Background
This project gives a set of annual statements for Forgetful Insurance Company. These annual statements are based on statutory accounting principles. Account balances and results for year are reported in column F. Though, figures reported in column F fail to take into account two transactions explained below:
Transactions omitted:
1. On August 1, 2007, Forgetful underwrote $150,000 one-year policy. Forgetful collected premium in cash less a 18% commission.
By December 31 2007, $40,000 of losses and $5,000 of loss adjustment expenses were incurred but neither of these expenses were paid.
2. To minimize company's risk and to gain surplus relief, company ceded 75% of policy described in transaction 1 to reinsurer on August 1, 2007. Reinsurer's commission was 20%. Forgetful received commission in cash. Reinsurance is pro rata reinsurance contract.
Hint: Record ceding reinsurance commission as reduction in policy acquisition expenses.
Instructions
I. Adjust Forgetful Insurance Company's 2007 annual statements to reflect transaction 1 and report these adjusted results in column "I". Adjust annual statements to reflect both transaction 1 and transaction 2 and report these adjusted results in column "K".
II. Calculate each of the given ratios using "unadjusted" data as given in column "F". For extra practice, recompute ratios using data you generate for the other columns.
a. Capacity ratio
b. Liquidity ratio
c. Return on policyholders' surplus
d. Loss ratio
e. Pure loss ratio
f. Combined ratio (financial basis and trade basis)
g. Investment earnings ratio
III. In column "G", create a common-size income statement and common-size balance sheet based on annual statement data provided in column "F".
Other information & data:
1. Suppose insurer is exempt from taxes.
2. Admitted assets at the start of 2007 totaled $1,675,000.
3. Invested assets' fair market value at year-end is $1,500,000.
4. Net premiums written, ignoring transactions 1 and 2 is $600,000.
Forgetful Insurance Company
Statutory Income Statement
For the year ending Dec. 31, 2007 |
| Underwriting income: |
SAP |
Common- size for column F |
SAP Adjusted for trans 1 |
SAP Adj'd for trans 1 & 2 |
| Premiums earned |
$ |
550,000 |
|
|
| Losses incurred |
|
-325,000 |
|
|
| Loss adjustment expenses incurred |
|
-65,000 |
|
|
| Policy acquisition expenses |
|
-100,000 |
|
|
| Net underwriting gain/loss |
$ |
60,000 |
|
|
| Investment income: |
|
|
|
|
| Net investment income |
$ |
35,000 |
|
|
| Other income: |
|
|
|
|
| Other income |
$ |
5,000 |
|
|
| Income before dividends & income taxes |
|
100,000 |
|
|
| Dividends to policyholders |
|
-10,000 |
|
|
| Income before taxes |
|
90,000 |
|
|
| Income taxes |
|
0 |
|
|
| Net income |
$ |
90,000 |
|
|
| Statement of Changes in Policyholders' Surplus |
|
|
|
|
| Policyholders' surplus, January 1, 2007 |
|
470,000 |
|
|
| Net income |
|
90,000 |
|
|
| Add: Decrease in non-admitted assets |
|
10,000 |
|
|
| Capital changes |
|
0 |
|
|
| Dividends to shareholders |
|
0 |
|
|
| Changes in surplus for the year |
|
100,000 |
|
|
| Policyholders' surplus, Dec. 31, 2007 |
|
570,000 |
|
|