease in reserves must be computed without any reduction of the closing balance of section 807 reserves by the policyholders' share of tax-exempt interest. See the instructions for line 2, page 1.

Note.   In figuring the company's and policyholders' share percentages, carry the computations to enough decimal places to ensure substantial accuracy and to eliminate any significant error in the resulting tax.

Lines 9 and 12.   Do not include any of the interest income received on an ESOP loan made prior to August 21, 1996. For binding contract and refinancing rules, see section 1602 of the 1996 Act.

Line 13.   Do not include the exempt portion of any of the interest income received on an ESOP loan made prior to August 21,1996. For binding contract and refinancing rules, see 1996 Act section 1602.

Line 16.   In computing the amount entered on line 16, any decrease in reserves must be figured without any reduction of the closing balance of section 807 reserve items by the policyholders' share of tax-exempt interest.

Line 18a.   A policyholder dividend is any dividend or similar distribution to policyholders in their capacity as such.

Enter on line 18a policyholder dividends paid or credited (including an increase in benefits) where the amount is not fixed in the contract but depends on the corporation's experience or management's discretion.

Also, under section 808(e), any policyholder dividend which (a) increases either the cash surrender value of the contract or other benefits payable under the contract or (b) reduces the premium otherwise required to be paid is treated as paid to and returned by the policyholder to the company as a premium. Include these amounts in income on line 1, page 1.

Line 18b.   Excess interest means any amount in the nature of interest:

• Paid or credited to policyholders in their capacity as such and
• In excess of interest determined at the prevailing SAIR for such contract.

Line 18c.   Premium adjustment means any reduction in the premium under an insurance or annuity contract which (except for the reduction) would have been required to be paid under the contract.

Line 18d.   Experience-rated refund means any refund or credit based on the experience of the contract or group involved.

Line 28.   Multiply gross investment income (line 9) by 90% or, in the case of gross investment income related to assets held in segregated asset accounts under variable contracts, by 95%. Enter the result on line 28.

Schedule G - Policy Acquisition Expenses

For purposes of section 848(b), all life insurance company members of the same controlled group are treated as one company. Any deduction determined for the group must be allocated among the life insurance companies in the group in such a manner as the IRS may prescribe.

Line 1. Gross premiums and other consideration.   Generally, gross premiums and other consideration is the total of:

1. All premiums and other consideration (other than amounts on reinsurance agreements) and
2. Net positive consideration for any reinsurance agreement (see Regulations section 1.848-2(b)).

Also include on this line:

• Advanced premiums,
• Amounts in a premium deposit fund or similar account, as permitted by Regulations section 1.848-2(b)(3),
• Fees,
• Assessments,
• Amounts that the insurance company charges itself representing premiums with respect to benefits for its employees (including full-time insurance salesmen treated as employees under section 7701(a)(20)), and
• The value of a new contract issued in an exchange described in Regulations section 1.848-2(c)(2) or (3).

Line 2. Return premiums and premiums and other consideration incurred for reinsurance.   For purposes of section 848(d)(1)(B) and Regulations section 1.848-2(e), return premiums means amounts (other than policyholder dividends or claims and benefit payments) returned or credited to the policyholder. See Regulations sections 1.848-2(f) and 1.848-3 for how to treat amounts returned to another insurance company under a reinsurance agreement.

Line 5.   The entries in columns 5(a), (b), or (c) may be positive or negative.

Line 6.   If the sum of columns 5(a), (b), and (c) is negative, enter this sum on line 6. The result is a negative capitalization amount under section 848(f).

Line 9. General deductions.   These deductions are under sections 161 through 198, relating to itemized deductions, and sections 401 through 424, relating to pension, profit-sharing, stock bonus plans, etc. Also, include on this line ceding commissions incurred for the reinsurance of a specified insurance contract. Do not include amortization deductions of specified policy acquisition expenses under sections 848(a) or (b). Skip line 9 if the corporation has elected out of the general deductions limitation. See Regulations section 1.848-2(g)(8).

Note.   If interest expense is included on line 9, do not also include it on page 1, line 15a.

Line 13. Unamortized specified policy acquisition expenses from prior years.   Enter the balance of unamortized specified policy acquisition expenses from prior years as of the beginning of the tax year. See section 848(f)(1)(B).

Line 16. Phase-out amount.   The amount of amortization for members of a controlled group and the phase-out of the group's specified policy acquisition expenses under section 848(b) must be allocated to each member in proportion to that member's specified policy acquisition expenses for the tax year.

Schedule H - Small Life Insurance Company Deduction

To qualify for the small life insurance company deduction, a life insurance company must have less than:

• $15 million of tentative LICTI and
• $500 million in assets.

The deduction for qualifying small life insurance companies is 60% of the first $3 million of tentative LICTI for the tax year. If tentative LICTI exceeds $3 million, the deduction is phased out. The reduction in the deduction is equal to 15% of the tentative LICTI for the tax year that exceeds $3 million.

In computing the small life insurance company deduction, all life insurance company members of the same controlled group are treated as one company. Any small life insurance company deduction determined for the group must be allocated among the life insurance companies in the group in proportion to their respective tentative LICTIs.

Do not include any items from noninsurance businesses when figuring tentative LICTI for purposes of computing the small life insurance company deduction.

Noninsurance business generally means any activity which is not an insurance business. However, under section 806(b)(3)(B), any activity which is not an insurance business shall be treated as an insurance business if:

1. It is of a type traditionally carried on by life insurance companies for investment purposes, but only if the carrying on of the activity (other than real estate) does not constitute the active conduct of a trade or business or
2. It involves the performance of administrative services in connection with plans providing life insurance, pension, or accident and health benefits.

For the assets test, the assets of all members of a controlled group, as defined in section 806(c)(3), must be included, whether or not they are life insurance companies. For information regarding the valuation of assets, see the instructions for Schedule L, Part I.

Schedule I - Limitation on Noninsurance Losses

Section 806(b)(3)(C) provides that, in computing LICTI, any loss from noninsurance business (defined above in the instructions for Schedule H) is limited to the smaller of:

• 35% of the loss or
• 35% of LICTI (computed by excluding any noninsurance loss included in arriving at LICTI on line 24, page 1).

For more information on either the computation of the allowable loss deduction or on applicable carryback provisions, see section 1503(c).

Schedule J Part I - Shareholders Surplus Account

Any stock life insurance company that had a policyholders surplus account (PSA) on December 31, 1983, will continue to maintain a shareholders surplus account (SSA). See section 815(c)(1) for more information.

Line 2d.   Do not include the increase in cash value for section 264(f) policies.

Line 4.   In figuring the tax liability on line 4, adjustments must be made for any year in which the alternative minimum tax is imposed or the minimum tax credit has been taken.

Line 6.   Enter all amounts treated under section 815 as distributions to shareholders. Any distribution to shareholders is treated as having been made first out of the SSA, to the extent thereof.

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