The Art of Short Selling by Kathryn F. Staley

Author:Kathryn F. Staley [Unknown]
Language: eng
Format: epub, mobi, pdf
Published: 2010-02-04T10:03:00+00:00

As you can see, the insurance commission makes the companies publish everything an analyst needs to know. But it requires patience to read all those tiny numbers and try to track reality.

An analyst wants to know the possibility that problems in the portfolio will eat through surplus (that is like eating through the net worth). Clair and Joseph Galloway, in their blockbuster insurance accounting textbook Handbook of Accounting for Insurance Companies, said that policyholders' surplus is not meant to imply value of the company, but is "intended to measure the strength of the company for regulatory purposes.... Because of conservative statutory accounting practices, including the exclusion of nonadmitted assets, the policyholders' surplus does provide an estimate of minimum financial strength of the company available for policyholders."20

The NAIC suggests that life companies reserve for possible problems in the investment portfolio by establishing a reserve account that reduces surplus, much like banks must have reserves for loan losses. In the early 1990s the NAIC divided the old reserve (the mandatory securities valuation reserve-MSRV) into two pieces: the asset valuation reserve (AVR) and the interest maintenance valuation reserve (IMR). Also like banks, life companies have a direct relationship between problem assets and reserves. The NAIC does this with the AVR, which is a liability of the company-an increase in AVR causes a decrease in surplus. AVR is made up of two components: a default com ponent for credit-related losses on bonds, preferred stocks, and mortgages and an equity component for all types of equity.

The IMR is intended to capture realized gains and losses unrelated to credit quality changes. This reserve amortizes gains or losses into income over the life of the investment and is a policyholder liability, not a valuation reserve. The AVR requirements concerning portfolio reserves follow. Publicly traded stocks are automatic 20-percent reserves times a weighted average portfolio beta factor; preferreds are from 3 to 22 percent.

In 1990, the NAIC instituted new categories for bonds that rely more heavily on rating services than the previous categories did. The categories are:

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