FINANCIAL STATEMENTS

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FINANCIAL STATEMENTS OF GENERAL INSURANCE
COMPANIES
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CONTENTS

• Basic Accounting Concepts
• Regulatory Framework governing Financial
  statements of Insurance companies
• Financial Statements
• Ratio Analysis

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BASIC ACCOUNTING CONCEPTS
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BASIC ACCOUNTING CONCEPTS

1. Going Concern
2. Dual Aspect
3. Time period
4. Realization
5. Matching
6. Consistency
7. Materiality

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BASIC ACCOUNTING CONCEPTS

• Going Concern
• Going concern refers to a company's ability to
  continue functioning as a business entity for an
  indefinite period. It is the responsibility of
  the directors to assess whether the going concern
  assumption is appropriate when preparing the
  financial statements.
• This concept implies that financial statements
  do not represent a companys worth if its assets
  were to be liquidated, but rather that the assets
  will be used in future operations.  This concept
  also allows companies to spread (amortize) the
  cost of an asset over its expected useful life.

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BASIC ACCOUNTING CONCEPTS

• Dual Aspect
• This dual aspect concept is also called Double
  Entry Methodology. The key point is that all
  transactions have two dimensions. This follows
  from the basic accounting equation which is
• ASSETS LIABILITIES OWNERS EQUITY
• Time period
• This concept defines a specific interval of time
  for which an entitys reports are prepared.  This
  can be a fiscal year (July 1 June 30), calendar
  year (January 1 December 31), or any other
  meaningful period such as a quarter or a month.

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BASIC ACCOUNTING CONCEPTS

• Realization
• Revenues are recognized when they are earned or
  realized.  This concept is related to prudence
  concept in which revenue is only recorded when it
  actually occurs and not at the point in time when
  a contract is awarded.  
• Matching
• To avoid overstatement of income in any one
  period, the matching principle requires
  that  revenues and related expenses be recorded
  in the same accounting period.  For example, if
  the company bills Rs. 20,000 of services in a
  month, in order to accurately represent the
  income for the month, it must report the expenses
  incurred in generating that income in the same
  month. 

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BASIC ACCOUNTING CONCEPTS

• Consistency
• This principle states that when a business has
  once fixed a method for the accounting treatment
  of an item, it will enter all similar items that
  follow in exactly the same way.
• Materiality
• Materiality relates to the importance/significanc
  e of an amount, transaction, or discrepancy.
  Information is material if its omission or
  misstatement could influence the economic
  decision of users taken on the basis of the
  financial statements. Materiality depends on the
  size of the item or error judged in the
  particular circumstances of its omission or
  misstatement. Thus materiality provides a
  threshold or cut-off point rather than being a
  primary qualitative characteristic which
  information must have if it is to be useful.

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REGULATORY FRAMEWORK
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REGULATORY FRAMEWORK

• Insurance Ordinance, 2000
• Insurance Rules, 2002
• Companies Ordinance, 1984
• Directives of Securities Exchange Commission of
  Pakistan
• International Accounting Standards

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FINANCIAL STATEMENTS
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PURPOSE OF FINANCIAL STATEMENTS

• There are two main purposes of financial
  statements
• To report on the financial position of an entity
  (e.g. a business, an organization) on a certain
  date and
• To show how the entity has performed financially
  over a particular period of time (an "accounting
  period").

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FINANCIAL STATEMENTS
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BALANCE SHEET
ASSETS
LIABILITIES EQUITY
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BALANCE SHEET

• A balance sheet or statement of financial
  position is a summary of the financial balances
  of a company. Assets, liabilities and owners
  equity are listed as of a specific date, such as
  the end of its financial year. A balance sheet is
  often described as a "snapshot of a company's
  financial condition".
• Interpretation of Balance Sheet
• Do we have enough working capital to avoid cash
  flow problems
• Our assets are enough to meet our liability
• Show the wealth of the share holders
• Net worth of the Company

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BALANCE SHEET
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PROFIT LOSS ACCOUNT

• Profit and loss account (PL), indicates how the
  revenue is transformed into the Net profit. It
  displays the revenues recognized for a specific
  period, and the cost and expenses charged against
  these revenues, including write-offs (e.g.,
  depreciation and amortization of various assets)
  and taxes. The purpose of the Profit Loss
  Account is to show managers and investors whether
  the company made a profit or loss during the
  period being reported.

