# Prop. Treas. Reg. § 1.56A-22: AFSI adjustments for certain insurance companies and other specified industries. Proposed regulation, not in force. REG-112129-23, 89 FR 75062, published 2024-09-13 . Interprets 26 U.S.C. § 56A. Par. 9. Sections 1.56A-0 through 1.56A-27 are added to read as follows: (a) Overview. This section provides rules under section 56A of the Code for determining AFSI for certain insurance companies and other specified industries. Paragraph (b) of this section provides additional definitions that apply to this section. Paragraph (c) of this section provides rules for determining AFSI as it relates to certain types of life insurance and annuity contracts. Paragraph (d) of this section provides rules for determining AFSI as it relates to funds withheld reinsurance or modified coinsurance agreements. Paragraph (e) of this section provides rules for determining AFSI as it relates to assets held by any one of several identified entities since the entity became fully subject to Federal income tax by an act of Congress. Paragraph (f) of this section provides the applicability date of this section. (b) Definitions. For purposes of this section: (1) Covered insurance company. The term covered insurance company means— (i) A company subject to tax under subchapter L of the Code; or (ii) A foreign company that is subject to regulation as an insurance (or reinsurance) company by its home country and is licensed, authorized, or regulated by the applicable insurance regulatory body for its home country to sell insurance, reinsurance, or annuity contracts. (2) Covered investment pool. The term covered investment pool means a pool of investment assets that are designated to support one or more covered variable contracts and that are taken into account in determining FSI. (3) Covered obligations. The term covered obligations means the AFS liabilities, including contract reserves and claims or benefits payable, that reflect a covered insurance company's obligations with respect to one or more covered variable contracts and that are taken into account in determining FSI. (4) Covered reinsurance agreement. The term covered reinsurance agreement means a funds withheld reinsurance or modified coinsurance agreement and any retrocession of all or part of the risk under either such agreement. Under these agreements, the reinsurance operates like conventional reinsurance, but from a legal title and financial accounting perspective, the ceding company retains the investment assets supporting the obligations to the holders of the underlying contracts (and for modified coinsurance, the ceding company also retains the reserves). The ceding company records a liability to the reinsurer to reflect the assets it has retained. (5) Covered variable contract. The term covered variable contract means a contract— (i) That is issued by a covered insurance company; (ii) That is regulated as a life insurance or annuity contract in the jurisdiction in which it is issued; and (iii) For which the amount of the covered insurance company's obligations to the contract holder depends in whole or in part (by law, regulation, or the terms of the contract) on the value of the assets that are designated to support the contract. (6) Withheld assets. The term withheld assets means the assets held by a ceding company to support the risk reinsured under a covered reinsurance agreement. (7) Withheld assets payable. The term withheld assets payable means a liability on the ceding company's AFS that reflects— (i) The ceding company's obligation to the reinsurer under a covered reinsurance agreement with respect to the withheld assets; and (ii) Changes in the value of the withheld assets. (8) Withheld assets receivable. The term withheld assets receivable means an asset on the reinsurer's AFS that reflects— (i) The reinsurer's right against the ceding company under a covered reinsurance agreement with respect to the withheld assets; and (ii) Changes in the value of the withheld assets. (c) AFSI adjustments for covered variable contracts —(1) Non-application of certain provisions —(i) In general. If the requirements in paragraph (c)(1)(ii) of this section are satisfied, the AFSI adjustments (and corresponding adjustments to CAMT basis) provided in §§ 1.56A-4, 1.56A-5, and 1.56A-18 through 1.56A-20 do not apply to determine the AFSI of a covered insurance company with respect to the covered investment pool assets referenced in paragraph (c)(1)(ii)(B) of this section that are otherwise within the scope of such regulations. Thus, amounts reflected in the FSI of the covered insurance company with respect to the covered investment pool assets, including unrealized gains and losses, are included in AFSI without adjustment if the requirements of paragraph (c)(1)(ii) of this section are met. (ii) Requirements. Paragraph (c)(1)(i) of this section applies if— (A) A covered insurance company issues or reinsures covered variable contracts; (B) Amounts reflected in the FSI of the covered insurance company with respect to covered investment pool assets result in a change in the amount of the obligations to the holders of the related covered variable contracts by reason of law, regulation, or the terms of one or more such covered