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AAAAAAHHHHH > Financial Statements > Flashcards

Financial Statements Flashcards

1
Q

UW Income (IS)

2 formulas

A
  • = EP – AY Loss – chg(prior AYs loss) – LAE – other UW expense
  • = EP – AY Loss & LAE – chg(prior AYs loss & LAE) – other UW expense
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2
Q

Net Investment Income / Net Investment Income Earned (NII)

A
  • = Investment revenue – investment expense – non-federal TLF
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3
Q

Net Investment Gain (NIG)

A
  • = NII + net realized capital gains – taxes
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4
Q

Other Income

A
  • = Agents/premium balances charged off + finance/service charges not included in prem + aggregate write in
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5
Q

Total Net Income

A
  • = UW Income + Net Investment Gain + Other Income – Dividend to Policyholders – Fed/Foreign taxes incurred
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6
Q

Earned Premium

A
  • = WP - chg(unearned premium)

sometimes referred to as unearned premium reserve

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7
Q

Surplus

Detailed formula

A

= Prior Surplus + net Income - stockholder dividends +∆:
- net unrealized (FX) capital gains (+)
- net deferred income tax (+)
- non-admitted assets (-)
- provision for reinsurance (-)
- surplus notes (+)
- change in gross paid-in & contributed surplus (+)
- cumulative effect of changes in accounting principles (+)

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8
Q

SAP vs GAAP

Used by, objective, intended users, oversight

A

Statutory Accounting Principles (SAP)
- Used by insurance companies, evolved from GAAP
- Measuring solvency (ability to pay claims)
- Intended user – regulators
- Oversight by individual states with assistance from NAIC

Generally Accepted Accounting Principles (GAAP)
- Used by all US public companies
- Measures earnings
- Intended user – policyholders, investors, general public
- Oversight by the SEC, delegated responsibility to FASB

FASB = Financial Accounting Standards Board

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9
Q

SAP vs GAP

11 differences

A

BASIC D-D-DiNG + PDR
- Balance sheet presentation of reinsurance (BS)
- Anticipated salvage/subrogation
- Structured settlements
- Invested assets
- Ceded reinsurance
- Deferred Acquisition Expense (DAC) (BS)
- Deferred Tax Asset (DTA) (BS)
- Discounting loss reserves (BS)
- Non-admitted assets (BS)
- Goodwill (BS)
- Premium Deficiency Reserve (PDR)

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10
Q

Balance Sheet (Reinsurance)

SAP vs GAP

A
  • SAP: Liabilities shown NET of reinsurance on BS
  • GAAP: Liabilities shown GROSS of reinsurance on BS
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11
Q

Anticipated S&S

SAP vs GAP

A
  • SAP: insurer can choose for Schedule P to show net OR gross of S&S
  • GAAP: insurer must subtracts S&S from unpaid losses
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12
Q

Deferred Acquisition Cost (DAC)

SAP vs GAAP, why it supports either

A

SAP:
- Recognized immediately (no DAC asset under SAP)
- Supports SAP purpose because expense money has been spent
- Expense money would not be available to PHs if company goes insolvent

GAAP:
- Defer & amortize DAC to match the recognition of EP (create a DAC asset)
- Supports GAAP purpose because assets and liabilities are matched
- Gives more accurate picture of company

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13
Q

Deferred Tax Asset (DTA)

SAP vs GAAP

A
  • Reflect temporary differences between tax treatments of assets and liabilities
  • SAP: DTA subject to strict admissibility test
  • GAAP: DTAs fully recognized
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14
Q

Non-Admitted Assets (BS)

A
  • Not highly liquid assets (furniture, equipment)

SAP:
- Does not allow certain assets of low liquidity (non-admitted assets)
- Supports SAP because non-admitted assets are not liquid after insolvency

GAAP:
- All assets are admitted
- Supports GAAP purpose because all assets should be considered in evaluating a company as a going concern

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15
Q

Invested Assets

SAP vs GAAP valuations

Bonds, common stock, redeemable/non-redeemable stock, SVO

A

SAP valuation:
- Bonds 1-2 –> amortized cost (less risky)
- Bond class 3-6 –> min(amortized cost, fair value) (more risky)
- Common stock –> fair value (risky)
- Redeemable stock 1-2 –> **cost or amortized cost (less risky)
- Redeemable stock 3-6 –> min(cost, amortized, fair value) (more risky)
- Non-redeemable stock 1-2 –> fair value (risky)
- Non-redeemable stock 3-6 –> min(cost, fair value**) (very risky)
- SVO investments 1-2 –> fair value or systematic value (risky)
- SVO investments 3-6 –> fair value (risky)

GAAP valuation:
- Available for sale (AFS) – intent to sell 1 year but before maturity
- Fair value – changes in fair value flow through other comprehensive income (OCI), direct charge to surplus (not IS)
- Held for trading (HFT) – intent to sell within hours/days
- Fair value – changes in fair value flows through IS
- Hold to maturity (HTM)– no equity securities
- Amortized cost – realized gains at maturity flow through IS

