THIS SESSION WILL USE POLLING!

Transcription

1 THIS SESSION WILL USE POLLING! (To access in an internet browser, go to vcia.cnf.io) Click on the Polling Icon on the VCIA app Click on your session Respond to the Polls

2 HOW TO USE SOCIAL Q&A! (To access in an internet browser, go to vcia.cnf.io) 2 1 Click on the Polling Icon on the VCIA app Click on your session 1. Vote for a Question 2. Ask a Question

3 Financial Statements and Ratios: Ready for Your Close-Up? August 10, VCIA; Speaker materials used by VCIA under license.

4 Welcome Presenters Magali Welch Partner Johnson Lambert LLP Christine Brown Assistant Chief Examiner VT Department of Financial Regulation, Captive Division Joseph Schimenti President Consensus Management Corporation & Yellowstone Insurance Exchange Risk Retention Group, a Vermont reciprocal captive insurance company 4

5 Agenda 1) Balance Sheet and Income Statement with Financial Focus and Emphasis on Captive Insurance Accounting and Key Terms 2) Ratios and Determining Financial Health of Company 3) Controls and Auditors requirements 4) Case Study 5

6 Focus of Different Parties Management s Focus ALL operating, compliance and financial reporting controls Auditor s Focus KEY financial reporting controls Board s Focus KEY operating, compliance and financial reporting controls in higher risk more complex processes Regulator s Focus Solvency Key financial reporting risks Prospective risks Compliance 6

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8 Areas of Financial Statement Emphasis Investments Claim Liabilities, net Capital & Surplus Claims incurred Premiums Reinsurance Balance Sheet Statement of Operations GAAP opinion Stat opinion modified (unrestricted) Stat opinion unmodified (restricted) Opinion Notes to the Financial Statements Accounting policies Operations Related Party Transactions 8

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10 Modified Opinion Basis for Qualified Opinion As discussed in Note A, the Company has included letters of credit issued in favor of the Commissioner of Insurance of the State of Vermont as assets and contributed capital in these financial statements. Such accounting treatment is allowed under the captive insurance laws of the State of Vermont but is not in accordance with accounting principles generally accepted in the United States. Qualified Opinion In our opinion, except for the effects of the matter discussed in the preceding paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company as of December 31, 2015 and 2014 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. 10

11 Statutory Opinion - Unrestricted Basis for Adverse Opinion on U.S. GAAP As described in Note A to the financial statements, the Company prepared these financial statements using accounting practices prescribed or permitted by the Insurance Department of the State of Vermont, which is a basis of accounting other than accounting principles generally accepted in the United States of America. The effects on the financial statements of the variances between these statutory accounting practices and accounting principles generally accepted in the United States of America, although not reasonably determinable, are presumed to be material. Adverse Opinion on U.S. GAAP In our opinion, because of the significance of the matter discussed in the "Basis for Adverse Opinion on U.S. Generally Accepted Accounting Principles" paragraph, the financial statements referred to above do not present fairly, in accordance with accounting principles generally accepted in the United States of America, the financial position of ABC Company as of December 31, 2015 and 2014, or the results of its operations or its cash flows for the years then ended. Opinion on Regulatory Basis of Accounting In our opinion, the financial statements referred to above present fairly, in all material respects, the admitted assets, liabilities, and surplus of ABC Company as of December 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended, on the basis of accounting described in Note A. 11

12 Statutory Opinion - Restricted Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the admitted assets, liabilities, and surplus of ABC Company as of December 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended, on the basis of accounting described in Note A. Basis of Accounting We draw attention to Note A of the financial statements, which describes the basis of accounting. As described in Note A to the financial statements, these financial statements were prepared in conformity with accounting practices prescribed or permitted by the Insurance Department of the State of Vermont, which is a basis of accounting other than accounting principles generally accepted in the United States of America. Restriction on Use Our report is intended solely for the information and use of the board of directors and the management of ABC Company and state insurance departments to whose jurisdiction the Company is subject and is not intended to be and should not be used by anyone other than these specified parties. 12

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14 Prescribed vs. Permitted Practices Prescribed Practices: Incorporated in state statutes and/or regulations Applicable to all companies domiciled in that state Permitted Practices: Departure from prescribed practices Issue by issue and company by company basis Generally, long-term requests that will not change on a year to year basis 14

15 Prescribed vs. Permitted Examples Prescribed Practices: GAAP reporting Letter of Credit Permitted Practices: SAP reporting Surplus notes reported as equity Investment holdings not in compliance with state investment restrictions 15

