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Flashcards in Chapter 10 Deck (18):
1

Premium Income

* If the contract contains any policyholder mortality or morbidity risk, premium income is generally recognized when the premiums are received.

* For contracts that do not expose the insurer to any policyholder mortality or morbidity risk, deposit accounting is generally followed in which a liability is established equal to the amount of premium
received under these contracts.

2

Premium Income

Deposit-Type Contracts

* The following categories of contracts may not subject the life insurance company to policyholder mortality or morbidity risk:
• Supplemental contracts without life contingencies
• Lottery payouts
• Structured settlements
• Guaranteed interest contracts
• Income settlement options
• Dividend and coupon accumulations
• Annuities certain
• Premium and other deposit type funds

not recorded as premium income but are reported directly to an appropriate liability account. Interest credited to deposit-type contracts is recorded as an expense in the summary of operations when earned under the terms of the contract. Payments that represent a return of policyholder balances are not recorded as expenses. To the extent such payments differ from the recorded reserve, the difference is recorded in the Summary of Operations as a benefit expense.

3

Investment Income

Bond Interest

The premium or discount is amortized into investment income using the interest method that produces a constant yield over the period until stated maturity of the investment

1. Accrual of Discount on Bonds
The premium or discount is amortized into investment income using the interest method that produces a constant yield over the period until stated maturity of the investment.
2. Amortization of Bond Premium
3. Call Prices: If a bond contains a call provision (where the issue can be called away from the reporting entity at the issuer’s discretion), any premium or discount is amortized to the call date or the maturity date, whichever produces the lowest asset value, (i.e., yield to worst).
4. Accrual of Interest on Bonds:Interest income earned on bonds for any period consists of the interest collected during the period, the change in the due and accrued interest between the beginning and end of the period, reductions for the amortization of any premium and interest paid on the acquisition of the bond, plus the accretion of any discount.

4

Investment Income

Loan-Backed and Structured Securities

Loan-Backed Securities
* are defined as pass-through certificates, collateralized mortgage obligations (CMOs), and other securitized loans for which payment of interest and/or principal is directly proportional to the interest and/or principal received by the issuer from the mortgage pool or other underlying securities.

Structured Securities
are similar to loan-backed securities described above, except that the security has been divided into two or more classes for which the payment of interest and/or principal of any class of securities has been allocated in a manner which is not proportional to interest and/or principal received by the issuer from the mortgage pool or other underlying securities.

5

Investment Income

Loan-Backed and Structured Securities

Premium and discount on loan-backed and structured securities should be amortized into investment income using the interest method.The amortization period is the estimated period over which repayment of the securities is expected, not the stated maturity period.

6

Investment Income

Dividend Income on Common and Preferred Stock

* Dividends on such unaffiliated common and preferred stock (whether cumulative or non-cumulative), other than mandatorily redeemable preferred stock, * are recorded as investment income on the ex-dividend date or date of record, that is, the date the corporation issuing the dividend properly identifies the stockholders of record.





7

Investment Income

Investments in Subsidiary, Controlled, and Affiliated Entities

When a life insurer values its investment in another company using the equity method defined in Chapter 21, gains and losses resulting from changes in the investment value are recognized as unrealized capital gains and losses.

8

Investment Income

Derivative Instruments

is a financial instrument whose value or return depends on, or is “derived” from, some “underlying” asset or index.

* Examples of derivatives are swaps, options, forwards, futures, caps, floors, and collars.

9

Investment Income

Mortgage Loans

* Interest income on mortgage loans is recorded as investment income when earned.

Commitment fees are reported as investment income if loan is not granted and refundable if loan granted.

* Loan origination fees are defined as fees charged to borrowers in connection with the process of originating, refinancing, or restructuring a loan. Nonrefundable loan origination fees are not recorded
until received in cash.

prepayment penalty or acceleration fee in the
event the loan is liquidated prior to its scheduled termination date is reported as interest income when received.

10

Investment Income

Real Estate Investments

Rental income on real estate owned by the company is recorded in investment income when earned.Expenses incurred in operating the real estate investment, including real estate taxes, utilities, and ordinary repairs and maintenance, are charged to investment
expenses when incurred.