variable contracts; and (C) The change in the amount of the obligations results in a change in the amount of the covered obligations of the covered insurance company. (2) Example. The following example illustrates the application of paragraph (c)(1) of this section. (i) Facts. X is a life insurance company subject to tax under subchapter L of the Code. X uses the calendar year as its taxable year and has a calendar-year financial accounting period. X uses GAAP to prepare its AFS. On January 1, 2024, X issues a life insurance contract that is a variable contract, as described in section 817, to an individual, A. The contract is regulated as a life insurance contract in the jurisdiction in which it is issued. X owns assets that are designated to support X's contractual obligation to A and holds those assets in a separate account that is segregated from the general asset accounts of X. X accounts for these assets and its contractual obligations to A in its FSI. The separate account assets are stock in unrelated domestic corporations. At the end of 2024, no assets that support A's variable contract have been sold, and the fair market value of the assets has increased by $10×. Under the terms of the variable contract, the increase in the value of the assets supporting A's variable contract caused X's contractual obligation to A to increase by $10×. On X's AFS, the $10x increase in the value of the assets supporting the variable contract is included in FSI and offsets the $10× increase in X's contractual obligation to A (which reduces X's FSI). (ii) Analysis. X is a covered insurance company, and the variable contract that X issued to A is a covered variable contract. The assets in the separate account that X holds to support its contractual obligations to A constitute a covered investment pool, and X's contractual obligations to A are reflected in X's AFS liabilities, which constitute covered obligations. Paragraph (c)(1) of this section provides that § 1.56A-18 does not apply to exclude from a covered insurance company's AFSI or otherwise adjust any gain or loss in a covered investment pool that is reflected in the FSI of the covered insurance company if the requirements in paragraph (c)(1)(ii) of this section are satisfied. In this case, the requirement in paragraph (c)(1)(ii)(A) of this section is satisfied because X is a covered insurance company that issues covered variable contracts. The requirement in paragraph (c)(1)(ii)(B) of this section is satisfied because the $10x increase in value in the covered investment pool results in a change in X's obligation to A under the terms of the variable contract. The requirement in paragraph (c)(1)(ii)(C) of this section is satisfied because the change in the amount of the obligation results in a change in the amount of X's covered obligations. Accordingly, section § 1.56A-18 does not apply to exclude any of the $10× unrealized gain from X's AFSI or otherwise adjust the amount. Thus, both the unrealized gain and the offsetting change in the covered obligations are taken into account for purposes of determining X's AFSI, which eliminates what would otherwise be a difference between X's AFSI and A's life insurance company taxable income. (d) AFSI adjustments for covered reinsurance agreements —(1) In general. For a covered insurance company that is a party to a covered reinsurance agreement, the changes described in paragraphs (d)(1)(i) and (ii) of this section that are accounted for separately in the covered insurance company's AFS with respect to each agreement are excluded from the covered insurance company's AFSI. (i) Ceding company. For the ceding company holding the withheld assets, changes in FSI of the ceding company as a result of changes in the amount of the withheld assets payable to the extent that— (A) The changes in the amount of the withheld assets payable correspond to the ceding company's unrealized gains and losses in the withheld assets; and (B) The unrealized gains and losses in the withheld assets are not included in the ceding company's AFSI (determined without regard to this section but after giving effect to all other sections in the section 56A regulations except for § 1.56A-23). (ii) Reinsurer. For the reinsurer, changes in FSI of the reinsurer as a result of changes in the amount of the withheld assets receivable, provided that the changes in the amount of the withheld assets receivable correspond to the unrealized gains and losses in the withheld assets. (2) Effect of retrocession agreement. The exclusion provided in paragraph (d)(1)(ii) of this section is reduced to the extent that the accounting for a retrocession of the reinsured risk results in the withheld assets receivable being offset on the AFS of the reinsurer by a withheld asset payable with respect to the retrocessionaire in the retrocession. (3) Fair value accounting. The exclusions provided in paragraph (d)(1) of this section will not apply to a covered insurance company with respect to a covered reinsurance agreement if— (i) The covered insurance company elects for AFS purposes to account for the covered reinsurance agreement at fair value in its FSI; or (ii) The covered insurance company accounts for both of the following items at fair value in