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Flashcards in Chapter 19 - Management reports Deck (18):
1

Management Reporting

Reporting for External Readers

Annual and quarterly financial statements usually consist of the following:
• A balance sheet listing the financial position of the company as of the reporting date.
• A statement of income for the period since the last report or last fiscal year.
• A statement of cash flows describing all important aspects of the company’s operating, investing and financing activities.
• A statement of changes in each of the categories of shareholders’ equity or changes in policyholders’ surplus.
• Explanatory notes to the financial statements.

In addition to these five items, it is common practice to provide narrative information relating to the company’s operations, philosophies, and future plans, in annual reporting to shareholders or policyholders, for example the MD&A.

2

Management Reporting

Reporting for External Readers.
The Sarbanes-Oxley Act

requires certain executive officers of public companies (usually the CEO and CFO) to “certify” any statement filed with the SEC that contains financial information.

The SOA is a comprehensive revision of federal securities laws applicable to public companies, and contains the following key provisions:
• Establishment of the Public Company Accounting Oversight Board (“PCAOB”), which is overseen by the SEC, and whose responsibilities include:
- registering and conducting inspections of public accounting firms;
- overseeing the audits of public companies;
- establishing auditing quality control, ethics, independence and other standards and rules relating to the preparation of audit reports for public companies;
- investigating, inspecting, and enforcing compliance relating to registered public accounting firms; and
- conducting disciplinary hearings and imposing sanctions for violations of the SOA.

• Establishment of new auditor and audit committee independence standards.
• Requires executive officers of public companies to certify the company’s SEC reports.
• Increases the liability for violations of federal securities laws by public companies and their management.
• Imposes obligations on attorneys to report securities laws violations and conflict of interest.
• Restricts trading by directors and executives during benefit plan blackout periods.

3

Management Reporting

Reporting for Management Control

The following are the basic concepts of management reporting systems.
Basic Objectives of Management Reporting
Structure of the Report
Reporting for Cost Control
Elements of Responsibility Reporting.
Report Design for Responsibility Control
Analytical Reporting

Additional Reporting Elements—Control of Performance.
• Policy Counts and Average Volumes.
• Changes in Acquisition Costs.
• Trend Analysis of Statutory and GAAP Reserves per Thousand Dollars of
Insurance.
• Clerical Cost Control Reporting.
• Management Information Systems Control.

Additional Reporting Elements—Planning.
• Historical Trend Analysis.
• Persistency.
• Comparison of Insurance in Force.
• Actual to Expected Mortality and Morbidity Analysis.
• Model of a Sample Block of Business
• Stratified Accident and Health Claims.
• Recoverability Analysis of Deferred Policy Acquisition Costs.
• Investment Yield Analysis
• Investment Yield on New Funds.
• Repayments and Maturities of Investments
• Cash Flow Projections.

4

Management Reporting

Securities Registration Statements

The Securities Act of 1933 (the Act) is a disclosure statute concerned principally with the registration of debt and equity securities with the SEC before they may be sold to the public. The Act does not deal with trading in such securities.

The Act requires submission and approval of a registration statement and a prospectus prior to sale of securities. These documents contain specified financial and other data necessary for an investor to evaluate a security. If requested, a copy of the prospectus, approved by the SEC, must be furnished to a buyer of a registered security. The registration statement, except for certain sections omitted because of confidentiality, is a public document available for inspection.

5

Management Reporting

Form S-1

It is intended to be used primarily by
• first-time registrants and
• those that have been public companies for less than 5 yrs

Form S-1 is separated into two sections:
1. Part I includes information that is also required to be in the prospectus, and
• selected financial data
• supplementary financial information
• management’s discussion and analysis of the financial condition and results of operations, and
• financial statements

2. Part II presents information that does not have to be included in the prospectus.

6

Management Reporting

Form S-1 is separated into two sections:
Part I: • selected financial data, • supplementary financial information, • management’s discussion and analysis of the financial condition and results of operations, and • financial statements
Part II presents information that does not have to be included in the prospectus.


Selected Financial Data

This section is intended to provide information as to trends in the company’s financial condition and results of operations.The minimum requirements for disclosure are set forth in Regulation S-K

In general, the selected financial data requirement represents five-year comparative data on revenue, income, assets, long-term obligations, and dividends.

7

Management Reporting

Form S-1 is separated into two sections:
Part I: • selected financial data, • supplementary financial information, • management’s discussion and analysis of the financial condition and results of operations, and • financial statements
Part II presents information that does not have to be included in the prospectus.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Prescribed by Regulation S-K and is meant to provide a discussion of the company’s liquidity, capital resources, results of operations, the effects of inflation, other changes in prices and any other information the company believes would be necessary to an understanding of its financial condition.

Supplementary Financial Information : The requirements of this section are also prescribed by Regulation S-K and pertain to selected quarterly financial data.

Financial statements:The form and content of and requirements for the financial statements and schedules are set forth in Regulation S-X

Regulation S-X prescribes the form and content of financial statements and supporting schedules required in any filing, as well as the dates and periods for which statements must be furnished.