11

Investment Income

Repurchase Agreements, Reverse Repurchase
Agreements and Dollar Repurchase Agreements

Repurchase agreements
“agreements under which the reporting entity purchases securities and simultaneously agrees to resell the same or substantially the same securities at a stated price on a specified date within 12 months of the purchase.”
• accounted for as collateralized lending
• underlying securities are not accounted for as investments owned by the company.
* • The amount paid for the securities is reported as short-term investments, and the difference between the amount paid and the amount at which the securities will be subsequently resold is reported as interest income, calculated on the straight-line or interest method, over the term of the agreement.

Reverse repurchase agreements
• * accounted for as collateralized borrowings.
• accounted for as investments of the company
• The proceeds from the sale of the securities are recorded as a liability and the difference between the proceeds and the amount at which the securities will be subsequently reacquired is reported as interest expense, calculated on the straight-line or the interest method, over the term of the agreement.

12

Investment Income

Policy Loans

is a loan to a policyholder under the provisions of an insurance contract that is secured by the cash surrender value or collateral assignment of the related policy or contract.

Interest income on policy loans is recorded when earned and included in investment income. If interest is received before it is earned, i.e., in advance, unearned interest income is recorded as a liability.
* Accrued interest on policy loans that is past due 90 days or more, i.e., in arrears, is reclassified from investment income due and accrued and included in the unpaid balance of the policy loan.

13

Miscellaneous Income

* Contingent deferred sales charges may also be reported as miscellaneous income. These are charges levied by companies against policyholders who surrender interest sensitive products during the early years of the policy.

14

Revenues

* Life insurance enterprises generate revenues from two primary sources: premium revenue and investment income (including realized gains).

15

Premium Income

Life, Individual and Group Accident and Health, and Credit Life and Accident and Health Contracts

Premium income includes and excludes?

* Includes: dividends, coupons, guaranteed annual pure endowments, and similar benefits provided by the insurance contract when such amounts are applied by the terms of the contract to provide for additional paid-up insurance, annuities, or to shorten the endowment or premium-paying period.Premiums and considerations waived by the company under disability provisions contained in the insurance contract, and reported in operations as a disability benefit, are included in premium income.

Excludes: premiums that have been received by the company prior to the reporting date but which are due on or after the next policy anniversary date (i.e., advance premiums).

Premium income is recognized for a supplementary contract with life contingencies. There is no premium income recognition for a supplementary contract without life contingencies.

16

Investment Income

is reported in the Summary of Operations on an accrual basis, net of investment expenses, investment taxes, licenses and fees (exclusive of federal income taxes), interest expense, and depreciation on real estate and other invested assets.

*Gross investment income: is comprised of income received during the year, plus or minus the change in income due and accrued, and the change in income unearned or nonadmitted.

* The IMR defers recognition of realized capital gains and losses resulting from changes in the interest rate environment. These gains and losses are amortized into investment income over the expected remaining life of the investments sold.

Realized gains and losses are excluded from net investment income, and are reported separately in the Summary of Operations net of federal capital gains taxes and transfers to the Interest Maintenance Reserves (IMR).unrealized gains and losses are excluded from this Summary of Operations, but are included as an adjustment to surplus.

17

Investment Income

Bond Interest

Origination fees?*

* are defined as fees charged to borrowers in connection with the process of originating, refinancing, or restructuring a transaction such as the private
placement of bonds.Origination fees intended to protect or compensate the reporting entity for interest rate risk (e.g., points), are amortized into income over the term of the bond. Other origination fees are recorded as income upon receipt.

* If a bond contains a call provision (where the issue can be called away from the reporting entity at the issuer’s discretion), any premium or discount is amortized to the call date or the maturity date, whichever produces the lowest asset value, (i.e., yield to worst).

18

Loan-backed and structured securities are revalued?

Loan-backed and structured securities are revalued using the new prepayment assumptions using either the prospective or retrospective adjustment methodologies, consistently applied by type of securities.

*The prospective method recognizes, through the recalculation of the effective yield to be applied to future periods, the effects of all cash flows whose amounts differ from those estimated earlier and the effects and changes in projected cash flows.

*The retrospective method changes both the yield and the asset balance so that expected future cash flows produce a return on the investment equal to the return now expected over the life of the investment as measured from the date of acquisition.