SECTION 2. BACKGROUND

.01 Section 846 provides that discounted unpaid losses must be separately determined for each accident year of each line of business by applying an interest rate determined under § 846(c) and the appropriate loss payment pattern to the amount of unpaid losses as measured at the end of the tax year.

Section 846(d) directs the Secretary to use the most recent aggregate loss payment data of property and casualty insurance companies to determine and publish a loss payment pattern for each line of business every five years. This payment pattern is used to discount unpaid losses for the accident year ending with a determination year and for each of the four succeeding accident years.

Section 846(e) allows a taxpayer to make an election in each determination year to use its own historical payment pattern instead of the Secretary’s tables. This election does not apply to any international insurance or reinsurance line of business.

Section 846(f)(4) defines the term “line of business” as a category for the reporting of loss payment patterns on the annual statement for property and casualty companies approved by the National Association of Insurance Commissioners (NAIC), except that the multiple peril lines shall be treated as a single line of business. Section 846(f)(5) states that the term “multiple peril lines” means the lines of business relating to farmowners multiple peril, homeowners multiple peril, commercial multiple peril, ocean marine, aircraft (all perils), and boiler and machinery.

.02 Pursuant to § 846(d), the Secretary has determined a loss payment pattern for each property and casualty line of business for the 2012 determination year that, pursuant to § 846(d)(1), must be applied through the 2016 accident year.

.03 The loss payment patterns for the 2012 determination year are based on the aggregate loss payment information reported on the 2010 annual statements of property and casualty insurance companies and compiled by A.M. Best and Co. The tables are arranged in alphabetical

December 3, 2012 645 2012–49 I.R.B.

All the discount factors presented in this section were determined using the applicable interest rate under § 846(c) for 2012, 2.89 percent, and by assuming all loss payments occur in the middle of the calendar year.

.02 If the groupings of individual lines of business on the annual statement change, taxpayers must discount unpaid losses on the resulting line of business in accordance with the discounting patterns that would have applied to those unpaid losses based on their classification on the 2012 annual statement. .03 Tables.

order. Following is an additional explanation of some of the tables and changes to the tables.

(1) NAIC Changes in Lines of Busi- ness . The NAIC has changed the reporting of unpaid loss experience on the annual statement for warranty companies. These changes are reflected in the lines of business set forth below.

(2) Format of the Tables . To simplify the tables, the columns entitled Tax Year provide the actual tax years, rather than AY+0, AY+1, and so on.

(3) Accident Years Not Separately Re- ported on the NAIC Annual Statement . Section V of Notice 88–100, 1988–2 C.B. 439, sets forth a composite method for computing discounted unpaid losses for accident years that are not separately reported on the annual statement. The tables

separately provide discount factors for taxpayers who elect to use the composite method of section V of Notice 88–100. See Rev. Proc. 2002–74, 2002–2 C.B. 980.