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Life Insurance Company
Financial Statements
Koon Cheng
17 January 2009
Life Insurance Company Financial Statements
Statutory Accounts – Government ReturnGAAP Accounts – Management and Investors
Only Statutory Accounts will be discussed
Statutory Accounts (Chap 41 Insurance Companies Ordinance)
Profit and Loss Statement• Revenue Account – by Class• Consolidated Profit and Loss Account
Consolidated Balance Sheet• Long Term Business• Other than Long Term• Total
Revenue Account
T-account
Left Hand Side• Fund brought forward• Receipts• Transfer from Profit and Loss Account
Right Hand Side• Disbursements• Fund Carried Forward• Transfer to Profit and Loss Account
Life Insurance Funds
Authorization required for each class of business
Class A to I for Life Insurance Companies
• A – Life and Annuity • C – Linked Long Term• D – Permanent Health• G – Retirement Scheme Management I • H – Retirement Scheme Management II• I – Retirement Scheme Management III
One fund maintained for each class of businessFund exceeds liability by at least 1/6 Solvency Margin
Transfers
Profit or loss only recognized after transferMost countries imposed 90/10 or similar limitation for transferNo limitation in Hong Kong
Receipts
• Gross premium, less reinsurance premiums ceded • Reinsurance Commission• Investment Income• Other Income
Disbursements
• Commission • Claims less reinsurance claims recoverable• Policyholder dividends• Operating Expenses
Consolidated Profit and Loss Account
Investment Income – ShareholdersOperating ExpensesOther IncomeTransfer from/(to) Revenue AccountsProfit before TaxTaxNet Profit attributable to Shareholders
Consolidated Balance Sheet
AssetsLiabilitiesCapital & Reserve
Assets
Invested assets • Cash & Bank Deposits • Policy loans• Equities & Shares• Bonds • Mortgages• Investment properties• Other loans• Accrued interest
Fixed assets • Real Estate • Computer & Software• Furniture & Fixture
Other assets • Due Premiums • Amount due from reinsurer• Prepayments & other debtors
Liabilities
Insurance funds Claims payableOther insurance liabilitiesInterest-bearing loansTax payableOther liabilities
• Amount due to reinsurer • Accrued expense & other creditors
Capital & Reserve
Issued capital • Ordinary shares • Preference shares
Accumulated profits & losses
Example: 5-year endowmentYear 1 2 3 4 5
Premium 194.00 184.25 174.49 164.70 154.91
Inv Income 9.54 20.00 29.61 38.37 46.25
Commission -15.52 -3.69 -3.49 -3.29 -3.10
Claims -0.25 -0.34 -0.44 -0.45 -0.46
Sur & Mat -7.85 -17.45 -27.65 -38.50 -798.06
P/h dividends -3.13 -6.65 -9.85 -12.77 -15.40
Expenses -19.40 -4.61 -4.36 -4.12 -3.87
Tax -1.65 -1.57 -1.48 -1.40 -1.32
Incr in reserve -157.58 -169.46 -155.47 -140.64 623.15
Profit w/o SM -1.83 0.49 1.34 1.90 2.11
YE Reserve 157.58 327.04 482.51 623.15 0.00
Incr in SM -8.68 -5.98 -5.37 -4.77 24.79
Interest on SM 0 0.52 0.89 1.22 1.53
Profit w SM -10.51 -4.97 -3.14 -1.66 28.39
ROI = 10.8%
YE Sol Margin 8.68 14.80 20.40 25.45 0.00
Note: rounding differences
Revenue Account
Fund bf 0.00
Premium 194.00 Commission 15.52
Inv Income 9.54 Claim 0.25
Surrender 7.85
Dividend 3.13
Expense 19.40
T/f from P&L 8.87
Fund cf 166.26
212.40 212.40
Year 1
Revenue Account
Year 2
Fund bf 166.26
Premium 184.25 Commission 3.69
Inv Income 20.52 Claim 0.34
Surrender 17.45
Dividend 6.65
Expense 4.61
