Actuarial Notes

Statutory Surplus: Computation, Pricing, and Valuation

By S. Feldblum · Casualty Actuarial Society · 2003

Study guide: Exam 6U

A Casualty Actuarial Society study note (fifth edition, June 2003) that explains the differences between statutory surplus and invested capital and the implications for actuarial pricing and valuations. It traces the computation of statutory surplus and its difference from GAAP equity, contrasts both with invested capital, and adds the capital in the policyholder reserves to the capital required by statutory regulations to determine the capital supporting the insurance policy.

On the syllabus

  • Exam 6U — objectives C1 and C2; pp. 1–10, including errata; candidates are not responsible for the endnotes.

Introduction

  • Insurers now use return on capital models for pricing and performance measurement, and the models differ in whether capital means statutory surplus, GAAP equity, economic surplus or invested capital.
  • The idiosyncrasies of statutory accounting complicate the relation between statutory surplus and invested capital: last year's surplus plus this year's net income does not equal this year's surplus, because of adjustments such as the change in non-admitted assets and the change in the provision for reinsurance, which are direct charges or credits to surplus.

Balance Sheets and Income Statements

  • Surplus has two definitions: the balance sheet definition, surplus = assets – liabilities, and the income statement definition, surplus = last year's surplus + current year's income.
  • The two are not the same if some balance sheet transactions do not flow through the income statement.

Non-Admitted Assets

  • An illustration of premium more than 90 days past due that is not admitted: the income statement entries are unchanged, while the balance sheet recognizes only the admitted portion of assets.

The Asset Exhibit

  • Exhibit 1, "Analysis of Non-Admitted Assets and Related Items" (page 13 of the Annual Statement), shows the change in non-admitted assets during the year, which is the needed adjustment to income statement surplus.
  • An increase in non-admitted assets is a decrease in the admitted portion of the assets, and a direct charge to policyholders' surplus.

The Statutory Balance Sheet

  • The statutory balance sheet uses four columns to reconcile with the income statement: total assets, assets not admitted, net admitted assets, and net admitted assets for the prior year.

Surplus Adjustments

  • The negative entry in column 3 of Exhibit 1, an increase in non-admitted assets, is carried to page 4 and reduces surplus; a positive entry increases it.
  • Net unrealized capital gains or losses are a separate adjustment to surplus.

Office Furniture

  • Insurers have two statutory accounting options for non-admitted assets: Method 1 writes the asset off as an expense in the income statement; Method 2 uses GAAP entries for both statements but classifies the asset as non-admitted, with a direct charge to surplus.

Accrued Retrospective Premiums

Statutory Liabilities: Provision for Reinsurance

  • Any transaction that affects the balance sheet but not the income statement is a direct charge or credit to surplus; the change in the Schedule F provision for reinsurance is a direct charge (credit) to surplus.

Unrealized Capital Gains

  • Unrealized capital gains are direct credits to surplus, and the change in the related deferred tax liability is a direct charge.

Audit Premiums

Deferred Policy Acquisition Cost and Premium Deficiency Reserve

  • GAAP recognizes premium and expenses over the policy term with an unearned premium reserve and a DPAC asset; statutory accounting has no DPAC, though a premium deficiency reserve is set up on both bases where needed.

Interest Due and Accrued

Real Estate

Stockholder Dividends and Capital Contributions

  • Shareholder dividends are a direct charge to surplus; capital paid in and surplus paid in are direct credits to surplus.

Statutory Surplus, GAAP Equity, and Capital Invested

Double Taxation

Valuation: Cost of Holding Capital

Endnotes

Sources

  • Statutory Surplus: Computation, Pricing, and Valuation (CAS Exam 7 Study Note, fifth edition, June 2003) — the document: title page, introduction, section headings and the text of pp. 1–10 (a scan with no text layer, read as page images and OCR; 16 pages, sha256 7d0a068fa5c4e6618c03ce79230cd706bde392309773c96476f69473e9fcf27a); the opening text before the first heading is untitled in the original (listed here as Introduction), the headings are printed in small capitals and the section levels are not distinguished, so each is listed in the order printed; pp. 11–14 are listed by heading only, and the errata the content outline mentions were not found in this copy
  • CAS Exam 6U Content Outline, Fall 2026 — the citation ("Feldblum (Surplus)"), the assigned pages and the exclusion of the endnotes