Odomirok - Income Statement

Question 1

What are the sources of Income on the Income Statement?

Answer 1

• Underwriting Income
• Investment Income
• Other Income

Question 2

What is the formula for Underwriting Income?

Answer 2

= EP - Incurred Loss & LAE - Other UW Expenses Incurred - Aggregate Write-ins for UW Deductions - Net Income for Protected Cells

Question 3

How is the Incurred Loss & LAE calculated for the Income Statement?

Answer 3

Current AY Incurred + Change in Prior AY Incurred

Question 4

What are the components of Investment Income

Answer 4

• Net investment income earned (also simply called net investment income)
• Net realized capital gain (loss)

Question 5

What is the formula for Net Investment Income Earned

Answer 5

= (investment revenue) – (investment expenses) – (non-federal TLF)

investment revenue = interest and dividends received on investment
assets

Question 6

What is a net realized capital gain/loss?

Answer 6

Investment gain that results from the sale of investments for more or less than original cost, adjusted for the amortization of premiums or accretion of discounts (amortized cost).

Includes: Foreign exchange gain & Other than temporary impairments reco

this is not bonds coupons/dividends.

Question 7

For Bonds, what are the components of Investment Income earned?

Answer 7

• Interest Received during the year. These are the coupon payments
• Interest Due and Accrued
• Current Year amortization/accretion. Recall amortization is needed because of difference in face value and purchase price which “earns” over time.
• Interest paid for accrued interest on dividends. This is for bonds purchased between coupon payments. Interest must be payed from buyer to seller

Question 8

For Stock, what is the investment income?

Answer 8

Is the amount of dividends received during the year plus the change in the accrual for dividends declared but unpaid

(dividends are accrued on the ex-dividend date)

Question 9

How are changes in common stock value reflected in Investment Income?

Answer 9

• At Purchase: Actual Cost plus comm/taxes is the initial carrying value
• Subsequent valuations: Recorded at Fair Value.
• Valuation Impact: Change in Fair Value is recorded as unrealized valuation increases (decreases) in Schedule D
• When Sold: Difference of amount received and original cost is recorded as realized gain (loss) on disposal.

Question 10

When can a derivative be accounted for as a hedge and what does this mean?

Answer 10

• When the company can demonstrate that the hedge has sufficiently reduced the risk related to the specific underlying asset or assets.
• The derivative is accounted for in the same way as the asset that is hedged

Ie Changes in value of hedged asset are offset by change in value of derivative.

Question 11

What are the components of Other Income?

Answer 11

• Net Gain (Loss) from Agents’ or Premium Balances Charged Off
• Finance and Service Charges not Included in Premiums
• Aggregate Write-ins for Miscellaneous Income

Question 12

What else needs to be accounted for before arriving at Net Income?

Not UW, Investment, or Other Income

Answer 12

• Dividends to Policy Holders
• Federal and foreign income taxes incurred

Question 13

What is the full formula for Net Income?

Answer 13

UW Income + Investment Income + Other Income - Dividends to Policyholders - Federal and Foreign Income Taxes Incurred

Question 14

What is the purpose of the Capital and Surplus Account?

Answer 14

It reflects changes in surplus that are not recorded in the income statement and it reconciles the beginning surplus to the ending surplus for the reporting period

Recall Net Income is UW + Investement + Other - Div. to PH - Fed Taxes

Question 15

What is the formula for Current Year Surplus?

Line 39

Answer 15

Prior Year Surplus (line 21) plus the summation of:
+ Current Year’s Net Income (line 22)
+ Other Surplus Changes (lines 24 through 31)
+ Additional Capital Contributions (lines 32 and 33)
+ Stockholder Dividends (line 35)

Question 16

What are Unrealized Capital Gains and how are they reflected in financial statements?

Answer 16

Generally occur when the fair value of investments carried at fair value change during the reporting period.

Since reflected in the balance sheet, but not in net income an adjustment to surplus is needed to maintain Admitted Assets - Liabilities = Surplus.

Since we start with PY Surplus, it is the change we want not the absolute value.

Question 17

What ar Unrealized Foreign Exchange Capital Gains and how are they reflected in the financial statments

Answer 17

Similar to unrealized capital gains, but occur when purchase asset in a foreign currency and the exchange rate changes.

Since it is reflected in the balance sheet, but not in net income an adjustment to surplus is needed to maintain Admitted Assets - Liabilities = Surplus.

Since we start with PY Surplus, it is the change we want not the absolute value.

Question 18

What are non-admitted assets and their impact on financial statement

Answer 18

Non admitted assets are note permitted to be considered as part of surplus in statutory accounting.

Thus, the change in non-admitted assets needs to be reflected.

A decrease in non-admitted assets increases surplus.

Question 19

How does the Change in Provision for Reinsurance impact surplus?

Answer 19

Recall that under statutory accounting the provison for reinsurance is found on the Balance Sheet as an additional liability that reduces surplus.

However since it is not part of net income, the change of in provision needs to be reflected as a charge to surplus to maintain Admitted Assets - Liabilities = Surplus.

Question 20

What are the Capital Changes and Surplus Adjustments found in the Surplus Section?

Answer 20

Inflows and outflows of capital from the new issuance of stock or return of capital, as well as transfers from surplus to capital when stock dividends are issued

Question 21

What are the direct charges to surplus found in the Capital and Surplus Account Section?

Answer 21

The following are considered other surplus changes
* Changes in unrealized capital gains
* changes in unrealized foreign exchange
* changes in deferred income tax
* changes in nonadmitted assets
* changes in provision for reinsurance
* cumulative effect of changes in accounting principles

Additionally need to account for capital contributions (surplus notes, captial paid in) and stockholder dividends.

Question 22

What is the formula to calculate Earned Premium (UW Income)?

Answer 22

WP – (change in UEP)

Question 24

How do you calculate Current Year Surplus from PY Surplus?

Answer 24

(surplus) _CY = (surplus) _PY + (NI) _CY + (direct charges to surplus) _CY

Question 25

What is the balance sheet formula for calculating suplus?

Statutory

Answer 25

Surplus = Net Assets - Liabilities = (Total Assets – Nonadmitted Assets) - Liabilities

which reduces do:

Surplus= Admitted Assets - Liabilities