Part 2 (Odomirok 6-7) Flashcards
Balance Sheet
Important Exhibit in Annual Statement
Main components:
- Assets
- Liabilities
- Surplus
List of Different Assets
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
Assets
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
Bonds (Exhibit D)
Initial principle payment, make interest payments during term, then return principle at maturity
Stocks
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
Real Estate (Exhibit A)
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
Cash (Schedule E1), Cash Equivalent (Schedule E2), and Short Term Investments (Schedule DA)
Assets that are immediately convertible to cash
Uncollected & Deferred Prem & Agent’s Balance
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
Amounts Recoverable from Reinsurers
Balances due for losses that HAVE been paid by insurer
Net Deferred Tax Assets
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
Receivables from Parent, Subsidiary & Affiliates
Concern if significant amount since these are not very liquid
Look at the source of receivables and portion historically paid on time
Other Nonadmitted Assets
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
Liabilities
Loss & LAE Reserves
Reinsurance Payable on Losses & LAE
Other Expenses
Unearned Premiums
Ceded Reinsurance Premiums Payable
Funds Held under Reinsurance Treaties
Provision for Reinsurance
Loss & LAE Reserves
Booked at management’s BEST estimate
If only range is provided with no amount more likely than another, choose the midpoint
Reinsurance Payable on Losses & LAE
Generated when insurer is assuming business (taking risk from another insurer)
Only includes amounts owed to reinsureds for losses that they have already paid
Other Expenses (Excluding Taxes, Licenses, and Fees)
Made up of
- General and administrative expenses
- Investment expenses
- Expenses that have been incurred but not yet paid
Unearned Premiums
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
Segmenting UEPR
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
Premium deficiency Reserve
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
Ceded Reinsurance Premiums Payable
Premium due to the reinsurer
Record net of any commission from the reinsurer that covers the ceding company’s expense
Funds held under Reinsurance Treaties
Happens when insurer is holding funds from the reinsurer as collateral
Provision for Reinsurance
Provision for reinsurance recoverable that may not be collectable
Surplus
Admitted Assets - Liabilities
Also known as equity (GAP terminology)
Surplus common components
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
