Chapter 5 Flashcards
Admitted Assets
- An admitted asset is defined as having probable future economic benefits. It also has three essential characteristics:
a) it embodies a probable future benefit which contributes to cash flow,
b) a particular entity can obtain this benefit, and
c) the transaction giving rise to entity’s right to control the benefit has already occurred.
Non-ledger assets
Assets not recorded on an insurance company’s general ledger that are recognized as admitted assets for Annual Statement purposes.
Principal Other Assets
Cash (Schedule E)
is coins, currency, checks, drafts, money orders, and any other items that a bank will accept for deposit with an immediate credit to the depositor. Cash includes funds in transit and not yet sent to the bank which are entered on a write-in line on the assets page.
- It also includes bank account balances, whether they represent demand deposits or savings accounts, cash equivalents, including certificates of deposit with one year or less from date of acquisition to maturity.
Cash is show in “cash and short-term investments” on the Assets and also on exhibit E.
Principal Other Assets
Short-Term Investments (Schedule DA)
- are defined as those investments with maturities of one year or less at time of acquisition.
This classification may include repurchase agreement (“repos”), money market instruments, *commercial paper and collateral and mortgage agreements.
The asset is itemized in Schedule DA of the Annual Statement.
Money-market funds: quite often are classified as “stocks” because in the day-to-day purchase and sale of these funds, units or shares are acquired and sold.
Principal Other Assets
Electronic Data Processing (EDP) Equipment and Software
net of accumulated deprecation, are admitted assets.
*EDP equipment and software are depreciated over a useful life not to exceed 3 yrs, while non-operating systems software cannot exceed 5 yrs. Non-operating systems software is a nonadmitted asset and charged against surplus.
** EDP equipment and operating systems software, that can be shown as admitted assets is limited to 3% of the reporting entity’s capital and surplus, as reported in the financial statement most recently filed with the domiciliary commissioner adjusted to exclude any EDP and operating system software, net deferred tax assets and positive goodwill.
Principal Other Assets
Federal Income Tax Recoverable
income tax recoverable from the federal government are included in admitted assets.
Once the year in question has been audited and a deficiency has been assessed, no asset is included for that year. CH 12
Principal Other Assets
Deferred and Uncollected Premiums
Industrial policies
the reserves generally are based on midterminal reserve factors.
Uncollected premiums on industrial policies are handled like ordinary life insurance. (The accounting for uncollected premiums is similar to that for deferred premiums in that only the net premiums are necessary to match the reserve liability.)
Principal Other Assets
Investment Income Due and Accrued
Reported as a separate item on Asset page. The unearned income is reported as a liability in the statement.
>
- Dividends on Stocks:
• Accrued dividends on both preferred and common stocks consist of those amounts declared but not yet paid on stocks that have gone ex-dividend prior to the statement date.
•It includes the dividends on stocks sold after the ex-dividend date, but not yet received,
• as well as on those stocks still owned at the end of the period.
> Interest on Mortgage Loans: Interest income includes interest collected, the change in interest due and accrued and the change in unearned interest income, as well as amortization of premiums, discounts and fees.
> Policy Loan Interest: Any policy loan interest payment that is due but has not been paid or booked is included as investment income due and accrued.
* If the policies provide that the interest is payable in advance, it is possible to have some due and unpaid interest, but the only accrued interest would relate to policies in the grace period.
Foreign Exchange Assets
The foreign currency totals are converted to U.S. dollars at the exchange rates published by the NAIC. The two (U.S. dollar) totals are then compared, and the difference becomes the adjustment in assets or liabilities.
The asset or liability line titled “net adjustment in assets and liabilities due to foreign exchange rates” is intended for insurers with operations in foreign countries, but is also used by companies with assets denominated in a foreign currency.
Changes in the foreign exchange adjustment are reported as unrealized capital gains and/or losses. Unrealized gains or losses are shown on the line titled “Foreign exchange.” Foreign exchange realized gains or losses are recorded when the assets is sold or the liability is settled. This is shown as a separate line item in the capital and surplus section.
Write-In Assets
All the write-ins are aggregated and explained in detail at the bottom of the assets page. Those involving invested assets or cash are written in above Subtotals, cash and invested assets (to become a part of the investment yield calculation), while other assets are written in below Subtotals, cash and invested assets.
Other invested assists - schedule BA
Nine Classes of assets?
oil and gas production investments transportation equipment timber deeds mineral rights motor vehicle trust certificates surplus notes collateral loans All other
Non-admitted assets
Non-admitted assets Nonadmitted assets have the same characteristics but are specifically identified as nonadmitted or not specifically identified as admitted within the NAIC Accounting Practices and Procedures Manual or by jurisdictions.
- An example of a nonadmitted asset would be automobiles. They meet the definition of an asset established in SSAP No. 4, Assets and Nonadmitted Assets. However, they are not readily available to satisfy policyholder obligation and as a result the
undepreciated portion is nonadmitted.
