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