SAP & GAAP Flashcards
SAP vs GAAP
- Conservative to avoid insolvency vs match revenue to expenses to see earnings
SAP vs GAAP differences BASIC-D^3NG
- Balance sheet reinsurance
- SAP: liabilities are net of reinsurance vs GAAP: gross of reinsurance
SAP vs GAAP differences BASIC-D^3NG
- Anticipated S&S
- SAP: net or gross vs GAAP: net
SAP vs GAAP differences BASIC-D^3NG
- Structured settlements
- 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
SAP vs GAAP differences BASIC-D^3NG
- Invested assets
- 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
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?
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
SAP vs GAAP differences BASIC-D^3NG
- Ceded reinsurance (prospective & retrospective)
-
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)
SAP vs GAAP differences BASIC-D^3NG
- DAC (deferred acquisition cost)
- 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
SAP vs GAAP differences BASIC-D^3NG
- DTA (deferred tax assets)
- SAP: portion is non-admitted asset (strict admissibility test) vs GAAP: 100% admitted asset
SAP vs GAAP differences BASIC-D^3NG
- Discounting loss rsvs
- SAP: use tabular or non-tabular (easy to compare across companies) vs GAAP: use SAP or other (tailored to company)
SAP vs GAAP differences BASIC-D^3NG
- Non-admitted assets
- SAP: low liquid assets (furniture) not available in insolvency vs GAAP: all assets are admitted
SAP vs GAAP differences BASIC-D^3NG
-
Goodwill
- amortized?
- formula?
- 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)]
Purchase GAAP accounting
scenario
formula for goodwill
treatment if positive
treatment if negative
merger value?
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
3 components of estimating Fair Value of Liabilities under purchase GAAP accy
- EV of future undiscounted L&LAE cash flows (pmt pattern based on loss rsv development OR paid loss to ult loss by AY)
- discount #1 by rf & illiquidty adjustment (rf=us tresury daily yield curve + higher discount rate if more illiquid)
- discount #1 again (aka take present value) to add risk margin to compensate for liability uncertainty (cost of capital approach)
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)?
- based on loss rsv development actuary selected when reviewing managments rsv selection
OR
- based on paid loss to ult loss by AY (IBNR to case rsv ratios should be stable and decreasing)
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
- 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
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%
- 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)
- 0.520M(.65)(.45)+20M(.10)/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
