SAP & GAAP

Question 1

Answer 1

Question 2

Answer 2

Question 3

Answer 3

Question 4

Answer 4

Question 5

Answer 5

Question 6

SAP vs GAAP

Answer 6

1. Conservative to avoid insolvency vs match revenue to expenses to see earnings

Question 7

SAP vs GAAP differences BASIC-D^3NG

1. Balance sheet reinsurance

Answer 7

• SAP: liabilities are net of reinsurance vs GAAP: gross of reinsurance

Question 8

SAP vs GAAP differences BASIC-D^3NG

1. Anticipated S&S

Answer 8

• SAP: net or gross vs GAAP: net

Question 9

SAP vs GAAP differences BASIC-D^3NG

1. Structured settlements

Answer 9

• IF Yes full liability release from claimant THEN purchase price is paid loss in both SAP & GAAP
• IF No full liability release from claimant THEN SAP: paid loss listed in notes to financial statement vs GAAP is reinsurance

Question 10

SAP vs GAAP differences BASIC-D^3NG

1. Invested assets

Answer 10

• SAP: class 1&2 (bonds & preferred stock)=AmortizedCost
• SAP: class 3+ (bonds & preferred stock) =MIN(FV,AC)
• SAP: common stock =FairValue
• vs GAAP: FairValue except bonds held to maturity

Question 11

taxable income is temporarily higher than income by 40k

insurer beileves it is more than likely that the full Deffered Tax Asset (DAT) will not be realized and creates a valuation allowance of 3.3k

tax rate = 22%

GAAP deferred tax asset =?

SAP deferred tax asset =?

how is valuation asset accounted for?

Answer 11

DTA = 40k*.22=8.8k

GAAP DTA = 0.22*40k-3.3k=5.5k

GAAP - fully recognized meaning 100% of 5.5k is admitted asset

valuation asset = contra asset (offsets the DTA)

SAP DTA - not fully recognized meaning portion of 5.5k is non admitted asset based on formulaic admissibiity test

Question 12

SAP vs GAAP differences BASIC-D^3NG

1. Ceded reinsurance (prospective & retrospective)

Answer 12

• propective
  
  • SAP: liabilities are net of reinsurance vs GAAP: gross of reinsurance
• retrospective
  
  • SAP:ceded rsv is contra (negative) liability vs GAAP: reinsurance asset
  • SAP:liab↓other income↑ surplus↑ vs GAAP: asset↑liab↑no change to surplus nor income (gain is deferred)

Question 13

SAP vs GAAP differences BASIC-D^3NG

1. DAC (deferred acquisition cost)

Answer 13

• SAP: not an asset vs GAAP: is an asset
• SAP: expense (acquisition cost/liability) immediately so NOT match assets (EP) vs GAAP: defer/amortize (acquisition costs/liability) so match assets (EP)
• SAP: conservative as funds not available if insolvent vs GAAP: company as going concern

Question 14

SAP vs GAAP differences BASIC-D^3NG

1. DTA (deferred tax assets)

Answer 14

• SAP: portion is non-admitted asset (strict admissibility test) vs GAAP: 100% admitted asset

Question 15

SAP vs GAAP differences BASIC-D^3NG

1. Discounting loss rsvs

Answer 15

• SAP: use tabular or non-tabular (easy to compare across companies) vs GAAP: use SAP or other (tailored to company)

Question 16

SAP vs GAAP differences BASIC-D^3NG

1. Non-admitted assets

Answer 16

• SAP: low liquid assets (furniture) not available in insolvency vs GAAP: all assets are admitted

Question 17

SAP vs GAAP differences BASIC-D^3NG

1. Goodwill
   
   1. amortized?
   2. formula?

Answer 17

• SAP: amortize over 10yrs until reach 0 vs GAAP: not amortized
• SAP: GW=MIN(Price-Surplus, 10% of S) vs GAAP: GW=P-[FV(Assets)-FV(liab)]

Question 18

Purchase GAAP accounting

scenario

formula for goodwill

treatment if positive

treatment if negative

merger value?