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18 INVESTMENT CYCLE 18

19 Investments - Recording GAAP Bond Portfolios Recognition of investment and unrealized gain/loss depends on the portfolio classification Held to maturity (HTM) Held at amortized cost, unrealized gain/loss is not recognized until sale Available for sale (AFS) Held at fair value (FV), unrealized gain/loss as a component of comprehensive income included within equity Trading/FV Option Held at FV, unrealized gain/loss recorded on income statement STATUTORY Depends on the NAIC Rating NAIC ratings 1 & 2 - Held at amortized cost (investment grade). Unrealized gain/loss is not recognized until sale. NAIC ratings >2 lower of amortized cost or fair value. If at FV, unrealized G/L included in surplus. 19

20 Investments - Recording Equity Portfolios GAAP Recognition of investment and unrealized gain/loss depends on the portfolio classification STATUTORY At Fair Value with unrealized G/L included in surplus. Available for sale (AFS) Held at fair value (FV), unrealized gain/loss as a component of comprehensive income included within equity Trading/FV Option Held at FV, unrealized gain/loss recorded on income statement 20

21 Investments Regulatory Monitoring Focus Valuation Appropriateness of portfolio and strategy Matching principal/payout patterns/investment Yield Monitoring Tools AFS Footnotes valuation hierarchy; unrealized gain/loss position Compliance with investment restrictions (RRGs) NAIC tools = jumpstart reports (RRGs) 21

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23 Impairment Not on your radar 23

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25 Investments Board Considerations Approval of investment and impairment policies Maturity of investments (cash flow matching of assets/liabilities) Investment restrictions 25

26 UNDERWRITING CYCLE 26

27 Key Terms Direct Premiums The policy issued to the policyholder by the captive insurance company is referred to as the primary insurance This transaction results in direct written premiums Policyholder Captive Insurance Company 27

28 Key Terms Assumed Premiums The Parent Company owns 100% of the Captive Insurance Company Insurance accepted from another insurer Parent Company Primary Insurer/Fronting Company Reinsurer/Captive Insurance Company 28

29 Key Terms Ceded Premiums Policies issued by the captive insurance company are ceded to the reinsurance company under a reinsurance agreement This transaction results in ceded (outgoing) premiums for the captive insurance company Policyholder Captive Insurance Company Reinsurance Company 29

30 Reinsurance Considerations Many Captives rely heavily on reinsurance. Some factors to consider include: Understanding of agreement(s) and features Reinsurance Creditworthiness Concentration of Reinsurers 30

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33 Underwriting Regulatory Monitoring Net premiums written to surplus ratio Benchmark generally < 300% Loss ratio Lower = better Combined ratio Benchmark generally < 100% Net retention to surplus Benchmark generally< 10% Growth rate 33

34 Premiums/Underwriting Board Considerations Approval of rates Underwriting Committee Adjustable features (direct, assumed & ceded) 34

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36 LOSS CYCLE 36

37 Key Terms Balance Sheet Claim reserves Dollars YET to be paid IBNR Incurred But Not Reported, incudes unknown and known but undeveloped Total reserve Confidence Level A percentage that roughly estimates the odds of a level of funding Loss development Changes to claims estimate Quantified in actuary s report 37

38 Key Terms Income Statements Paid Claims Amount paid for claims Incurred Claims Paid claims + chg claim reserves + chg in IBNR + chg in discounting 38

39 IBNR Hire a qualified actuary Approval of actuary by state of domicile (check with your state) Actuarial report Opinion Opinion summary (VT) 39

40 Reserves Regulatory Monitoring Net reserves to surplus ratio Benchmark generally < 3 : 1 Loss development Which accident years and causes of unfavorable development Confidence levels Conservatism Reasons for changing Recorded reserves at point estimate or within range Benchmark = +/- 5% Credit for Reinsurance 40

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42 Loss Development 2014 Liability as of J uly 1, 2013, net of reins urance 101,013,705 Incurred related to: Current year 56,893,924 P rior years (2,366,625) Total incurred during the year 54,527,299 P aid related to: Current year (21,951,874) P rior years (19,220,391) (41,172,265) Liability as of J une 30, 2014, net of reins urance 114,368,739 42

