As the year-end reporting is almost here, we thought it might be useful to share what we see as areas of auditor’s focus when we look at 2022 financial results:
- Unrealized losses – As the market took a deep dive during the year, concerns arising from this area should no longer be a surprise. The first thing to consider would be if there are any impairment issues, and if there are – record the impairment and evaluate its impact on surplus. Secondly, a significant increase in unrealized losses may affect the company’s projections of 3-year unrealized loss recoveries for DTA admissibility, which may further reduce surplus if DTA is determined to be non-admitted.
- Acquisition costs – Specific to Property & Casualty carriers who record ceding commission income under the reinsurance treaties, our recommendation is to refresh what items may be included in the calculation of acquisition costs. ASU 2010-26 and FASB ASC 944-30-55 are good places to start if you are looking for a definition of qualifying acquisition costs. Under SSAP 62R, paragraph 76, commission income in excess of acquisition costs needs to be recorded as a liability and amortized over the effective period of the reinsurance agreement.
- Schedule BA assets – During the last couple of years, we noticed that in search of better yields, the industry began to gravitate towards alternative type investments that end up being reported as other invested assets on Schedule BA of the annual statement. Even though this practice is completely acceptable from a financial reporting standpoint, there are a few items that we commonly see overlooked by the reporting entities. Admissibility should be considered for investments in the scope of SSAP No. 48, which requires obtaining audited financial statements of the investee. SSAP No. 48 further lays out exceptions when audited financial statements are unavailable that need to be considered when reporting investments on Schedule BA. Additionally, consideration should be given to validate conformance with the investment code in the state of domicile. Occasionally we see instances of overreliance by carriers on their investment advisors who do not always ensure regulatory compliance of invested assets.
If you have already considered all of these, we think your auditor won’t have a chance to catch you off guard, especially since any adjustments in these areas may negatively impact a company’s capital and surplus.