SECTION 4. TABLES OF

DISCOUNT FACTORS

.01 The tables in this section 4 present separately for each line of business the unpaid loss discount factors under § 846 for use in the first taxable year beginning after December 31, 2017, and for use in calculating the TCJA adjustment. All of the discount factors presented in these tables are determined by using the applicable interest rate for 2018 under § 846(c) and the proposed regulations, which is 3.12 percent, compounded semiannually, and the revised payment patterns for the 2017 determination year determined by the Secretary under § 846(d) and the proposed regulations. All of the discount factors presented in these tables are determined by assuming all loss payments occur in the middle of the calendar year.

.02 Tables 1 and 2 present separately for each line of business the unpaid loss discount factors under § 846 for use in the first taxable year beginning after December 31, 2017. Any taxpayer using discount factors prescribed in Tables 1 and 2 to compute discounted unpaid losses under § 846 for its first taxable year beginning after December 31, 2017, must use the discount factors prescribed in Tables 1 and 2 with respect to all of its property and casualty lines of business and, consistent with the TCJA transition rule, must use the discount factors prescribed in Tables 1 and 2 for all accident years ending with or before calendar year 2018. The taxpayer also must use the discount factors prescribed in Tables 1 and 2 as the salvage discount factors for the 2018 accident year and all prior accident years for purposes of determining estimated salvage recoverable under § 832 with respect to all of its property and casualty lines of business for its first taxable year beginning after December 31, 2017.

.03 Consistent with the TCJA transition rule, any taxpayer using the discount factors prescribed in Tables 1 and 2 for its first taxable year beginning after December 31, 2017, must, for that taxable year, use the discount factors prescribed in Tables 3 and 4 for purposes of determining the unpaid losses and expenses unpaid (as defined in § 832(b)(5) and (6)) at the end

eral, the loss payment pattern determined by the Secretary for each line of business is determined by reference to the historical loss payment pattern applicable to such line of business determined in accordance with the method of determination set forth in § 846(d)(2) and the computational rules prescribed in § 846(d)(3) on the basis of data from annual statements described in § 846(d)(2)(A) and (B). However, under § 1.846–1(d)(2) of the proposed regulations, the Secretary may adjust the loss payment pattern for any line of business using a methodology described by the Secretary in other published guidance if necessary to avoid negative payment amounts and otherwise produce a stable pattern of positive discount factors less than one.

.03 Discount Factors for Accident Year 2018 and Prior Accident Years

(1) The discount factors prescribed in this revenue procedure are determined by using the applicable interest rate for accident year 2018 under § 846(c) and the proposed regulations and revised loss payment patterns determined by the Secretary for the 2017 determination year under § 846(d) and the proposed regulations.

(2) Pursuant to § 846(c) and the proposed regulations, the Secretary has determined that the annual rate for the 2018 calendar year is 3.12 percent, compounded semiannually. This annual rate is the average of the monthly spot rates on corporate bonds with times to maturity of not more than seventeen and one-half years based on a yield curve that reflects the average of monthly yields on corporate bonds described in § 430(h)(2)(D)(i) for the period from January 2013 through December 2017 (that is, the most recent 60-month period ending before the beginning of the 2018 calendar year). ¹

(3) Pursuant to § 846(d) and the proposed regulations, the Secretary has determined a revised loss payment pattern for each property and casualty line of business for the 2017 determination year for use with respect to unpaid losses incurred in accident year 2018 and prior accident years. The revised loss payment patterns for the 2017 determination year are based,

initially, on the aggregate loss payment information reported on the 2015 annual statements of property and casualty insurance companies and compiled by A.M. Best and Co. The lines of business for the 2017 determination year are the same as the lines of business for the 2012 determination year. See Rev. Proc. 2012–44, 2012–49 I.R.B. 645. Losses are reported on the annual statement net of losses on reinsurance ceded, but include losses on assumed proportional reinsurance. Losses with respect to assumed non-proportional reinsurance are reported in three separate lines of business (for property, liability, and financial reinsurance). The loss data include defense, cost containment, adjusting, and other loss expenses, but are not reduced for salvage and subrogation receipts.

(4) Pursuant to § 1.846–1(d)(2) of the proposed regulations, the Secretary may adjust the loss payment pattern for any line of business using a methodology described by the Secretary in other published guidance if necessary to avoid negative payment amounts and otherwise produce a stable pattern of positive discount factors less than one. For the 2017 determination year, only one line of business requires adjustments under the proposed regulations. That line of business is Products Liability - Claims Made. The initial payment pattern results in negative payment amounts for the fifth, seventh, and ninth years after the accident year. Therefore, the payment amounts for the fourth through the ninth year after the accident year are adjusted following the steps listed in the preamble to the proposed regulations. See 83 FR 55646.