Balance Sheet

Study guides: Exam 6U, Exam CFE-101

The Balance Sheet reports what an insurer owns and owes at a point in time. In the statutory NAIC Annual Statement it occupies two pages — Assets (page 2) and Liabilities, Surplus and Other Funds (page 3) — and counts only admitted assets, so the residual, surplus as regards policyholders, measures what is actually available to pay claims.

$\text{Surplus} = \text{Admitted assets} - \text{Liabilities}$

$\text{Admitted assets} = \text{Total assets} - \text{Nonadmitted assets}$

Assets are dominated by invested assets — bonds (investment grade at amortised cost), common stocks (at fair value), cash and short-term investments — then premiums receivable, reinsurance recoverable on paid losses, investment income due and accrued, and the admitted part of the net deferred tax asset. Premiums more than 90 days past due, furniture and equipment, and deferred tax that fails the admissibility test are nonadmitted.
Liabilities are dominated by the loss and LAE reserves (Unpaid Claims) and the unearned premium reserve, both reported net of reinsurance; then commissions, expenses and taxes payable, ceded premiums payable, funds held under reinsurance treaties, and the provision for reinsurance — the Schedule F charge for recoverables that are unsecured or overdue.
Surplus comprises capital stock, gross paid-in and contributed surplus, surplus notes, special surplus funds (such as the restricted gain on retroactive reinsurance) and unassigned funds, less treasury stock. Its movement over the year is the Capital and Surplus account.
Across regimes. GAAP restores nonadmitted assets, adds a DAC asset, carries available-for-sale bonds at fair value and grosses up reinsurance; IFRS 17 also grosses up, discounts claim liabilities and folds acquisition costs into the liability for remaining coverage. The statutory balance sheet is the smallest and most conservative of the three.
Use. Leverage tests are built on it — premium and reserves to surplus (Insurance Leverage), Risk-Based Capital, the IRIS Ratios — and its loss and LAE reserve line is the figure the appointed actuary's opinion covers.

From Ledger to Surplus Year-end balances, in $ millions: bonds $800$ , common stocks $150$ , cash and short-term $50$ , premiums receivable $120$ (of which $15$ more than 90 days past due), reinsurance recoverable on paid losses $20$ , furniture and equipment $10$ , net deferred tax asset $30$ (of which $12$ admissible). Liabilities: net loss reserves $500$ , net LAE reserves $90$ , net unearned premium $260$ , other liabilities $40$ , provision for reinsurance $5$ .

Compute statutory surplus.
Answer
 $\begin{align*} \text{Total assets} &= 800 + 150 + 50 + 120 + 20 + 10 + 30 \\ &= 1{,}180 \\ \text{Nonadmitted} &= 15 + 10 + (30 - 12) \\ &= 43 \\ \text{Admitted assets} &= 1{,}180 - 43 \\ &= 1{,}137 \\ \text{Liabilities} &= 500 + 90 + 260 + 40 + 5 \\ &= 895 \\ \text{Surplus} &= 1{,}137 - 895 \\ &= 242 \end{align*}$ 
Surplus is $\$242$ M. The $\$43$ M nonadmitted is not lost — the receivable may still be collected — but it is charged against surplus because a regulator could not count on it to pay claims.

One Reinsurance Program, Three Balance Sheets Gross unpaid losses are $\$1{,}000$ M, of which $\$300$ M is ceded to an authorised reinsurer; gross unearned premium is $\$500$ M, of which $\$100$ M is ceded. How does each regime present this?

Answer

SAP: loss reserves $\$700$ M and unearned premium $\$400$ M — net. The ceded $\$300$ M and $\$100$ M appear on no line of the balance sheet; they are visible only in Schedule F.

GAAP: liabilities $\$1{,}000$ M and $\$500$ M gross; assets of $\$300$ M reinsurance recoverable (less a credit-loss allowance) and $\$100$ M prepaid reinsurance premium.

IFRS 17: gross insurance contract liabilities, measured on its own basis (discounted, with a risk adjustment), and a separately measured reinsurance contract asset reduced for non-performance risk.

Net of reinsurance, SAP and GAAP agree (IFRS 17 differs only by its measurement basis), but only the grossed-up presentations show the $\$400$ M of counterparty exposure on the face of the statement. A reserves-to-surplus ratio computed from the statutory balance sheet is a net leverage measure; gross leverage and reinsurance credit risk must be read from Schedule F.