43 Loss development - STAT 43

44 Loss development GAAP (eff 2017) Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance in thousands As of December 31, 2016 For the Years Ended December 31, Accident Year Total of Incurred-but- Not-Reported Liabilities Plus Expected Development on Reported Claims Cumulative Number of Reported Claims 2007 $10,000 $9,900 $9,700 $9,800 $9,750 $9,750 $9,600 $9,650 $9,575 $9,550 $ ,950 11,000 10,500 10,750 10,850 10,600 10,250 10,150 10, ,000 11,750 11,500 10,900 10,900 10,850 10,750 10, ,250 12,500 12,550 12,400 12,200 12,150 12, ,300 12,500 12,650 12,750 12,800 12, ,800 12,900 12,750 12,700 12,700 1, ,000 13,250 13,100 13,150 1, ,150 13,250 13,300 2, ,500 13,250 3, ,750 5, Total $121,300 44

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46 Reserve (Gross/Ceded) Board Considerations Loss/Claims committee Reserving philosophy Discussion Actuarial Range Point estimate Confidence level Loss development by line by year Reinsurers creditworthiness 46

47 Notes to the financial statements 47

48 Footnotes Regulatory Monitoring Description of accounting policies Insurance activity/business plan Investments Losses and LAE activity Related parties/service providers Subsequent events Reconciliation to annual statement 48

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50 Capital & Surplus Regulatory Monitoring Minimum Unimpaired Surplus Leverage/Solvency Ratios - Benchmarks Net reserves to surplus = < 3:1 Total liabilities to surplus = < 5:1 Net premium written to surplus = <3:1 Net retention to surplus Risk Based Capital (RBC) > 200% (no action level) Trend test = RBC btwn 200% - 300% and combined ratio > 120% 50

51 NAIC Insurance Regulatory Information System (IRIS) Solvency monitoring tool IRIS Ratios = key financial ratios based on info reported in NAIC annual statement Available to regulators and interested parties Include range comparisons 51

52 NAIC Insurance Regulatory Information System (IRIS) Ratios Over Under 1. Gross Premiums Written to Surplus Net Premiums Written to Surplus Change in Net Premiums Written Surplus Aid to Surplus Two-Year Overall Operating Ratio Investment Yield Gross Change in Surplus Change in Adjusted Surplus Adjusted Liabilities to Liquid Assets Gross Agents Balances to Surplus One-Yr Reserve Development to Surplus Two-Yr Reserve Development to Surplus Current Reserve Deficiency to Surplus

53 INTERNAL CONTROLS 53

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55 Designing Controls Financial Reporting objectives Outsourcing Implications 55

56 Internal Controls 56

57 Internal Controls: Deficiency Letter Should I be concerned if I have a deficiency letter? Recommendations Other control deficiencies Significant deficiencies Material weaknesses 57

58 Summary - Regulatory Financial Solvency Oversight 5 Elements of Risk-Focused Surveillance: 1. Risk-focused examination 2. Financial analysis 3. Review of internal/external changes 4. Priority system 5. Supervisory plan 58

59 Financial Statements and Ratios: Ready for Your Close-Up? Board Perspective Learning Step 1: A Backwards Approach Examples: Starting with the Notes to the financial statements, Why?» Board didn t understand the financials / numbers at first and went to text» Board provided questions from the notes which led them to an understanding of the financials and some tax issues Reinsurance Swing Rate vs Fixed rate The Reinsurance Receivable/Recoverable 59

60 Financial Statements and Ratios: Ready for Your Close-Up? Step 2- Are we making money? Does board look at Growth in Investment and Cash? Growth in equity or net income? Step 3 - What is purpose of company and numbers the Board wants to focus on Where do we stand? Dashboard / Benchmarks IRIS ratios RBC Vermont Standing 60

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63 Financial Statements and Ratios: Ready for Your Close-Up? Board Perspective The SAC had selected trusted advisors to give them information and to ask questions The DFR became the Yellowstone s no-cost consultant: Business Plan changes Operational reviews 63

64 QUESTIONS? PLEASE EVALUATE THIS SESSION Click on Evaluations Click on the session title Answer all the questions! Thank you!

65 Contact Info Joseph T. Schimenti, President Consensus Management Corporation 4301 Hillsboro Pike, Ste 310 Nashville, TN Christine Brown, CFE Assistant Chief Examiner VT Dept. of Financial Regulation Magali Welch, CPA, AIAF, CA Partner Johnson Lambert LLP

66 Disclaimer This presentation contains general information only. VCIA and its guest speakers are not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Neither VCIA nor its guest speakers shall be responsible for any loss sustained by any person who relies on this presentation. 66