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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 is not be reported as discontinued operations 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 by sale or a novation may meet the criteria for classification as assets held for sale under ASC 360-10-45-9. The results of operations for a component that qualifies as held for sale may be 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 affecting 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) do not result in classification of a component as held for sale and, therefore, are not reported as discontinued operations.
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