Part 2 (Odomirok 6-7)

Question 1

Balance Sheet

Answer 1

Important Exhibit in Annual Statement
Main components:
- Assets
- Liabilities
- Surplus

Question 2

List of Different Assets

Answer 2

Bonds
Stocks
Real Estate
Cash, Cash equivalent, Short Term Investment
Uncollected & Deferred Premium & Agent’s Balance
Net Deferred Tax Asset
Receivables from Parent, Subsidiary, & Affiliates
Other Non-admitted Assets

Question 3

Assets

Answer 3

Cash & Invested vs Non-Invested
- Cash & Invested are listed in top rows of Asset Section since more liquid (SAP)

Admitted vs Non-Admitted
- Non-Admitted means not easily convertible to cash, so it is not included in surplus,
- Regulators (GAP) look for sufficient Admitted Assets

Question 4

Bonds (Exhibit D)

Answer 4

Initial principle payment, make interest payments during term, then return principle at maturity

Question 5

Stocks

Answer 5

Ownership share in company, very volatile

Common: Voting Rights & Possible Dividends
- Subordinate to bondholders and creditors during liquidation

Preferred: No Voting rights & Guaranteed Dividends
- Priority to Common in liquidation

Question 6

Real Estate (Exhibit A)

Answer 6

Properties occupied by company (>50% occupied)
- Valuation = Depreciated cost - Encumbrances

Properties held for production for income
- Valuation = Depreciated cost - Encumbrances

Properties held for sale
- Valuation = Min(Depreciated cost, Fair Value) - Encumbrances - Cost to sell property

Encumbrances = Outstanding Loan Amt

Question 7

Cash (Schedule E1), Cash Equivalent (Schedule E2), and Short Term Investments (Schedule DA)

Answer 7

Assets that are immediately convertible to cash

Question 8

Uncollected & Deferred Prem & Agent’s Balance

Answer 8

Written premium that is not yet received

Uncollected: Balances due before the financial statement is due

Deferred: Balances due after the financial statement is due

Unadmitted: If prem is 90 days overdue

Write off premium if believed it will not be collected

Analysts focus their concern on companies that have higher % of assets in uncollected premium compared to industry

Question 9

Amounts Recoverable from Reinsurers

Answer 9

Balances due for losses that HAVE been paid by insurer

Question 10

Net Deferred Tax Assets

Answer 10

Reflect only DTA or DTL
- DTA if DTA > DTL and viceversa

Accounting for discounting of Loss reserves in Tax accounting

Carry forward net operating losses from prior years if expect these to offset future gains and taxes

Question 11

Receivables from Parent, Subsidiary & Affiliates

Answer 11

Concern if significant amount since these are not very liquid

Look at the source of receivables and portion historically paid on time

Question 12

Other Nonadmitted Assets

Answer 12

Not included in Surplus - Investigate if insurer has large portion of these

Most common ones
- Furniture, equipment, and supplies
- 10% of deductibles recoverable in excess of collateral
- Investments in items that exceed state limitations
- Overdue balance from sales by agent over 15 days
- Funds held at a reinsured company (if reinsuring one) that exceed liabilities

Question 13

Liabilities

Answer 13

Loss & LAE Reserves
Reinsurance Payable on Losses & LAE
Other Expenses
Unearned Premiums
Ceded Reinsurance Premiums Payable
Funds Held under Reinsurance Treaties
Provision for Reinsurance

Question 14

Loss & LAE Reserves

Answer 14

Booked at management’s BEST estimate

If only range is provided with no amount more likely than another, choose the midpoint

Question 15

Reinsurance Payable on Losses & LAE

Answer 15

Generated when insurer is assuming business (taking risk from another insurer)

Only includes amounts owed to reinsureds for losses that they have already paid

Question 16

Other Expenses (Excluding Taxes, Licenses, and Fees)

Answer 16

Made up of
- General and administrative expenses
- Investment expenses
- Expenses that have been incurred but not yet paid

Question 17

Unearned Premiums

Answer 17

Portion of premium that is yet to be earned

Calculate via:
Daily pro rata method: Based on number of days of the policy that have expired

Monthly pro rata method: Assumes that premiums are written evenly through each month.
- Within a certain month, 1/24 is earned that month, 1/12 is earned over each of the next 11 months, 1/24 in following 13th month

Question 18

Segmenting UEPR

Answer 18

Amount unearned (1yr or less from effective date of the policy)

Amount unearned (over 1 yr from the effective date of the policy)

Earned but unbilled premiums (EBUB)
- Arises from policies that are subject to exposure audit

Reserves for rate credits & retrospective adjustments based on experience

Question 19

Premium deficiency Reserve

Answer 19

Related to the unearned premium

Create if the unearned premium is insufficient to cover losses, expense, and other costs associated with the unearned portion of the policy

Question 20

Ceded Reinsurance Premiums Payable

Answer 20

Premium due to the reinsurer

Record net of any commission from the reinsurer that covers the ceding company’s expense

Question 21

Funds held under Reinsurance Treaties

Answer 21

Happens when insurer is holding funds from the reinsurer as collateral

Question 22

Provision for Reinsurance

Answer 22

Provision for reinsurance recoverable that may not be collectable

Question 23

Surplus

Answer 23

Admitted Assets - Liabilities

Also known as equity (GAP terminology)

Question 24

Surplus common components

Answer 24

Common Capital Stock
- Par value of the insurer’s stock that is issued and outstanding
- Par value is minimum amount set by the insurer at which the stock can trade at its initial offering (ie. Initial amount)

Gross Paid in & Contributed Surplus
- Excess of the sale price of stock over its par value

Unassigned Funds
- Retained earnings contribution to surplus
- Retained earnings are earnings that the insurer retains, rather than paying out to owners as dividends or in some other form