Financial Statements Flashcards
Odomirok 6-7 BS 8-9 IS 10 Notes 11 GenInt 12 5-yr 13 Overview
asset
a property, right, or claim arising from past events that has future value
liability (general definition)
an obligation that the company must fulfill, based on past events, which will require the use of the company’s resources
surplus
the difference between assets & liabilities (also called equity)
cash & invested assets (6)
bonds
preferred stocks
common stocks
real estate
cash & cash equivalents
other invested assets
non-invested assets (3)
uncollected premiums & agents balances
reinsurance recoveries
DTA (Deferred Tax Asset)
liabilities (6)
loss
UEP (Unearned Premium)
LAE
reinsurance payables for losses and premiums
funds held, provision for reinsurance
surplus items (4)
unassigned funds
gross paid in & contributed surplus
aggregate write-ins for special surplus funds
common capital stock
Deferred Tax Asset (DTA)
expected future tax benefits related to amounts previously recorded in the statutory financial statements not expected to be reflected in the tax return as of the reporting date
difference in tax accounting & statutory accounting for loss reserves
carryforward of net operating loss from previous years
Elements of balance sheet & income statement (5)
Assets, Liabilities, Surplus
Revenue, Expenses
5 Financial Statements & Purpose of each
Balance Sheet (financial POSITION/solvency)
Income Statement (financial PERFORMANCE - profitability)
Capital & Surplus (CHANGES IN SURPLUS not recorded in the income statement)
Statement of Cash Flow
Notes to the Financial Statements (quantitative & qualitative disclosures)
Underwriting Income
EP - (current AY loss) - (change prior years’ AY loss) - LAE - (other UW exp)
Investment Income
investment revenue - investment expenses
Other Income
agents’ balances charged off + service fees + aggregate write-ins
Net Income
UW inc + Inv inc + Other Inc - (Dividends to Policyholders)
Surplus from Net Income
Prior Surplus + CY NI + CY direct charges to surplus
ADD change in unrealized capital gains, deferred tax, cumulative effect of changes in accounting principles, unrealized foreign exchange
ADD change in surplus notes, change in gross paid-in & contributed surplus
SUBTRACT change in reinsurance provision, nonadmitted assets
SUBTRACT stockholder dividends
Surplus from NEP
Prior Surplus + NEP
- Incurred L&LAE, Other CY UW Expense
+ Net investment income earned + realized capital gains
+ Other CY income
+ change in net unrealized capital gains less tax
+ net deferred income tax
- federal & foreign taxes
- div to policyholders, div to stockholders
- change in RP
- change in nonadmitted assets
Think of it as starting from EP to build out Net Income then work Surplus from there
Notes (10)
Category 1: (requires direct involvement by actuaries)
Change (incurred loss & LAE)
Asbestos (& environmental) reserves
Reinsurance
Discounting (unpaid loss & LAE)
PDR (Premium Deficiency Reserves)
Category 2: (relevant to actuaries)
Summary of significant accounting principles
High deductibles
Intercompany pooling
Events subsequent
Structured settlements
Purpose of General Interrogatories
Controls (both internal & external)
Operations
Business practices
Exposure to catastrophes
Items in General Interrogatories
The General Interrogatories are a series of questions included in the statutory Annual Statement of an insurance company. There are 2 parts:
Part 1: common questions for all types of insurers
Part 2: specific questions for property/casualty insurers.
Regulatory exams
Merger activity
Exemptions from regulations
Sales commissions - whether they’re excessive just to acquire business
Suspension of licenses - if applicable
Items shown in 5-yr Historical Data Exhibit
premiums (both gross and net)
balance sheet information (assets & liabilities)
income statement information (U/W gain, investment gain,..)
operating ratios
RBC (total capital & ACL or Authorized Control Level capital)
Schedules
A real estate
B mortgage loans
BA other long-term invested assets
D stocks & bonds
DA other short-term investments
DB derivatives
DL securities lending
E cash & cash equivalents
What information is shown on the Insurance Expense Exhibit (IEE) versus the Income Statement?
IEE shows statutory profit (loss), both direct & net of reinsurance, by line of business
Income Statement shows only aggregate information net of reinsurance
3 parts of IEE + Int
PART I:
- allocates expenses (from Part 3) into 22 different expense groups
- doesn’t show profit (loss)
PART II:
- shows pre-tax profit (loss) net of reinsurance (see columns 41, 42)
PART III:
- shows pre-tax profit (loss) direct of reinsurance (see columns 33, 34)
- excludes all investment gain
Interrogatories:
- explanatory notes for Parts 1,2,3 (comes before Parts 1,2,3 in Annual Statement)
- interrogatory question #4 is very important: provides info on the allocation method of profits & expenses to line
- if the allocation is done in a standard way then no further info is required
Surplus Allocation in IEE
m(x) = mean of (prior CY value of x , current CY value of x)
SR = m(S) / [ m(L) + m(LAE) + m(UEP) + NEPCY ]
SA = SR x [ m(LA) + m(LAEA) + m(UEPA) + NEPA(CY) ]
Pros of IEE surplus allocation method (4)
not distorted by Reinsurance
uses 2 years of data to smooth results (reduces distortions)
easy to obtain Data (from annual statement)
easy to Calculate & compare across companies & lines of business
Cons of IEE surplus allocation method (4)
does not reflect Future business or growth (it is retrospective)
does not allow for Actuarial/management input (method is formulaic)
does not reflect Risk characteristics of line of business (Ex: short vs long-tail)
does not recognize Catastrophe potential
describe differences between: IEE surplus allocation method & method used for ratemaking (2)
difference 1:
- IEE method is retrospective (based on past 2 years of data)
- ratemaking method is prospective
difference 2:
- IEE allocates based on: loss, LAE, UEP reserves AND net EP data
- ratemaking allocation better accounts for risks in a line of business (Ex: cat risk)
Net Investment Gain Ratio & allocation process
Net Inv Gain / Total Investable Assets
TIA = m(L) + m(LAE) + m(UEP) + m(ceded reins prem payable) + m(S) – m(agents’ balances)
Allocation: NIG(A) = NIGR * TIA(A)
Funds Attributable to Ins Transactions
FAITA = m(LA) + m(LAEA) + m(UEPA) + m(reA) – m(ABA) – (PPE for UEP)A
think of it like TIA for a specific line but without surplus, then subtract PrePaid Expense ratio for UEP
(PPE for UEP)A = PPERA x m(UEPA)
PPERA = (net acquisition expense)A / NWPA
Net Investment Gain Attributable to Ins Transaction
NIGITA = NIGR x FAITA
NIGR is an aggregate ratio - all lines of business use the same ratio.
Total Investment Gain components
investment gain attributable to Capital & Surplus
investment gain attributable to Insurance Transactions
