Introduction to Property & Casualty Financial Statements

Course Objectives

The overall goal of this workshop is to understand the key components of a property and casualty (P&C) company’s statutory (SAP) and GAAP financial statements and apply key ratios to analyse financial strength. Specifically, participants will learn to:

• Evaluate the risks inherent in the main products offered by P&C and reinsurance companies and recognise how they are reflected in the financial statements
• Compare and contrast the statutory (SAP / yellow book) and GAAP statements in order to assess balance sheet, income statement and cash flow financial strength
• Calculate and apply basic ratios to quantify a P&C company’s performance, risk based solvency and risk profile.

Target Audience

This programme is designed for analysts, who have limited experience in the analysis of insurance company financial statements. A parallel workshop Introduction to Life Insurance Financial Statements covers the life sector. These workshops are designed as a preparation for the intermediate level US Insurance Company Analysis workshop.

CONTENT

INSURANCE MARKET INTRODUCTION

Types of company

• Composite, multi-line and monolines
• Mutual versus listed.

Key activities and products

• Risk profile for differing products: personal, commercial and speciality
  • Auto: own damage and third party liability
  • Fire and accident: commercial and personal property, allied coverage
  • Accident and health: personal accident, medical and creditor cover
  • Casualty: worker’s compensation; directors’ & officers; product liability, medical malpractice etc.
  • Marine, aviation and transport
  • Credit and financial guaranty.
• Long tail versus short tail business: risk in the tail
• Catastrophe risk: challenges in modelling and pricing
• Reinsurance: treaty and facultative reinsurance, proportional v non-proportional, finite risk.

STATEMENT LOGIC

Financial statements

• Relating the business to the balance sheet, income statement and cash-flow
• Premiums: direct versus indirect; gross versus net, written versus earned
• Losses / claims: losses incurred versus paid, IBNR; current year versus prior year losses; calendar year versus accident year
• Reserves: loss and loss adjustment reserves, unearned premiums; reserve discounting; loss reserve triangles; reserve development
• Reinsurance impact on assets, liabilities, premiums and losses
• Intangible and other assets: deferred acquisition costs, goodwill.

Accounting and disclosure

• Key differences statutory accounting practices (SAP) versus GAAP: solvency versus going concern
• Investment accounting: cost versus fair value; impairment rules, unrealised gains and losses
• Reserving policies: discounting, realistic versus prudent assumptions etc.
• Expenses: deferral of acquisition costs
• Key focal points: solvency versus profitability
  • SAP yellow book: risk based capital, non admitted assets; underwriting exhibit; schedules D, F and P; dividend capacity
  • GAAP accounts: on going profitability.
• Reconciliation of GAAP and SAP accounts.

RATIO ANALYSIS

Underwriting risk

• Loss ratio, expense and combined ratio
• Reserve adequacy: reserve development, survival ratio
• Reinsurance: retention ratio, credit quality and reinsurance leverage.

Performance risk

• Key performance indicators, benchmarks and signals of strong and weak performance.

Investment risk

• Asset and liability management: duration, liquidity
• Investment leverage: stress testing for write downs
• Investment returns and operating ratio.

Financial risk

• Liquidity and leverage: liquidity ratio; operating, liability and financial leverage
• Solvency: risk based capital and ratio guidelines; quality of capital: core capital and surplus notes.

Closing case study

• Financial analysis of a property and casualty insurer.