8

Management Reporting

Other Registration Form

• Form S-2. This form is available to companies that have been subject to the 1934 Act reporting requirements (Form 10-K) for at least three years, but do not meet the trading activity and volume criteria to use Form S-3
• Form S-3 . This is a short form registration statement available to companies that have been subject to the 1934 Act reporting requirements for at least one year and have securities meeting certain market value and trading volumes.
• Form S-4. This form registers securities issued in connection with business combination transactions, such as mergers and exchange offers.
• Form S-8. This is a form for use when registering equity securities to be offered pursuant to any employee benefit plan.

9

Management Reporting

The Significance of Financial Reporting Releases
(FRRs)

The FRRs replaced the Accounting Series Releases and are designed to communicate the SEC’s position on accounting and auditing principles and practices. They are used to adopt, amend, or interpret rules and regulations on accounting or auditing issues, and on financial statement disclosures.

10

Management Reporting

Reporting Under the Securities Exchange Act of 1934

The 1934 Act requires that certain publicly owned companies whose securities are not listed on an exchange, register with the SEC if they meet the requirements as to size. This provision provides that generally companies with assets in excess of $5,000,000 and a class of equity securities held by five hundred or more persons must register those securities with the SEC.

Form 10-K must be filed with the SEC within ninety days after the end of the fiscal year, and like other filings becomes public information unless confidential treatment of selected sections is requested and granted by the SEC. Information

• Form 10-Q, Quarterly Report: is filed for each of the first three fiscal quarters and is due within forty-five days after the end of the quarter. Exhibit

• Form 8-K, Current Report: used for current reporting to the SEC, must be filed within fifteen days after the occurrence of certain significant events, the most common of which are the acquisition and disposition of assets.

• Proxy Statements

11

Management Reporting

Regulation S-B

facilitate capital raising by small business (including insurance companies) and to reduce the costs of compliance with the federal securities laws.

A small business issuer is defined in the rules as a U.S. or Canadian entity with revenues of less than $25 million unless the issuer’s public float (the aggregate market value of voting stock held by non-affiliates) is $25 million or more. Also, if the small business issuer is a majority owned subsidiary of another company, its parent must also meet the small business issuer definition.

12

Management Reporting

Electronic Filing.

EDGAR (Electronic Data Gathering, Analysis, and Retrieval)

Virtually all documents processed by the SEC, including correspondence and supplemental information, are required to be submitted electronically. Electronic submissions are governed by Regulation S-T, which contains rules prescribing requirements and procedures relating to electronic submissions.

13

Reporting to Other Regulatory Agencies

Reporting to Stock Exchanges

When an insurance company desires to list its securities on a national stock exchange, it is required to file a registration statement with the SEC, usually on Form 10. It also must file an application for an original listing with the stock exchange.

The registration statement and original listing application are generally prepared and filed concurrently. The registration statement normally becomes effective thirty days after the SEC receives certification from the exchange that it has approved the company’s securities for listing.

14

Reporting to Other Regulatory Agencies

Financial Tests

ratio calculations performed under the statistical phase:

Ratio 1. Net Change in Capital and Surplus
Ratio 2. Gross Change in Capital and Surplus.
Ratio 3. Net Gain to Total Income.
Ratio 6. Total Real Estate to Capital and Total Mortgage Loans to Cash and Invested Assets.
Ratio 7. Total Affiliated Investments to Capital and Surplus.
Ratio 8.1. Surplus Relief.
Ratio 8.2. Surplus Relief


Ratio 3. Commissions and Expenses to Premiums and Deposits.
Ratio Adequacy of Investment Income.
Ratio 5. Nonadmitted to Admitted Assets.

15

Reporting to Other Regulatory Agencies

Stability Tests

Ratio 9. Change in Premium.
Ratio 10. Change in Product Mix.
Ratio 11. Change in Asset Mix..
Ratio 12. Change in Reserving Ratio

16

Management’s Discussion and Analysis

The supplement is to be filed by April 1st of each year and covers the two most recent fiscal periods, though reference may be made to the Five-Year Historical data, if necessary. The content is generally to include all material and significant changes and events, but specifically must address the following:

• Financial Position
• Results of Operations
• Cash Flow and Liquidity

The form of the supplement is to be non-consolidated, unless the insurer has ceded substantially all of its business to a consolidated pooling arrangement of insurers, or if the insurer’s state of domicile permits audited consolidated financial statements. Then the supplement is to be prepared on a consolidated basis

17

*Responsibilities of Public Company Accounting Oversight Board (“PCAOB”) are:

* Establishment of the Public Company Accounting Oversight Board (“PCAOB”), which is overseen by the SEC, and whose responsibilities include:

• registering and conducting inspections of public accounting firms;
• overseeing the audits of public companies;
• establishing auditing quality control, ethics, independence and other standards and rules relating to the preparation of audit reports for public companies;
• investigating, inspecting, and enforcing compliance relating to registered public accounting firms; and
• conducting disciplinary hearings and imposing sanctions for violations of the SOA.

18

Management Reporting

Shelf Registrations

* Regulation C allows the registration of securities offered and sold on a delayed or continuous basis. Under this provision, certain companies (meeting the criteria to be able to file a Form S-3) can register debt and equity securities they reasonably expect to sell during the next two years. The registration statement becomes effective and available for future offerings, and the securities can then be priced and offered for sale when market conditions are favorable.