Basket Assets
Many jurisdictions permit companies to make some investments that do not meet all of the strict regulatory requirements.
*These additional investments are often referred to as “basket” assets , i.e., they have been made out of a company’s free surplus (i.e., not policyholders’ funds) and are “in the basket.”
For example, Second or third-lien mortgages typically qualify as “basket” loans.
Valuation
- The AVR (Asset Valuation Reserve) described in Chapter 8, acts as a “shock absorber” to surplus and helps minimize the effect of the difference between book and market.
Principal Other Assets
Policy Loans
Types of Policy Loans?
- Loans on policies are valuable to the policyholders, and insurers encourage them to protect this feature by saving it for emergency use.
Loans are available to pay premiums in the event payment is otherwise precluded and can be obtained when other credit sources are denied. Policy loans do not have fixed principal payments or a maturity.
- Two types of Policy Loans:
1. conventional (or cash): the insured makes a request for a loan. *The maximum loan amount is frequently limited to the cash value of the policy plus the value of paid-up additions.
- automatic premium loans (APLs): * occur when an insured has indicated in the insurance application that the policy is not to lapse for nonpayment of premiums so long as there is loan value adequate to cover unpaid premiums. APLs can also be created to pay policy loan interest if the policyholder-borrower does not pay it in cash. Unpaid premium and/or interest is usually paid by granting a loan at the end of the grace period for that payment.
Valuation of Policy Loans: an admitted asset. They are carried at the unpaid balance of the loan provided the unpaid balance does not exceed either the cash surrender value of the policy or the policy reserves.
Principal Other Assets
Policy Loans
Valuation of Policy Loans?
- Policy loans are reported as admitted assets in the statutory financial statement. They are carried at the unpaid balance of the loan provided the unpaid balance does not exceed either the cash surrender value of the policy or the policy reserves. The cash surrender value generally consists of the cash value of the basic policy plus cash value of any policy accumulations and paid-up additions.
Principal Other Assets
Premium Notes
- Are debts of policyholders to the company for payment of premiums.
*On both old and new business, companies can also avoid premium notes by entering into agreements involving deposits of a portion of the premium with an extension on the balance. These deposits are treated as a liability and not credited to income until the deposit is used to pay the premium.
Premium notes can be admitted assets to the extent a reserve liability exists.
Principal Other Assets
Collateral Loans
- Collateral loans are obligations of the borrower that are secured by pledged assets.The outstanding principal balance and accrual interest are recorded as admitted assets. Included in Schedule BA.
- The pledged assets are usually readily marketable securities (stocks, bonds) as the relationship of the true value of the pledge to the loan is necessary to obtain the admitted value for statement purposes.
- Collateral loans are carried at the amount of the outstanding indebtedness. If the fair value of the pledged investment is less than the amount of the loan outstanding, the excess amount of the loan is treated as a nonadmitted asset.
If Impaired: The impairment is measured based on the fair value of the collateral less estimated costs to sell the collateral. The difference between the net value of the collateral and the asset is recognized by a charge to operations.
Principal Other Assets
Other Invested Assets
- Schedule BA includes nine classes of assets: oil and gas production investments (if not included in the D Schedules), transportation equipment, timber deeds, mineral rights, motor vehicle trust certificates, surplus notes, collateral loans, and “All other.”
The “All other” category can include joint ventures, limited partnerships, notes receivable, leased equipment, and miscellaneous loans.
Principal Other Assets
Deferred and Uncollected Premiums
Ordinary Life policies
- Ordinary Life: The gross premiums are included in income, the loadings are deducted as expenses, and the net premiums (gross less loading) are included in assets.
- Generally, policy reserves are calculated on the assumption that all premiums are paid on an annual basis at the beginning of each policy year. Reserves are calculated on a mean reserve basis
**Uncollected premiums are also an asset in statutory accounting. These premiums are usually those past the due date but in the grace period. Life insurance companies are still at risk for these contracts. Many companies actually go beyond the grace period for thirty or sixty days to avoid canceling and reinstating many policies. The accounting for uncollected premiums is similar to that for deferred premiums in that only the net premiums are necessary to match the reserve liability.
Principal Other Assets
Receivable for Securities
Sales of securities are recorded as of the trade date. A receivable due from the broker is established in instances when a security has been sold, but the proceeds from the sale have not been received.
- Receivable for securities not received within 15 days from the settlement date are nonadmitted, and are classified as other than invested assets.
- Receivables arising from subsequent sale of securities acquired on a “To Be Announced” (TBA) basis which have not yet been received by the seller in the secondary sale transaction, may be admitted until the security is exchanged for payment. TBA securities may be purchased well in advance of the actual date of security issuance (frequently 90 days or more).
