Financial statements for forgetful insurance company

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Reference no: EM1312429

Finding premium earned and losses incurred for Forgetful Insurance Company

Background
This project provides a set of annual statements for Forgetful Insurance Company. These annual statements are based on statutory accounting principles. The account balances & results for the year are reported in column F. However, the figures reported in column F fail to take into account two transactions described below:

Transactions omitted:
1. On August 1, 2007, Forgetful underwrote a $150,000 one-year policy. Forgetful collected the 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 the company's risk and to gain surplus relief, the company ceded 75% of the policy described in transaction 1 to a reinsurer on August 1, 2007. The reinsurer's commission was 20%. Forgetful received the commission in cash. The reinsurance is a pro rata reinsurance contract.
Instructions
I. Adjust Forgetful Insurance Company's 2007 annual statements to reflect transaction 1 and report these adjusted results in column "I". Adjust the annual statements to reflect both transaction 1 and transaction 2 and report these adjusted results in column "K".
II. Compute each of the following ratios using the "unadjusted" data as provided in column "F". For additional practice, recompute the ratios using the 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 (refer to lecture notes for its definition)
f. Combined ratio (financial basis and trade basis)
g. Investment earnings ratio

III. In column "G", prepare a common-size income statement and common-size balance sheet based on the annual statement data provided in column "F".

Other information & data:
1. Assume the 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.

After adjusting the SAP-based financial statements for Forgetful Insurance Company, answer the following specific questions.

1. Premiums earned [adjusted for transaction 1] (I71)
2. Losses incurred [adjusted for transaction 1] (I72)
3. Loss adjustment expenses incurred [adjusted for transaction 1] (I73)
4. Policy acquisition expenses [adjusted for transaction 1] (I74)
5. Cash [adjusted for transaction 1] (I123)
6. Loss reserves [adjusted for transaction 1] (I132)
7. Unearned premiums [adjusted for transaction 1] (I134)
8. Premiums earned [adjusted for transactions 1 and 2] (K71)
9. Losses incurred [adjusted for transaction 1 and 2] (K72)
10. Loss adjustment expenses incurred [adjusted for transactions 1 and 2] (K73)
11. Policy acquisition expenses [adjusted for transactions 1 and 2] (K74)
12. Cash [adjusted for transactions 1 and 2] (K123)
13. Loss reserves [adjusted for transactions 1 and 2] (K132)
14. Unearned premiums [adjusted for transactions 1 and 2] (K134)
15. Total assets [adjusted for transactions 1 and 2] (K129)
16. Common-sized percentage for losses incurred (G72)
17. Common-size percentage for cash (G123)
18. Capacity ratio (F177)
19. Liquidity ratio (F180)
20. Investment income ratio (F183)
21. Return on policyholders' surplus (F186)
22. Pure loss ratio (F)
23. Loss ratio (column F)
24. Financial basis combined ratio (F)
25. Trade basis combined ratio (F)

Reference no: EM1312429

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