SVO = securities valuation office

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16
Q

Prospective Reinsurance

SAP vs GAAP

A
  • SAP: Liabilities shown NET of reinsurance on BS
    • schedule P will be affected
  • GAAP: Liabilities shown GROSS of reinsurance on BS
    • ceded reserves shown as a reinsurance recoverable (asset)
17
Q

Retroactive Reinsurance

SAP vs GAAP

A

SAP
- record ceded reserves as negative write-in liability (BS)
- schedule P will NOT be affected
- gains go into other income (IS)
- change in surplus goes into special surplus (BS)

GAAP:
- record ceded reserves as reinsurance asset
- gains are deferred –> no immediate impact on income and surplus

18
Q

Structured Settlements

SAP vs GAAP

A
  • insurer settle certain types of liability claims by purchasing an annuity from a life insurer for the insured

If claimaint signs the release of liability, SAP = GAAP treatment:
- purchase price of annuity is recorded as paid loss
- claim is closed

If released is not signed, the insurer is contingently liable:
- SAP: record purchase price of annuity as paid loss
- also need to disclose the contigent liability in the Notes to Financial Statement
- GAAP: purchase price of annuity is recorded as a reinsurance recoverable asset

19
Q

Reserve Discounting

SAP vs GAAP, why it supports either

A
  • SAP rarely allows discounting except for certain WC / long term disability claims that have fixed and reasonably determinable payment patterns

SAP:
- Tabular discount rate (for WC) – 3.5% default
- Non-tabular discount rate (for non-WC):
- If invested assets ≥ PH reserves: min(investment yield – 1.5%, US treasury yield)
- If invested assets < PH reserves: min(avg net portfolio yield – 1.5%, US treasury yield)
- Supports SAP because cross-company comparison is easier

GAAP:
- Can use SAP rate or reasonable alternative
- Supports GAAP because it can be more tailored to company

Yield of US treasury with similar duration as the loss duration

20
Q

Premium Deficiency Reserve

SAP vs GAAP

A

SAP
- Profit = UPR + Investment Income - PV(loss)
- Premium Deficiency = negative profit — can’t be < 0
- DAC asset = 0
- Premium Deficiency Reserve Liability = Premium Deficiency - DAC asset (0)

GAAP:
- Profit = UPR + Investment Income - PV(loss) - DAC
- Premium Deficiency = negative profit — can’t be < 0
- DAC asset = DAC - Premium Deficiency — can’t be < 0
- Premium Deficiency Reserve Liability = Premium Deficiency - DAC asset — can’t be < 0

21
Q

SAP Goodwill

Formula

A

= min(P - S2, 10% * S1)
- P = purchase price of company
- S1 = surplus of acquiring company (company that’s buying)
- S2 = surplus of acquired company (company that’s being bought out)

Amortized over time to unrealized capital gain/loss up to 10 years
- negative goodwill will create a contra asset (reduces total assets)

22
Q

GAAP Goodwill

General formula

A

= Purchase price - (net assets) = P - [FV(assets) - FV(liabilities)]
- if goodwill > 0 –> establish an asset equal to goodwill
- if goodwill < 0 –> immediately recognize as operating income gain
- not amortized

23
Q

GAAP Goodwill FV(Liabilities)

All formulas

A

= sum(discounted unpaid loss+LAE) + FV(other liabilities) + (risk margin)
- risk margin = (r - i) * sum[avg(Ct, Ct+1) / (1+i)^(t+1)]
- r = pre-tax cost of capital
- i = discount rate = risk-free rate + illiquidity premium %
- Ct = capital required at time t to support future liabilities

24
Q

GAAP Surplus

General formula

A

= SAP Surplus + (provision for reinsurance) + Deferred Acquisition Cost (DAC)

25
Q

Schedule P Functions and Parts

A

DT TRAIN 9877-3-45-1
- Development of reserves over time attributable to specific years and lines – 2,3,4
- Trends in frequency and severity – Part 1,2,5
- (calculate) RBC loss-sensitive discount – Part 7
- (evaluate) Adequacy of recorded reserves – Part 2,5
- (determine) Payment patterns for discounting Part 3
- IBNR: observe split between IBNR and case reserves Part 4,5
- Disclosures for the SAO – Part 1

26
Q

Cautions When Using Schedule P to Assess Reserve Adequacy

A
  • Schedule P is net of reinsurance and does not consider credit risk
  • Only shows 10 years of data – might not be sufficient for long tail lines
  • Commutation can cause sudden increase in net reserves
  • Can be distorted by changes in claim handling practices
  • Can be distorted by management decisions on reserving levels

AAAAAAHHHHH (10 decks)

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