Odomirok 6-7 Flashcards
Annual Statement
the “Blank”
publicly available document in which insurers report their financial results to the state regulators in the US
developed/ maintained by the NAIC
1st page of annual statement
Jurat page
contains basic information about the insurer, including its:
Name NAIC code Address Name & title of preparer Officers
why do regulators focus on the strength of the balance sheet?
Since the regulators are mainly concerned that the insurer can meet its obligations to the policyholders
Actuaries are involved in both the creation & use of the balance sheet
The actuaries play a big role in determining the reserves
The balance sheet provides some of the data used to assess the adequacy of capital
main components of the Balance Sheet
Assets
Liabilities
balance sheet categorizes the assets two ways
Cash & invested assets vs Non invested assets
Admitted vs nonadmitted assets
Cash & invested assets vs Non invested assets
and rows of Asset page
Cash & invested assets are more liquid. This distinction is important given that the statutory accounting is focused on solvency.
Cash & invested assets can be found in Rows 1-12 of the Assets page, and Non invested assets in Rows 13-25.
Admitted vs nonadmitted assets
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.
these are displayed in separate columns in the balance sheet.
major assets held by insurers
bonds and stocks
bond
n instrument that in return for an initial principal payment, makes interest payments during the term, and returns the principal at maturity
what contains details of the bonds held by the insurer
Schedule D
Type of issuer (federal, state, corporate) Maturity NAIC Class (rating)
Stocks
instruments that represent an ownership share in a company
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
they do not offer voting rights, but they do guarantee dividends
owners of preferred stocks have priority to those of Common stocks to receive a return of their investment during a liquidation
why regulators will typically be concerned if the insurer has a relatively high holding of stocks
because they have volatile values
valuation rules depend on the type of real estate
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
think of the encumbrance as the outstanding amount of the loan
contains details of the real estate transactions & holdings
Schedule A
Cash, Cash Equivalents and Short-Term Investments
include assets that are immediately convertible to cash
Details about Cash, Cash Equivalents and Short-Term Investments can be found in different sections of the Annual Statement
Cash details are in Schedule E-1
Cash equivalents (original maturity under 3 months) are in Schedule E-2
Short term investments (original maturity under a year) are in Schedule DA
Uncollected & Deferred Premiums & Agents’ Balances
These assets 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
Premium that is over 90 days overdue is
nonadmitted
In addition to this, the insurer should treat all premium that it believes that it will not collect as a bad debt (impaired).
Analysts need to investigate companies that have a higher percentage of their assets in Uncollected & Deferred Premiums & Agents’ Balances compared to the industry
they will need to assess the impact to liquidity
Amounts Recoverable from Reinsurers
reinsurer may owe the ceding company money for losses that have been paid and/ or unpaid by the ceding company
“Amounts Recoverable from Reinsurers” includes just the balances due for the losses that have been paid
Schedule F, contains details about the expected recoveries (on both paid & unpaid losses).
Net Deferred Tax Assets
refers to future tax benefits that arise due to temporary differences in income recognition between tax and statutory accounting
“Net DTA” is recognized in the Balance Sheet, which nets out any Deferred Tax Liability (DTL) that may exist
The Balance Sheet will contain EITHER
DTA or DTL
It will not contain both
Two of the most common sources of DTAs include
Loss reserves are discounted in tax accounting, but undiscounted in SAP accounting. Under tax accounting, the discounting will reduce over time, generating an incurred loss, and reducing the tax due. The DTA accounts for this future reduction.
Carryforward net operating losses from prior years: this occurs when the insurer has net operating losses in one year, and expects these to offset future gains, and therefore future taxes.
Receivables from Parent, Subsidiary & Affiliates
These often arise when the affiliates share services or resources
Users should be concerned if an insurer has significant amounts of Receivables from Parent, Subsidiary & Affiliates
as they are usually not as liquid or available as other assets. In particular, they should look at the source of the receivables and the portion that are paid on time.
Other Nonadmitted Assets
**Users would need to investigate further if the insurer has a large portion of non admitted assets
Investments in bonds, stocks, mortgage loans or real estate that exceed any state limitations (limits are not mentioned)
Investments in electronic data processing equipment (EDP) & software that exceed the set limits (limits are not mentioned)
Furniture, equipment & supplies
Balances due from an agent from sale of a security, overdue by over 15 days from settlement
Funds held at a reinsured company that exceed the associated liabilities
10% of deductibles recoverable in excess of collateral
Loss & Loss Adjustment Expense Reserves
what it should be booked at
reserves should be booked at management’s best estimate
Reinsurance Payable on Losses & LAE
includes liabilities for amounts owed to reinsureds for losses that they have already paid.
(Liabilities for loss & LAE unpaid by the ceding company are held in the assuming entity’s Loss & LAE Reserves).
Other Expenses (Excluding Taxes, Licenses & Fees) and 2 main categories
This includes expenses that have been incurred but not paid.
two main categories of expenses:
LAE and Underwriting & investment expenses:
Underwriting & Investment Exhibit (U&IE), Part 3 (Expenses) contains more details on expenses. Each category of expenses is broken into
LAE
Other Underwriting Expenses
Investment Expenses
allocation of expenses
The insurer has to perform the allocation of expenses into 2 categories. The allocation does impact the balance sheet, as it affects whether an unpaid expense will be classified as LAE reserves or other expense liabilities.
Unearned Premiums and methods to calculate it
This includes the portion of the premium that is yet to be earned
Daily pro rata method: based on the number of days of the policy that have expired
Monthly pro rata method: assumes that premiums are written evenly through each month. Of the premium written within a certain month: -1/24 is earned that month -1/12 is earned over each of the next 11 months -1/24 is earned in the following (13th) month This method uses less data & calculations than the daily method.
premium deficiency reserve
This is actually a separate liability that the insurer needs to create if the premium is insufficient to cover losses, expenses & other costs
U&IE (Underwriting & Investment Exhibit) segments UEPR into
Amount unearned (1yr or less from the effective date of the policy)
Amount unearned (over 1yr from the effective date of the policy)
Earned but unbilled premiums (EBUB): arises from policies that are subject to exposure audit (in order to book EBUB, it needs to be reasonably estimable in aggregate)
Reserves for rate credits & retrospective adjustments based on experience
Ceded Reinsurance Premiums Payable
These need to be recorded net of any commission from the reinsurer that covers the ceding company’s expense.
Funds held under Reinsurance Treaties
These arise when the insurer is holding funds from the reinsurer as collateral
Provision for Reinsurance
This is a provision for the reinsurance recoverables that may not be collectable
SURPLUS
Most companies have asset balances far greater than the liabilities. The difference between the two is known as surplus.
Common Capital Stock
This is the par value of the insurer’s stock that is issued & outstanding.
Par value is the minimum amount set by the insurer at which the stock can trade at its initial offering.
Common capital stock is not material for most insurers as the par value is often set low.
Gross Paid in & Contributed Surplus
This is generated when the insurer issues stock. It equals the excess of the sale price of stock over its par value.
Unassigned Funds
This results from the contribution of retained earnings to surplus.
Mutual insurers surplus consists primarily of Unassigned Funds, as they do not issue shares.
Surplus will decrease if nonadmitted assets
are purchased
how bonds are recorded on balance sheet
Class 1 & 2 bonds are recorded at amortized cost
Lower grade bonds are recorded at the min(amortized cost, fair value)
example balance sheet: assets
example balance sheet: liabilities and surplus
low-grade bonds
have a relatively high risk of default
Fixed income securities
: in a high interest rate or high inflation environment, bond values would decline
