Assets Flashcards
The balance sheet categorizes the assets two ways
Cash & invested assets vs Non invested assets: Cash & invested assets are more liquid. This distinction is important given that the statutory accounting is focused on solvency.
Admitted vs nonadmitted assets: these are displayed in separate columns in the balance sheet. Non admitted assets are not easily convertible to cash to satisfy the insurer’s liabilities (now or in the future), and are therefore not included in the surplus.
admitted assets
admitted assets = assets – non admitted assets
Bonds
Stocks
Real Estate
Cash, Cash Equivalents and Short-Term Investments
Uncollected & Deferred Premiums & Agents’ Balances
Amounts Recoverable from Reinsurers
Net Deferred Tax Assets
Receivables from Parent, Subsidiary & Affiliates
Funds held from reinsured
EDP=Network & Computer equipment/Electronic Data Processing
Bonds
instrument that in return for an initial principal payment, makes interest payments during the term, and returns the principal at maturity
Stocks
instruments that represent an ownership share in a company; regulators will typically be concerned if the insurer has a relatively high holding of stocks, since they have volatile values.
- Common stocks provide voting rights, and possible dividends. They are subordinate to bondholders and creditors to receiving money in the event of a liquidation.
- Preferred stocks are similar to Common stocks, except that they do not offer voting rights, but they do guarantee dividends. Another difference is that the owners of preferred stocks have priority to those of Common stocks to receive a return of their investment during a liquidation.
Cash, Cash Equivalents and Short-Term Investments
assets that are immediately convertible to cash.
Uncollected & Deferred Premiums & Agents’ Balances
represent the written premium that has not yet been received
- Uncollected premiums & agents’ balances: balances due before the financial statement date
- Deferred premiums: balances due after the financial statement date
- The classes above also include the unpaid installment premiums that meet same criteria
Amounts Recoverable from Reinsurers
balances due for the losses that have been paid
Net Deferred Tax Assets
refers to future tax benefits that arise due to temporary differences in income recognition between tax and statutory accounting
Real estate valuation
Schedule A
*Properties occupied by the company (need to occupy at least 50%): Depreciated cost – Encumbrances
*Properties held for the production of income: Depreciated cost – Encumbrances
*Properties held for sale: min (Depreciated cost, Fair value) – Encumbrances
encumbrance = the outstanding amount of the loan
Bond valuation
When the bond is purchased, it is recorded at actual cost
After purchase, it is valued at adjusted carrying value
*NAIC Class 1 & 2 (higher grade bonds): amortized cost (updated annually to reflect amortization/ accretion of premium/ discount)
*NAIC Class 3-6 (lower grade bonds): min (amortized cost, fair value)
Common stock valuation
valued at the initial carrying value when purchased and they are valued at fair value after purchase
preferred stock valuation
valued at the initial carrying value when purchased and value after purchase depends on whether they are redeemable (the issuer has the option to redeem for a preset price at a specified maturity date or after a specified period of notice) or perpetual (cannot be redeemed)
Risks to company’s financial health in balance sheet
- Common stocks represent a relatively high percentage of the assets, and are subject to high volatility in value.
- The company has a substantial investment in low-grade bonds which have a relatively high risk of default.
- Fixed income securities: in a high interest rate or high inflation environment, bond values would decline.
- There is a constant potential for the devaluation of real estate, and thus lower statutory surplus.
- Cash is a relatively small percentage of the total assets; a few large dollar claims could easily eat through this.
- The company has a high percentage of its assets invested in real estate and CMOs, which are relatively illiquid
- The company’s bond portfolio does not appear to be well-diversified, as it has a sizeable investment in a single corporate bond
Non Admitted Assets
- Premium that is over 90 days overdue
- Interest Due & Accrued over 90 days overdue
- 10% of the unsecured Accrued Retrospective prem that is due to the insurer
- permanent excess of book over the market value
- Furniture, equipment & supplies
common components Liabilities
Loss & Loss Adjustment Expense Reserves
Reinsurance Payable on Losses & LAE
Other Expenses (Excluding Taxes, Licenses & Fees)
LAE
Underwriting & investment expenses
Unearned Premiums (UEPR)
Ceded Reinsurance Premiums Payable: recorded net of any commission from
Funds held under Reinsurance Treaties
Provision for Reinsurance
Premium Deficiency Reserve