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PROFIT LOSS ACCOUNTS
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STATEMENTS OF PROFIT LOSS ACCOUNT

• Statement of Premium
• Statement of Claims
• Statement of Expenses
• Statement of Investment

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STATEMENT OF PREMIUM

• Premium written
• Unearned premium
• Premium earned
• Premium ceded
• Prepaid reinsurance premium ceded
• Reinsurance expense
• Net premium

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STATEMENT OF PREMIUM
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STATEMENT OF PREMIUM

• Gross Premium Earned Gross Written Premium
  Opening unearned premium closing unearned
  premium
• Unearned premium represents the portion of
  premium written relating to the unexpired period
  of coverage and is deferred to the subsequent
  accounting period. It is recognized as a
  liability by the company. This liability is
  generally calculated by applying the 1/24 method.

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REVENUE RECOGNITION OF PREMIUM1/24 METHOD
Suppose a company earns gross premium of Rs.
20,000 in a year then it will calculate unearned
premium at a end as follows
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STATEMENT OF CLAIMS

1. Claims paid
2. Outstanding claims
3. Claims expenses
4. Reinsurance and other recoveries received
5. Reinsurance and other receivables
6. Reinsurance and other recoveries revenue
7. Net claims

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STATEMENT OF CLAIMS
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STATEMENT OF CLAIMS

• Claims incurred
• Claims incurred for any period consists of
• The actual amount of losses settled during the
  period concerned
• Add Related handling expenses
• Add Adjustment to estimate made for losses
  reported in earlier periods
• Add Adjustment for provision for those losses
  that have occurred but not reported (IBNR) as at
  the end of the period.
• Less Proceeds from recoveries from Salvage
  /subrogation rights recoveries
• Values received from assets salvaged after
  insurer has settled a claim on total loss basis
  or the exercise of subrogation rights, should be
  used to reduce the amount of claims incurred.

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STATEMENT OF CLAIMS

• Reinsurance Recoveries
• Insurers are entitled to recoveries based on
  their reinsurance contracts which should be
  reflected in the accounts.
• In addition to direct recoveries, others based on
  the following provisions should be also accrued
• Outstanding claims
• Claims incurred but not reported
• Reinsurance claims recoveries could be shown in
  the financials as deduction from gross claims
  incurred.

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STATEMENT OF EXPENSES

1. Commission Expense
2. Other management expenses
3. Underwriting Expenses
4. Commission from reinsurer
5. Total

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STATEMENT OF EXPENSES
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STATEMENT OF EXPENSES

• The underwriting expenses include
• business acquisition cost, such as commissions,
• salaries of staff, stationery cost, office space,
  etc.
• The costs that are directly and wholly linked to
  underwriting activities are straightforward and
  do not pose any difficulty. But where relevant
  costs cannot be directly linked, the expenses are
  apportioned on Gross Premium basis or Net Premium
  basis. 
• Only Commission cost should be deferred.
• The costs deferred should be that proportion
  of the total commission costs which the unearned
  premiums provision bears to gross written
  premiums for relevant class of business.
• Deferred Commission costs should be shown in the
  balance sheet under assets.

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STATEMENT OF EXPENSES

• COMMISSION INCOME
• Insurers earn commission on business they pass on
  to reinsurance companies. This should be added
  in determination of the underwriting result for
  the company.
• Just as a portion of the commission cost should
  be deferred as an asset, relevant portion of the
  commission income should be deferred as unearned
  commission income.
• This should appear in the balance sheet as
  liability and the commission income earned should
  be the figure after adjustments for opening and
  closing unearned commission income.

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STATEMENT OF INVESTMENT INCOME
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CASH FLOW STATEMENT

• A cash flow statement is a financial statement
  that shows how changes in balance sheet accounts
  and income affect cash cash equivalents, and
  breaks the analysis down to operating, investing,
  and financing activities.
• Essentially, the cash flow statement is
  concerned with the flow of cash in and cash out
  of the business. The statement captures both the
  current operating results and the accompanying
  changes in the balance sheet.

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CASH FLOW STATEMENT
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CASH FLOW STATEMENT
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NOTES TO FINANCIAL STATEMENTS

• Notes to the Financial Statements are additional
  notes and information added to the end of the
  financial statements to supplement the reader
  with more information. Notes to Financial
  Statements help explain the computation of
  specific items in the financial statements as
  well as provide a more comprehensive assessment
  of a company's financial condition. Notes to
  Financial Statements can include information on
  the method of accounting used to prepare the
  financial statements, debt, going concern,
  accounts, contingent liabilities, or information
  explaining the financial numbers (e.g. to
  indicate a lawsuit). The information contained
  within the notes not only supplement financial
  statement information, but they clarify
  line-items that are part of the financial
  statements.

