LOMA 361 FINAL EXAMS ANSWERS AND
QUESTIONS SET A+
✔✔Admitted asset - ✔✔"assets whose full value is reported on the Assets page of the
Annual Statement. Examples are cash, cash equivalents, and most invested assets."
Note that the admitted and nonadmitted asset classifications are only relevant for
statutory reporting purposes; under GAAP accounting, an insurer includes values for all
of its assets in its financial statements. Because of this difference, the asset amounts in
an insurer's Annual Report rarely equal those shown on the Assets page of the insurer's
Annual Statement."
✔✔Nonadmitted assets - ✔✔Types of property, such as office furniture and equipment,
that regulators do not allow insurers to show as assets on financial statements because
these assets cannot readily be converted to cash at or near their market value.
prepaid expenses are an example
a lower value for a company's nonadmitted assets ratio indicates a smaller amount of
highly illiquid assets
✔✔Partially nonadmitted assets - ✔✔"only a portion of their value is reported on the
Assets page of the Annual Statement. One example is deferred tax assets."
✔✔liquid assets - ✔✔cash and items that can be quickly converted to cash
✔✔Net admitted assets - ✔✔= Assets - Nonadmitted assets
page 45
✔✔Investing - ✔✔"refers to employing a principal sum of money to generate earnings.
In a financial sense, usually involves using a sum of money to (1) purchase assets or
(2) deposit funds into a financial institution. Typical examples are bonds, mortgages,
and stock."
,✔✔Investment Accounting - ✔✔"the area of accounting that is responsible for recording
all accounting entries related to the invested assets held in an insurer's investment
portfolios"
✔✔Investment portfolio - ✔✔"a collection of various investments owned by the same
organization, usually assembled to meet a defined set of financial goals.
The invested assets in a portfolio can be further classified as securities.
For insurance companies, important examples of securities are debt securities, equity
securities, hybrid securities, and derivative securities."
✔✔debt security - ✔✔"an obligation of indebtedness owed by a business, a
government, or an agency. Important examples are bonds and mortgages issued by
other companies or entities. They represent loans made by the purchaser of the security
to the issuer of the security."
Insurers prefer these in part because their investment risk is generally lower than that of
equity securities.
Have fixed maturity dates and fixed interest-payment schedules. These characteristics
ensure that adequate funds are available to insurers when needed to pay contractual
obligations. Of the ones held by life insurance companies, bonds are the clear industry
favorite.
✔✔equity security - ✔✔Represents stock ownership in another company that
sometimes pays dividends
"an ownership interest in a business. The most important example for life insurers is
common stock.
By purchasing the common stock of another company, the insurer hopes to receive (1)
income in the form of cash dividends and (2) growth in the value of that stock upon its
eventual sale."
✔✔Hybrid security - ✔✔"has characteristics of debt and equity securities. are becoming
more common in insurance company portfolios because they often combine the best
features of debt securities and equity securities. Preferred stock is an example
✔✔Derivative security - ✔✔"derives its value from other securities. Types that are
important to insurers are options, forward contracts, futures contracts, and swaps."
✔✔Bond - ✔✔"A debt security that a bond issuer, typically a corporation or government
entity, sells to raise money.
The purchaser of a bond, or owner of a bond, is known as the bondholder.
,✔✔coupon payment - ✔✔Periodic interest payments, usually on a semiannual basis—
every six months—in the United States.
The interest rate specified on a bond is called the coupon rate, also known as the stated
rate.
A bond's coupon rate is a percentage of its par value.
✔✔par value of a bond - ✔✔Typical maturities for bonds fall in the five-year to 30-year
range.
is the designated legal monetary value assigned to the bond.
Other terms used for par value are principal and face amount.
When a bond issuer first sells a bond, the selling price is usually the bond's par value,
typically $1,000. Thereafter, the value of the bond fluctuates according to competitive
market forces.
✔✔Corporate Bonds - ✔✔"Bonds issued by corporations are called corporate bonds,
whereas those issued by governments—including federal, state, provincial, county, city,
and other local governments—are called government bonds.
Although the largest proportion of an insurer's bond investments are corporate bonds,
insurers also invest a considerable amount of money in government bonds."
✔✔"Bonds rated NAIC 1 to NAIC 5" - ✔✔Reported as amortized costs
1 is high quality , 5 is low quality
✔✔NAIC 6 - ✔✔"the designation for bonds "in or near default"—life insurers typically
use a valuation method known as the lower-of-cost-or-market (LCM) rule.
