IRS Revenue Ruling
1997-5

Code Sec. 832

<<FULL TEXT>>

Insurance companies; premium stabilization reserves. A non-life
insurance company's surplus does not include amounts held on behalf of a
group of insureds in a premium stabilization reserve. Rev. Rul. 70-480,
revoked.


REV. RUL. 97-5

Rev. Rul. 70-480, 1970-2 C.B. 142, provides that amounts held by a
nonlife insurance company in a "stabilization reserve" funded with credits
on retrospectively rated term insurance contracts are not taken into
account in determining the company's unearned premiums under section
832(b)(4) of the Internal Revenue Code. Rev. Rul. 70-480 concludes that
stabilization reserves are not unearned premiums because the credits
retained by the insurance company to fund the stabilization reserves came
into being after the relevant risk period expired and thus were part of
the company's earned premiums. Rev. Rul. 70-480 further states that the
company's earned premiums less its costs and expenses constitute part of
its surplus, which is available to pay policyholder dividends. Rev. Rul.
70-480 thus treats the stabilization reserves as part of the company's
surplus.

Rev. Rul. 70-480's conclusion that the stabilization reserves are part
of the insurance company's surplus is erroneous. The stabilization
reserves are avail able to the policyholders upon cancellation of the term
accident and health insurance contracts. The nonlife insurance company at
all times had a legal obligation to return the stabilization reserves to
its policyholders to the extent that the stabilization reserves were not
used to purchase future coverage. Thus, stabilization reserves are not
part of the nonlife company's surplus.


HOLDING

A non-life insurance company's surplus does not include amounts held in
a stabilization reserve of the type described above.


EFFECT ON OTHER DOCUMENTS

Rev. Rul. 70-480 is revoked.


DRAFTING INFORMATION

The principal author of this revenue ruling is Gary Geisler of the
Office of the Assistant Chief Counsel (Financial Institutions and
Products). For further information regarding this revenue ruling contact
Mr. Geisler on (202) 622-3970 (not a toll-free call).

<<END RULING>>
 

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