An insurer may have a disposal strategy that involves the "run-off" of operations (i.e., to cease accepting new business but to continue to provide service under existing contracts until they expire or are terminated). Under ASC 360-10-45-15, a component of an entity that is to be abandoned through the run-off of operations should not be reported as held for sale or discontinued operations (if qualifying) until all operations, including run-off operations, cease. The insurer will be conducting the activities of meeting claim obligations and investing in assets until all obligations have been extinguished. Therefore, the insurance entity will not report run-off operations as discontinued operations until the run-off is completed.

A component that is expected to be disposed of via a stock sale or a novation would be subject to the criteria for classification as assets held for sale under ASC 360-10-45-9, and the results of operations for a component that qualifies as held for sale is reported as discontinued operations in the income statement in accordance with ASC 205-20-45-1. ASC 360-10-45-9(b) requires that the asset (disposal group) be available for "immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (disposal groups)." Insurers may agree to sell an operation through a novation agreement that becomes effective at some point in the future because policyholder approval is needed to legally transfer policies from the seller to the buyer. Until the novation is effective, the two parties often enter into a 100% indemnity reinsurance agreement, which transfers the underlying economics of the policies being sold, but does not result in the extinguishment of the seller's policy obligations. Although legal requirements for effecting a novation may differ among states, we expect that satisfaction of the criteria in ASC 360-10-45-9(b) prior to the effective date of the novation will be rare given the requirement for policyholder approval.

Reinsurance transactions that do not qualify for sale treatment under reinsurance accounting (e.g., 100% indemnity reinsurance agreements with no expectation of sale/novation) will not result in classification of a component as held for sale and, therefore, will not be reported as discontinued operations.

For certain run-off transactions executed prior to 2002, prior accounting literature may have permitted classification as discontinued operations. Such transactions were grandfathered upon the adoption of the guidance that now prohibits discontinued operations presentation.

Insurers may sometimes sell a legal entity and simultaneously assume back the risk relating to a subset of the sold business through a reinsurance transaction (e.g., a product line that the purchaser has no interest in continuing) in two separate agreements. If the agreements are negotiated together in contemplation of each other, the combined total consideration exchanged for both transactions should be determined and allocated on a relative fair value basis to the proceeds from the sale of the subsidiary and the proceeds for assuming the reinsurance. This fair value allocation is important to ensure that the gain or loss on sale of the subsidiary, and separately, amounts relating to the assumed reinsurance (i.e., claim liabilities and any intangible asset or deferred gain), are appropriately recognized. The reinsurance agreement is considered a new transaction as the insurer has been relieved of its primary obligation to the policyholder. In some situations, the reinsurance agreement may have been executed prior to the sale (e.g., as an intercompany transaction between the entity sold and a reinsurance subsidiary of the parent). We believe it is appropriate for the insurer to fair value the reinsurance transaction as if it was newly executed at the sale/disposition date, given that it becomes a transaction with an entity outside the insurer's control group at that date. The decision to retain what was formerly an intercompany reinsurance transaction upon sale of the cedant is analogous to issuing a new reinsurance contract with the purchaser at the date of the sale.