its FSI— (A) The changes in the withheld assets payable that correspond to the unrealized gains and losses in the withheld assets (for the ceding company) or the withheld assets receivable that correspond to the unrealized gains and losses in the withheld assets (for the reinsurer); and (B) The covered reinsurance agreement. (4) Examples. The following examples illustrate the application of paragraphs (d)(1) and (3) of this section. (i) Example 1: Covered reinsurance transaction— (A) Facts. X and Y are life insurance companies subject to tax under subchapter L of the Code. Each of X and Y uses the calendar year as its taxable year, has a calendar-year financial accounting period, and uses GAAP for purposes of preparing its AFS. On January 1, 2024, X, the ceding company, enters into a funds withheld reinsurance agreement with Y, the reinsurer. Y does not retrocede any risk covered by the funds withheld reinsurance agreement. Under the terms of the agreement, from a legal title and financial accounting perspective, X retains the assets supporting the obligations to the holders of the reinsured contracts (the withheld assets) as security for the reinsurer's obligations under the reinsurance agreement. X has a liability to Y with respect to the withheld assets (the withheld assets payable). X reflects all unrealized gains and losses on the withheld assets in OCI on its AFS, and X accounts for the corresponding changes in the withheld assets payable in its FSI. Y records an asset that corresponds to X's withheld assets payable (the withheld assets receivable) on its AFS, and Y accounts for changes in the withheld assets receivable in its FSI. At the end of 2024, no withheld assets have been sold, and the fair market value of the withheld assets has increased by $10×. On its AFS, X includes the $10× unrealized gain in OCI and records the effect of the $10× increase in its withheld assets payable in FSI. Y records the effect of a corresponding $10× increase in its withheld assets receivable in its FSI. (B) Analysis. Each of X and Y is a covered insurance company, and the funds withheld reinsurance agreement is a covered reinsurance agreement. The $10× of unrealized gain in the withheld assets is included in OCI on X's AFS and thus is excluded from X's AFSI under the definition of FSI in § 1.56A-1(b)(20). Under paragraph (d)(1)(i) of this section, because the $10× of unrealized gain is not included in X's AFSI, the $10× increase in the withheld assets payable is also excluded from X's AFSI. The amount included in Y's FSI as a result of the $10× increase in Y's withheld assets receivable corresponds to the unrealized gain in the withheld assets. Under paragraph (d)(1)(ii) of this section, this $10× increase is excluded from Y's AFSI. (ii) Example 2: Fair value accounting— (A) Facts. The facts are the same as in paragraph (d)(4)(i)(A) of this section ( Example 1 ), except that Y had made an election to account for the covered reinsurance agreement at fair value on its AFS. In 2024, the value of Y's liability under the reinsurance agreement on its AFS increased by $8× (determined in accordance with the relevant accounting valuation rules). (B) Analysis. As a result of Y's election, Y accounts for both the $10× increase in its withheld assets receivable and the $8× increase in its reinsurance agreement liability at fair value in FSI. Under paragraph (d)(3) of this section, the exclusion provided in paragraph (d)(1)(ii) of this section does not apply. Accordingly, Y includes both the $10× increase in its withheld assets receivable and the $8× increase in its reinsurance agreement liability in AFSI. (e) Use of fresh start basis. For purposes of determining AFSI, the following rules apply. (1) Federal Home Loan Mortgage Corporation. The adjusted basis rules provided in section 177(d)(2) of the Deficit Reduction Act of 1984, Public Law 98-369, 98 Stat. 494 (1984), apply to determine the CAMT basis of any asset held by the Federal Home Loan Mortgage Corporation (and any successor(s) under section 381) since January 1, 1985. (2) Existing Blue Cross or Blue Shield organizations. The AFSI gain or loss (but not depreciation, amortization, or other amounts) for any asset held by an existing Blue Cross or Blue Shield organization, as defined in section 833(c)(2), as added by section 1012 of the Tax Reform Act of 1986, Public Law 99-514, 100 Stat. 2085 (1986) (and any successor(s) under section 381), since the first day of the entity's first taxable year beginning after December 31, 1986, is determined using the entity's adjusted basis for regular tax purposes for the asset. (3) Certain pension business entities. The AFSI gain or loss (but not depreciation, amortization, or other amounts) for any asset held by Mutual of America or Teachers Insurance Annuity Association-College Retirement Equities Fund, as referenced in sections 1012(c)(4)(A) and (B) of the Tax Reform Act of 1986 (and any successor(s) under section 381) since the first day of the entity's first taxable year beginning after December 31, 1997, is determined using the entity's adjusted basis for regular tax purposes for the asset. (f) Applicability date. This section applies to taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER ].