LOMA 307 Chapter 7

Long-term, High-cost Investment Proposal Examples

1. New investments in equipment or real estate. 2. Major repairs to or remodeling of existing investments. 3. Acquisitions of other companies or lines of business. 4. Mandated safety and environmental improvements. 5. Expense reduction projects. 6. Purchases of new computer systems and equipment.

Key Budgets Within the Master Budget (3)

1. Operational budgets. 2. Cash budgets. 3. Capital budgets.

U.S. Insurers Must File an Annual Report with the SEC If:

1. The insurer is a publicly trades stock insurer. Its stock is a security and would be subject to securities regulation. or 2. The insurer offers variable products, such as variable annuities or variable universal life insurance, which are securities subject to securities regulation.

Approaches to Budgeting (3)

1. Top-down budgeting. 2. Bottom-up budgeting. 3. Zero-based budgeting.

operational budget

A budget that include part of all of a company's ore business operations.. Begins with a forecast of sales revenue and investment income. They typically include a revenue and an expense budget.

expense budget

A budget that is a schedule of expenses expected during an accounting period. Useful in controlling expenses, measuring management performance, and assigning responsibility for expenses.

cash budget

A budget that projects a company's beginning cash balance, cash inflows, cash outflows, and ending cash balance for a specified accounting period, typically by quarter. Contains estimates of future cash activity to help predict timing and amount of cash shortages that will require loans or the amount of excess cash that the insurer can invest.

income statement

A financial document that lists an insurer's revenue and expenses over a specific period and shows whether the insurer experienced a profit or loss during that period. Also called statement of operations or profit and loss statement (P&L). Type of dynamic report, because it presents the movement or flow of a company's financial transaction during a specified accounting period.

cash disbursements budget

A schedule of cash disbursements (outflows) expected during an accounting period.

cash receipts budget

A schedule of cash receipts (inflows) expected during an accounting period.

expenses

Amount a company spends while conduction business.

Top-down budgeting

Budgeting that begins at the top of a company, with the company's senior management, and passed down to lower-level management.

financial plans

Contain estimates of future activities. One example is budgets.

statement of owners' equity (statement of stockholders' equity)

Financial statement that provides information about changes in owners' equity between two sequential balance sheets.

surplus

The cumulative amount of money that remains in the company over time. = Assets - Liabilities - Capital.

revenue

Amount a company earns from its business operations. For insurers, it comes mostly from premium income and annuity considerations.

budgeting

An accounting process that includes creating a financial plan of action designed to help an organization achieve its goals.

National Association of Insurance Commissioners (NAIC)

An association of the state insurance commissioners designed to promote consistent insurance regulation. Annual Statements are filed with this association.

capital budget

Budget that shows a company's plans for the financial management of its long-term, high-cost investment proposals.

Zero-based budgeting

Budgeting that begins each budget at zero. No resources will be allocated until each expense is shown to be in accord with the company's strategic and operational goals. Each activity and function are treated as though it were a new project under consideration. Lower-level employees play a role because they are often called upon to provide details that help a company assess the importance and financial requirements of each activity.

Bottom-up budgeting

Budgeting that starts at the bottom of a company, with lower-level managers generating budgets for their areas, which are then presented in the form of recommendations to senior management. Because it includes a larger number of employees and takes a considerable amount of time, it reflects the input and participation of the employees who will be responsible for achieving the company's operational goals. It is likely to reflect the realitites of the company's core business.

master budget

Combination of individual budgets for each department or area which show the overall operating and financing plans for the company during a specified accounting period.

Annual Report

Document that a company's management sends to interested parties to report on the company's financial performance during the past year. PROFITABILITY Answers the question: If this company remains in business tomorrow, would I want to invest in it or buy insurance from it?

Annual Statement

Document that presents information about an insurer's operations and financial performance, with an emphasis on demonstrating the insurer's SOLVENCY. Answers the question: If this company went out of business tomorrow, would it be able to meet its financial obligations to customers? Must be filed with the NAIC and every state in which the company does business.

Securities and Exchange Commission (SEC)

Federal government agency that regulates the investment industry in the United States.

balance sheet

Financial document that lists the values of a company's assets, liabilities, and capital and surplus of a specific date. Also known as a statement of financial position or statement of financial condition. It is a static report - snapshot of a company's financial condition at a specific moment in time.

cash flow statement

Financial statement that provides information about a company's cash receipts (inflows), cash disbursements (outflows), and net change in cash during a specific accounting period. Its main purpose is to show how a company manages its cash over time.

dynamic reports

Illustrate the movement of flow of a company's financial transactions during a specified accounting period. Examples: income statement, cash flow statement, statement of owners' equity.

financial reporting

Process of presenting past financial data about a company's financial position, operating performance, and flow of funds.

financial statements

Report that summarizes a company's financial situation or major monetary events and transactions. Examples are the income statement and the balance sheet.

capital

The amount of money invested in a company by its owners, usually through the purchase of the company's stock.

capital budgeting

The process companies undertake to analyze decisions about investing in long-term projects or assets.

capital and surplus (owners' equity)

What the company is "worth". Assets minus liabilities.

liabilities

What the company owes. Examples: contractual reserves.

assets

What the company owns. Examples: investments in securities such as stocks and bonds.

Disadvantages of Zero-Based Budgeting (3)

1. Costly and time consuming. 2. May not include sufficient input from upper management. 3. Applies only to expense budgets.

Financial Reports Important to Life Insurance

1. Financial statements. 2. Annual reports. 3. Annual statements.

Benefits of Budgeting (5)

1. Allocate scarce resources effectively. 2. Control and reduce expenses. 3. Evaluate managerial performance. 4. Communicate information throughout the company. 5. Motivate employees.

Benefits of Zero-Based Budgeting (2)

1. Breadth and quality of financial information contained in the budgets. 2. Training and education employees receive as part of their contribution to the budgeting process.

Disadvantages of Budgeting (5)

1. Consumes time that could have been spent on performing primary job duties. 2. Spend the entire budget amount, even when unnecessary. 3. Overestimate costs so that they will not be blamed if they overspend. 4. Become discouraged from experimenting with innovative solutions to changing market conditions. 5. Disregard quality and customer service because of budgetary constraints.

Main Expenses for Insurers (2)

1. Contractual benefit payments to policyholders. 2. Operating expenses - commissions, salaries, development costs, taxes

Main Financial Statements Included in the Annual Report (4)

1. Income statement. 2. Balance sheet. 3. Cash flow statement. 4. Statement of owners' equity.

Additional Content in Annual Report

1. Letter from company president to stockholders/policyowners, describing company performance during the past year. 2. Financial achievements during the previous 5-10 years. 3. List of company officers and directors. 4. Notes to the financial statements. 5. Management's Discussion and Analysis of Financial Condition and Results of Operation (MD&A), which explains the company's financial performance written by the company's management. 6. Independent auditor's report - statement by public accountants who have audited the annual report and attest that the information provided fairly represents the operations of the company.

revenue budget

A budget that indicates the amount of income from operations (policy sales, investments, fees) that the company expects in the coming budget period. It must be prepared before other budgets, because it determines their limits.