According to this rule, the lower of its amortized cost or fair value.
The difference between the bond's amortized cost and its fair value is generally an
unrealized loss."
This is in or near default
✔✔Accrued income - ✔✔the amount of interest that has been earned on a bond, but is
not yet payable to the bondholder as of the financial reporting date.
applies to investment income.
it is classified as an asset on the insurers balance sheet
Typical financial reporting dates are month-end, quarter-end, and year-end.
, To compensate the seller for this lost interest, the bond's purchase price must include
an amount equal to the accrued interest income as of the date of purchase."
✔✔Investment income due and accrued - ✔✔cash dividends that have been earned but
not yet received on stock that an insurer owns as of the insurer's financial reporting date
are reported under this.
under SAP, this is considered an asset account.
when the insurer receives the income, it records the amount of the income as a debit to
cash and a credit to investment income do an accrued.
is an asset account, whereas Bond Interest Income is a revenue account." Page 67
✔✔"To obtain the effective rate of return, - ✔✔divide the annual bond interest by the
purchase price paid for the bond."
✔✔Annual amount of interest paid - ✔✔on a bond is based on the bond's coupon rate
and the par value of the bond, regardless of the actual price paid for the bond."
✔✔mortgage-backed securities - ✔✔holders of mortgages form a pool of mortgages
and sell shares in the pool to investors"
"appeal to insurers because these investments generally return a predictable stream of
cash flows by providing (1) monthly debt repayment schedules and (2) a minimum,
often fixed, rate of return."
✔✔Mortgage - ✔✔a long-term loan secured by a pledge of specified real property. In
this context, the insurer is usually the purchaser, not the issuer (seller).
Under GAAP and SAP, mortgages are generally reported at their outstanding principal
balance or amortized cost (if acquired at a discount or a premium)."
✔✔Escrow account - ✔✔"a liability account for the lender, is a trust account used to pay
property maintenance expenses, property taxes, and other expenses related to a
mortgaged property.
Many lenders establish these to ensure that (1) the property is maintained at some
minimum level and (2) property taxes and other routine costs are paid."
✔✔stock - ✔✔"an asset that represents a stockholder's ownership interest in a
company.
sold in shares, and anyone who owns shares in a company is known as a stockholder
or shareholder."
QUESTIONS SET A+
✔✔Admitted asset - ✔✔"assets whose full value is reported on the Assets page of the
Annual Statement. Examples are cash, cash equivalents, and most invested assets."
Note that the admitted and nonadmitted asset classifications are only relevant for
statutory reporting purposes; under GAAP accounting, an insurer includes values for all
of its assets in its financial statements. Because of this difference, the asset amounts in
an insurer's Annual Report rarely equal those shown on the Assets page of the insurer's
Annual Statement."
✔✔Nonadmitted assets - ✔✔Types of property, such as office furniture and equipment,
that regulators do not allow insurers to show as assets on financial statements because
these assets cannot readily be converted to cash at or near their market value.
prepaid expenses are an example
a lower value for a company's nonadmitted assets ratio indicates a smaller amount of
highly illiquid assets
✔✔Partially nonadmitted assets - ✔✔"only a portion of their value is reported on the
Assets page of the Annual Statement. One example is deferred tax assets."
✔✔liquid assets - ✔✔cash and items that can be quickly converted to cash
✔✔Net admitted assets - ✔✔= Assets - Nonadmitted assets
page 45
✔✔Investing - ✔✔"refers to employing a principal sum of money to generate earnings.
In a financial sense, usually involves using a sum of money to (1) purchase assets or
(2) deposit funds into a financial institution. Typical examples are bonds, mortgages,
and stock."
,✔✔Investment Accounting - ✔✔"the area of accounting that is responsible for recording
all accounting entries related to the invested assets held in an insurer's investment
portfolios"
✔✔Investment portfolio - ✔✔"a collection of various investments owned by the same
organization, usually assembled to meet a defined set of financial goals.
The invested assets in a portfolio can be further classified as securities.
For insurance companies, important examples of securities are debt securities, equity
securities, hybrid securities, and derivative securities."
✔✔debt security - ✔✔"an obligation of indebtedness owed by a business, a
government, or an agency. Important examples are bonds and mortgages issued by
other companies or entities. They represent loans made by the purchaser of the security
to the issuer of the security."
Insurers prefer these in part because their investment risk is generally lower than that of
equity securities.
Have fixed maturity dates and fixed interest-payment schedules. These characteristics
ensure that adequate funds are available to insurers when needed to pay contractual
obligations. Of the ones held by life insurance companies, bonds are the clear industry
favorite.
✔✔equity security - ✔✔Represents stock ownership in another company that
sometimes pays dividends
"an ownership interest in a business. The most important example for life insurers is
common stock.
By purchasing the common stock of another company, the insurer hopes to receive (1)
income in the form of cash dividends and (2) growth in the value of that stock upon its
eventual sale."
✔✔Hybrid security - ✔✔"has characteristics of debt and equity securities. are becoming
more common in insurance company portfolios because they often combine the best
features of debt securities and equity securities. Preferred stock is an example
✔✔Derivative security - ✔✔"derives its value from other securities. Types that are
important to insurers are options, forward contracts, futures contracts, and swaps."
✔✔Bond - ✔✔"A debt security that a bond issuer, typically a corporation or government
entity, sells to raise money.
The purchaser of a bond, or owner of a bond, is known as the bondholder.
,✔✔coupon payment - ✔✔Periodic interest payments, usually on a semiannual basis—
every six months—in the United States.
The interest rate specified on a bond is called the coupon rate, also known as the stated
rate.
A bond's coupon rate is a percentage of its par value.
✔✔par value of a bond - ✔✔Typical maturities for bonds fall in the five-year to 30-year
range.
is the designated legal monetary value assigned to the bond.
Other terms used for par value are principal and face amount.
When a bond issuer first sells a bond, the selling price is usually the bond's par value,
typically $1,000. Thereafter, the value of the bond fluctuates according to competitive
market forces.
✔✔Corporate Bonds - ✔✔"Bonds issued by corporations are called corporate bonds,
whereas those issued by governments—including federal, state, provincial, county, city,
and other local governments—are called government bonds.
Although the largest proportion of an insurer's bond investments are corporate bonds,
insurers also invest a considerable amount of money in government bonds."
✔✔"Bonds rated NAIC 1 to NAIC 5" - ✔✔Reported as amortized costs
1 is high quality , 5 is low quality
✔✔NAIC 6 - ✔✔"the designation for bonds "in or near default"—life insurers typically
use a valuation method known as the lower-of-cost-or-market (LCM) rule.
According to this rule, the lower of its amortized cost or fair value.
The difference between the bond's amortized cost and its fair value is generally an
unrealized loss."
This is in or near default
✔✔Accrued income - ✔✔the amount of interest that has been earned on a bond, but is
not yet payable to the bondholder as of the financial reporting date.
applies to investment income.
it is classified as an asset on the insurers balance sheet
Typical financial reporting dates are month-end, quarter-end, and year-end.
, To compensate the seller for this lost interest, the bond's purchase price must include
an amount equal to the accrued interest income as of the date of purchase."
✔✔Investment income due and accrued - ✔✔cash dividends that have been earned but
not yet received on stock that an insurer owns as of the insurer's financial reporting date
are reported under this.
under SAP, this is considered an asset account.
when the insurer receives the income, it records the amount of the income as a debit to
cash and a credit to investment income do an accrued.
is an asset account, whereas Bond Interest Income is a revenue account." Page 67
✔✔"To obtain the effective rate of return, - ✔✔divide the annual bond interest by the
purchase price paid for the bond."
✔✔Annual amount of interest paid - ✔✔on a bond is based on the bond's coupon rate
and the par value of the bond, regardless of the actual price paid for the bond."
✔✔mortgage-backed securities - ✔✔holders of mortgages form a pool of mortgages
and sell shares in the pool to investors"
"appeal to insurers because these investments generally return a predictable stream of
cash flows by providing (1) monthly debt repayment schedules and (2) a minimum,
often fixed, rate of return."
✔✔Mortgage - ✔✔a long-term loan secured by a pledge of specified real property. In
this context, the insurer is usually the purchaser, not the issuer (seller).
Under GAAP and SAP, mortgages are generally reported at their outstanding principal
balance or amortized cost (if acquired at a discount or a premium)."
✔✔Escrow account - ✔✔"a liability account for the lender, is a trust account used to pay
property maintenance expenses, property taxes, and other expenses related to a
mortgaged property.
Many lenders establish these to ensure that (1) the property is maintained at some
minimum level and (2) property taxes and other routine costs are paid."
✔✔stock - ✔✔"an asset that represents a stockholder's ownership interest in a
company.
sold in shares, and anyone who owns shares in a company is known as a stockholder
or shareholder."