T/f from P&L 3.54
Fund cf 341.84
374.57 374.57
Revenue Account
Year 3
Fund bf 341.84
Premium 174.49 Commission 3.49
Inv Income 30.50 Claim 0.44
Surrender 27.65
Dividend 9.85
Expense 4.36
T/f from P&L 1.89
Fund cf 502.91
548.71 548.71
Revenue Account
Year 4
Fund bf 502.91
Premium 164.70 Commission 3.29
Inv Income 39.60 Claim 0.45
Surrender 38.50
Dividend 12.77
Expense 4.12
T/f from P&L 0.53
Fund cf 648.60
707.74 707.74
Revenue Account
Year 5
Fund bf 648.60
Premium 154.91 Commission 3.10
Inv Income 47.78 Claim 0.46
Surrender 798.06
Dividend 15.40
Expense 3.87
T/f to P&L 30.41
Fund cf 0
851.29 851.29
Consolidated Profit and Loss Account
Year 1 2 3 4 5
Inv Income 1.13 0.57 0.29 0.11 0.00
T/f from/(to) RevA/C -8.87 -3.54 -1.89 -0.53 30.41
Tax -1.65 -1.57 -1.48 -1.40 -1.32
Net Profit -9.39 -4.54 -3.07 -1.82 29.09
Consolidated Balance Sheet
Year 1 2 3 4 5
Long Term business
Invested Assets 166.26 341.84 502.91 648.60 0.00
Fund 166.26 341.84 502.91 648.60 0.00
Other than Long Term
Invested Assets 9.43 4.89 1.82 0.00 29.09
Capital 18.82 18.82 18.82 18.82 18.82
Retained Profits -9.39 -13.92 -17.00 -18.82 10.27
Capital & Surplus 9.43 4.89 1.82 0.00 29.09
Return on investment = (29.09/18.82)^(1/5) – 1 = 9.1%
Valuation Data
Year 1 2 3 4 5
GP/1000 194.00 194.00 194.00 194.00 194.00
NP/1000 160.80 185.80 185.80 185.80 185.80
CSV/1000 157.00 349.00 553.00 770.00 1000.00
Res/1000 165.92 363.62 568.35 780.38 1000.00
Q[prc]/1000 0.245 0.361 0.494 0.531 0.575
Q[val]/1000 0.613 0.644 0.686 0.737 0.799
Inforce SA-YS 1000.00 949.76 899.41 848.97 798.52
Net Risk 834.08 604.41 368.72 159.27 0.00
Reserve Reconciliation – Year 2
Net Premium = 184.25 x 185.80/194.00 = 176.46
Interest on reserve = (157.58 + 176.46) x 3.5% = 11.69
Mortality Cost = -0.644 x 604.41/1000 = -0.39
Release – death = -0.34 x 363.62/1000 = -0.12
Release – surrender = -17.45 x 363.62/349.00 = -18.18
Total reserve increase = 169.46
Reserve Reconciliation
Year 1 2 3 4 5
Net Premium 160.80 176.46 167.11 157.74 148.36
Interest [3.5%] 5.63 11.69 17.30 22.41 27.00
Mortality -0.51 -0.39 -0.27 -0.14 0.00
Release-death -0.04 -0.12 -0.25 -0.35 -0.46
Rel-surrender -8.30 -18.18 -28.42 -39.02 -798.06
Total 157.58 169.46 155.47 140.64 -623.15
V1 = ((V0+NP) x (1+I)-q[v] x SA) / (1-q[v])
V1-V0 = NP + (V0+NP) x I – q[v] x (SA-V1)
Source of Earnings – Year 2
P&L Expense Mortality Surrdner Interest Reserve
Premium 184.25 184.25 20.00
Inv Income 20.00
Commission -3.69 -3.69
Claims -0.34 -0.34
Sur&Mat -17.45 -17.45
Expenses -4.61 -4.61
Incr in
Reserve
-169.46 -169.46
Net Premium -176.46 176.46
Int on reserve -11.69 11.69
Mortality Cost 0.39 -0.39
Release-death 0.12 -0.12
Release-
surrender
18.18 -18.18
Profit 8.71 -0.50 0.17 0.73 8.31 0.00
Source of Earning
Profit = L0xGP-C-E-D-S+ L0xV0 – L1xV1 + I[p] x (L0xV0 + L0xGP–C–E–0.5x D)
L0 x V0 – L1 x V1 = (L0 – L1) x V1 – L0 x (V1 – V0)
= (w + d) x V1 – L0 x (V1 – V0)
Profit = (L0 x GP - L0 x NP) – C – E
+ (q[v] - q) x L0 x (SA-V1)
+ w x (V1 – CV1)
+ (I[p] – I[v]) x (L0 x V0 + L0 x NP)
+ I[p] x (L0 x GP – L0 x NP – C – E – 0.5 x D)
Year 1 2 3 4 5
Expense -1.72 -0.50 -0.48 -0.45 -0.42
Mortality 0.31 0.17 0.07 0.04 0.00
Surrender 0.45 0.73 0.77 0.52 0.00
Excess int on res 4.02 8.35 12.35 16.01 19.29
Excess int on csf -0.11 -0.04 -0.04 -0.04 -0.04
Total 2.94 8.71 12.68 16.07 18.83
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