This revenue procedure prescribes the loss payment patterns and discount factors for the 2007 determination year. These factors will be used to compute discounted unpaid losses under § 846 of the Internal Revenue Code.

.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 fire 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 2007 determination year that, pursuant to § 846(d)(1), must be applied through the 2011 accident year.

.03 The loss payment patterns for the 2007 determination year are based on the aggregate loss payment information reported on the 2005 annual statements of property and casualty insurance companies and compiled by A.M. Best and Co. The tables are arranged in alphabetical order. Following is an additional explanation of some of the tables and changes to the tables.

(1) Lines of Business. The lines of business for the 2007 determination year are the same as the lines of business for the 2002 determination year. See Rev. Proc. 2003-17, 2003-1 C.B. 427

(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 Reported 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.

(4) Smoothing Data. In Rev. Proc. 2003-17, section 2.03(4), comments were requested as to whether a methodology should be adopted to smooth the raw payment data and thus produce a more stable pattern of discount factors. This revenue procedure does not adopt such a methodology with respect to the 2007 determination year.

This revenue procedure applies to any taxpayer that is required to discount unpaid losses under § 846 for a line of business using the discount factors published by the Secretary.

.01 The following tables present separately for each line of business the discount factors under § 846 for accident year 2007. All the discount factors presented in this section were determined using the applicable interest rate under § 846(c) for 2007, 3.97 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 2007 annual statement.

.03 Tables

The principal author of this revenue procedure is Katherine A. Hossofsky of the Office of Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue procedure, contact Ms. Hossofsky at (202) 622-8435 (not a toll-free call).