Odomirok 13 Flashcards
Purpose of the Schedules
Help indicate whether there is a large concentration in riskier assets, in which case the insurer would require additional scrutiny. Even though the information in the Schedules has some quantitative and qualitative detail, users will need to engage in discussions with management about its investment policies in order to really understand its exposure to risk.
Schedule A
Provides details about real estate directly owned by the insurer. Contains three parts:
- Part 1 contains details about all of the real estate owned as of 12/31
- Part 2 provides a detailed listing of real estate purchased during the year
- Part 3 provides a detailed listing of real estate sold during the year.
Source of the values of real estate in the balance sheet
Part 1, Col 9 (Book/Adjusted Carrying Value less Encumbrance)
Three groupings of property in Schedule A
- Properties occupied by the insurer
- Properties held for the production of income
- Properties held for sale
Should an insurer have large holdings in real estate?
No, especially if it writes mainly short tailed lines
Schedule B
Lists mortgage loans (secured by real estate) owned by the insurer; has three parts
Schedule B, Part 1
Contains details about all of the mortgage loans owned as of 12/31. These are segmented into:
- mortgages in good standing
- restructured mortgages (those where the terms were modified, due to delinquency)
- those with interest over 90 days overdue; which are not in foreclosure
- those in the process of foreclosure
Schedule B, Part 2
Provides a detailed listing of mortgage loans acquired during the year
Schedule B, Part 3
Provides a detailed listing of mortgage loans ended during the year (including repaid)
Should an insurer have significant investment in mortgage loans?
No, because:
- they are not part of the core business strategy
- they are illiquid
Schedule BA
Gives information about other long term assets owned by the insurer. These assets are not included in any of the other invested asset schedules. Examples include:
- Real estate not directly owned by the insurer
- Joint ventures (a project undertaken by two or more parties)
- Partnership interests
- Surplus debentures (also known as a “surplus note”, this is a debt instrument that is treated as surplus)
Three parts of Schedule BA
- Part 1 contains details about all of the assets owned as of 12/31
- Part 2 provides a detailed listing of assets purchased during the year
- Part 3 provides a detailed listing of assets sold during the year
Should an insurer have significant investment in other long term assets?
Depends; actuaries should examine how the cash flows from the long term assets match the duration of the liabilities. Ideally the insurer would have sufficient cash flow to meet the liabilities.
Schedule D
Provides details about stocks and bonds; has six parts
Schedule D, Part 1
Lists the long term (maturity over 1 year from the date acquired) bonds and certificates of deposits owned by the insurer at 12/31. It provides the Book/Adjusted Carrying Value of the bonds which serves as the source of bond values in the Balance Sheet. It also lists the maturity of the bonds.
Categories of bonds
- US government
- All other government
- US states, territories, and possessions
- US political subdivisions of states, territories and possessions
- US special revenue and special assessment obligations and all non-guaranteed obligations of agencies and authorities of governments and their political subdivisions
- Industrial and miscellaneous
- Hybrid securities
- Parent, subsidiaries, and affiliates
Schedule D, Part 2
Lists stocks owned as of 12/31:
- Section 1 includes the preferred stocks. These are separated into:
+ Industrial and miscellaneous
+ Parent, subsidiaries, and affiliates
- Section 2 includes the common stocks. This also includes mutual funds and money market mutual funds
Schedule D, Parts 3 - 6
- Part 3: bonds and stocks acquired during the current year, which will still be owned as of 12/31
- Part 4: bonds and stocks that were owned at the start of the year, but sold (or redeemed) during the year
- Part 5: bonds and stocks acquired and also sold during the year
- Part 6: preferred and common stocks in affiliates
Schedule DA
Provides detail about the short term investments (maturities from acquisition date of 1 year or less). Examples include:
- Bonds
- Mortgage loans & other short-term invested assets for parent, subsidiaries and affiliates
- Mortgage loans
- Exempt money market mutual funds
- Class one money market mutual funds
- Other short-term invested assets
Part 1 lists the short term investments held as of 12/31
Schedule DB
Lists the derivatives owned by the insurer:
- Part A lists the positions in options, caps, floors, collars, swaps, and forwards
- Part B provides the positions in futures
- Part C provides the positions in replication (synthetic asset) transactions
- Part D describes the counterparty exposure (credit risk) for the derivative instruments open 12/31
Parts A and B are divided into 2 sections: Section 1 provides the open positions at year end, and Section 2 provides the positions terminated during the year.
Schedule DL
Provides detail about securities lending collateral assets. It was added to the Annual Statement in 2010 following the financial crisis in 2008/2009
Mechanics of securities lending collateral assets
Company lends certain securities it is not actively trading to another party, for a fee. The borrower short sells the asset, hoping to repurchase it at a lower price before returning it to the lender. This opens up the lender to credit risk, so collateral is required. The lender can invest the collateral, but it must do so in short term, low risk, highly liquid markets because the borrower can return the securities with short notice and expect the collateral to be returned.
Purpose of Schedule DL
To add transparency following the financial crisis; it provides detail about the collateral invested by the insurer, including the fair and book values, and the date in which the agreements mature.
Parts of Schedule DL
- Part 1 lists the collateral assets that are not included in other investment schedules
- Part 2 lists those that are reported in other asset schedules