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FINANCIAL RATIO ANALYSIS
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FINANCIAL RATIO ANALYSIS

• WHAT ARE RATIOS
• Ratios are ways to compare figures
• Ratios help in comparing previous results or
  competitors
• Identify change in performance

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BALANCE SHEET RATIOS

• BREAK UP VALUE OF SHARE
• The difference between the assets and the
  liabilities is known as equity or the net assets
  or the net worth or capital of the company and
  according to the accounting equation, net worth
  must equal assets minus liabilities.
• Break up Value of Share Shares Holders Equity
  
• Number of Shares
• Share Holders Equity Rs. 8,444
• Number of Shares 102
• Break up Value of Share 8,444
• 102
• Rs. 82.78 per Share

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PROFITABILTY RATIOS

• RETURN ON EQUITY (ROE)
• Return on Equity measures the rate of return on
  the shareholders equity. It measures a companys
  efficiency at generating profits from every unit
  of shareholders' equity (also known as net assets
  or assets minus liabilities). ROE shows how well
  a company uses shareholders funds to generate
  earnings growth.
• Return on Equity Ratio (ROE) Net Profit .
  
• Total Equity
• Net Profit
  Rs. 1,099
• Total Equity
  Rs. 8,444
• Return on Equity Ratio (ROE) 1,099 x 100
• 8,444
• 13
  

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PROFITABILTY RATIOS

• EARNING PER SHARE (EPS)
• The portion of a company's profit allocated to
  each outstanding share of common stock. Earnings
  per share serves as an indicator of a company's
  profitability.
• Earning per Share Net Profit
  _____X 100.
• No. of
  Shares
• Net Profit Rs. 1,099
• No. of Shares 102
• Earning per Share 1,099 X 100
• 102
• Rs. 10.77 per share

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PROFITABILTY RATIOS

• PRICE EARNING RATIO
• A valuation ratio of a company's current share
  price compared to its per-share earnings.
• Price Earning Ratio Market
  Value per Share .
• 
  Earning per Share
• Market Value per share Rs. 125
• Earning per Share Rs. 10.77
• Price Earning Ratio 125
• 10.77
• 11.61

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PROFITABILTY RATIOS

• COMBINED RATIO
• A measure of profitability used by an insurance
  company to indicate how well it is performing in
  its daily operations. A ratio below
  100 indicates that the company is making
  underwriting profit while a ratio above 100
  means that it is paying out more money in claims
  than it is receiving from premiums.
• The combined ratio is comprised of the claims
  ratio and the expense ratio. The Claims Ratio is
  net claims as a percentage of net premiums. The
  Expense Ratio is operating costs (underwriting
  expenses and net commission) as a percentage of
  net premiums. The combined ratio is calculated by
  taking the sum of losses and expenses and then
  dividing them by net premium.

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PROFITABILTY RATIOS
COMBINED RATIO (Contd.) Combined Ratio Net
Claims Underwriting Exp. Net Commission X
100 Net
Premium Net Premium Rs. 7,488
Net Claims Rs. 5,173 U/W
Expenses Rs. 1,206 Net Commission Rs.
741 Combined Ratio 5,173 1,206 741
X 100 7,488
95
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PROFITABILTY RATIOS
UNDERWRITING PROFIT RATIO This is reverse of
combined ratio. It can be calculated by either of
the following formulas Underwriting Profit
Ratio 1 Combined Ratio 1-
0.95 .05 or 5 OR
Underwriting Profit Net Premium
367 7,488
5
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PROFITABILTY RATIOS

• OPERATIONAL PROFIT
• Operating Profit
• Underwriting result General Admin Exp
  other income x 100
• Net Premium
• Underwriting result Rs. 367
• General Admin Rs. 512
• Other income Rs 184
• Operating Profit (in ) 362 - 512
  184 X 100
• 7,488
• 0.45

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PROFITABILTY RATIOS

• NET PROFIT
• Net Profit Net Profit after tax x 100
• Net Premium
• Net Profit Rs. 1,099
• Net Premium Rs. 7,488
• Net Profit 1,099
  X 100
• 7,488
• 14.67

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