Answer 18

When A buys B THEN A gets a goodwill asset based on FV of the B

Goodwill = Price-[FV (assets) – FV(liab)]

asset IF positive

income up IF negative

merger value = 0

Question 19

3 components of estimating Fair Value of Liabilities under purchase GAAP accy

Answer 19

1. EV of future undiscounted L&LAE cash flows (pmt pattern based on loss rsv development OR paid loss to ult loss by AY)
2. discount #1 by rf & illiquidty adjustment (rf=us tresury daily yield curve + higher discount rate if more illiquid)
3. discount #1 again (aka take present value) to add risk margin to compensate for liability uncertainty (cost of capital approach)

Question 20

1st component of estimating fair value of liabitlies under purchase GAAP accy = EV of future undiscounted L&LAE cash flows

how do you calculate the L&LAE cash flow payment pattern (2)?

Answer 20

1. based on loss rsv development actuary selected when reviewing managments rsv selection

OR

2. based on paid loss to ult loss by AY (IBNR to case rsv ratios should be stable and decreasing)

Question 21

Answer 21

Question 22

Answer 22

Question 23

Answer 23

Question 24

Answer 24

Question 25

Answer 25

Question 26

Answer 26

Question 27

Answer 27

Question 28

Answer 28

Question 29

Answer 29

Question 30

_adding risk margin to rsvs using cost of captial approach_ * nominal rsvs are 20M and pay out 10M/8M/2M in each of next 3 years * required capital ratio is 20.1% of unpaid claims estimates in each future period * pre tax cost of capital= 10% * return on capital is paid to investors at each year end * rf + illiquidty adjustsmnet for duration in yrs * 1.0 yr = 0.155% * 1.5 yr = 0.210% * 2.0 yr = 0.285% * 2.5 yr = 0.336% * 3.0 yr = 0.395% calc avg reuired captial over each of next 3 yrs calc risk margin

Answer 30

* yr 1 avg required captial = .201 [(20+10)/2] = 3.015 * yr 2 avg required captial = .201 [(10+2)/2] = 1.206 * yr 2 avg required captial = .201 [(2+0)/2] = 0.201 * yr 1 risk margin = [3.015 (0.10-.**00195**)] / 1.00155^1 * yr 2 risk margin = [1.026 (0.10-.00195)] / 1.00285^2 * yr 3 risk margin = [.201 (0.10-.00195)] / 1.00395^3 (3.015\*1+1.206\*2+0.201\*3)/(3.015+1.206+0.201)=1.364 years **0.00195** = linear interpolate between 1 and 1.5 yr

Question 31

Calculate the asset that replaces DAC in GAAP accy (**Value of Business In-Force**) * UEPR= 20M * Expected L&LAE Ratio = 65% * Policy Maitenance Costs = 10% of UEPR * L&LAE pmts & maitenance costs made 1/2 way thru year * Expected L&LAE paid out over 3 years (45%/30%/25%) * Required capital at each year-end is 50% of nominal expected L&LAE&Maitenance costs * Return on capital is paid at each year end * pre-tax cost of capital = 10% * rf= 3% * illiquidity premium = 1.5%

Answer 31

* VBIF = UEPR - FairValueOfExpL&LAE&MaitenanceCost * = 20M - [(1)+(2)] (1) = pv(expected L&LAE&MaitenanceCosts) * [20M(.65)(.45)+20M(.10)]/1.045^0.5 + * [20M(.65)(.30)] /1.045^1.5 + * [20M(.65)(.25)] /1.045^2.5 (2) = pv(CostOfCapital) * 0.5[20M(.65)(.45)+20M(.10)](.10-.03-.015)/1.045^1.0 + * 0.5[20M(.65)(.30)] (.10-.03-.015)/1.045^2.0 + * 0.5[20M(.65)(.25)] (.10-.03-.015)/1.045^3.0