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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 describeed 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. find out 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    

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M919902

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