Income Statement

Question 1

What is SAP and GAAP

Answer 1

Both are frameworks of accounting principles for reporting financial transactions and operating results

SAP (Statutory Accounting Principles): prescribed by an insurer’s domiciliary state (only used by insurers)

GAAP (Generally Accepted Accounting Principles): used by all public companies

Question 2

Why insurers use different accounting rules

Answer 2

• insurers have policyholders who must be protected
• SAP facilitates this by focusing on solvency
• GAAP focuses more on measurement of earnings for investors

Question 3

SAP and GAAP intended users, purpose and guiding principle

Answer 3

SAP
- Intended Users: State Regulators
- Purpose: Measuring solvency
- Guiding Principle: Conservatism

GAAP
- Intended Users: Investors and Creditors
- Purpose: measurement of earnings
- Guiding Principle: GAAP provides a true picture of profitability

Question 4

Important differences between SAP and GAAP (ART)

Answer 4

Asset Recognition:
- SAP: asset recognized when expense incurred
- GAAP: defer recognition to achieve revenue/expense matching
Reinsurance
- SAP: net of reinsurance
- GAAP: gross of reinsurance
Taxes
- SAP: taxes can’t be deferred
- GAAP: taxes can be deferred

Question 5

Elements of Financial Statements

Answer 5

Balance Sheet: Assets, Liabilities, Surplus (or equity)
Income Statement: Revenue, Expenses

Question 6

Statements in full set of Financials

Answer 6

Balance Sheet (financial position)
Income Statement (financial performance)
Statement of Cashflows
Capital and Surplus Exhibit (Changes in surplus not in IS)
Notes to Financial Statements (quantitative and qualitative disclosures)

Question 7

Balance sheet

Answer 7

shows company’s assets, liabilities and surplus at a specific time

Question 8

Income statement

Answer 8

shows company’s revenue and expenses over a certain period of time

Question 9

Capital and surplus exhibit

Answer 9

displays changes to surplus not reflected in income statement over a period of time

Question 10

Purpose of balance sheet

Answer 10

to show strength of a company’s capital (whether assets are sufficient to cover liabilities and remain solvent)

Question 11

Purpose of income statement

Answer 11

to show company’s current profitability ( a company could have a strong balance sheet but weak current profitability)

Question 12

1st page of balance sheet vs 2nd page

Answer 12

1st page: assets
2nd page: liabilities and surplus

Question 13

Types of income shown on IS

Answer 13

UW Income
Other Income (includes agents’ balances charged off, service fees, aggregate write-ins)
Investment Income

Question 14

UW Income Formula

Answer 14

EP - (current AY incurred loss) - (change in prior AYs incurred loss) - (UW expenses) - (loss adjustment expenses)

Question 15

Investment Income Formula

Answer 15

Investment Revenue - Investment Expenses

Question 16

Net Investment Gain Formula

Answer 16

Investment Income + Net Realized Capital Gains - Non-Federal Taxes, Licenses, and Fees

Question 17

Other Income Formula

Answer 17

Agents’ balances charged off + Service fees + agg write-ins

Question 18

Earned Premium Formula

Answer 18

EP = WP - (change in UEP)

Question 19

Total Net Income Formula

Answer 19

UW Income + Other Income + Inv Income - Federal/Foreign Taxes Incurred - PH Dividends

Question 20

Surplus Formulas

Answer 20

Surplus = (Assets - Non-Admitted Assets) - Liabilities

CY Surplus = PY Surplus + Net Income + Direct Charges to Surplus

Question 21

Direct Charges to Surplus (9)

Answer 21

Change in unrealized foreign exchange
Change in deferred income taxes
Change in unrealized capital gains
Change in non-admitted assets (subtract)
Change in reinsurance provision (subtract)
Cumulative change resulting from a change in accounting principles
Change in surplus notes
Change in paid in surplus
Stockholder dividends (subtract)

Question 22

Define Deferred Tax Asset (DTA)

Answer 22

represents expected future tax benefits related to amounts previously recorded in the statutory financial statements, not expecting to be reflected in tax return as of reporting date

Question 23

Examples of DTAs relevant to the actuary

Answer 23

• difference in tax accounting and statutory accounting for loss reserves
• carryforward of net operating loss from previous years