Study Notes and Published Refences - Note SN 8I-309-01 - MANAGEMENT REPORTS AND REPORTS TO REGULATORY BODIES

Intro

mgmt reporting systems designed to satisfy 3 basic purposes
- external reporting to shareholders/policyholders/regulators
- internal reporting to mgmt for control and planning
- internal reporting to mgmt for non-routine decision making

Management Reporting

comprises teh published reports of financial results for shareholders, PO, or other users of fin reports
- along with those used internally by mgmt for control and decision making
Reports for External Readers
- frequency and form dependent on # factors
  - stock vs mutual
  - needs of co mgmt
  - subject to SEC
  - demands of others (credit rating agencies)
- Annual/Qtrly usually consist of
  - balance sheet as of reporting date - usually w/ comparison to prev periods
  - income statement since last report - usually w/ comparison to prev periods
  - cash flow statement
  - statement of changes in shareholder equity (or PO surplus)
  - explanatory notes to fin statements (lots of disclosures)
  - common to provide a narrative (MDA)
Reporting for Mgmt Control
- provides mgmt w/ info necessary for planning and controlling current operations, making special decisions and formulating long-range plans
- Basic Objectives of Mgmt Reporting
  - must be at a level of detail & freq to enable the user manager to accomplish the control or planning function
  - shoudl focus on key controllale tiems on which a manager cna act
  - distribution of reports s/b limited to those who can act on the info
  - one mgmt reportng linnked to strategic objectives, mgmt comp can be lined (in part) to measurment of these metrics
  - Economic Value Analysis - analyze economic value of various untis of co to determine capital allocation strategies & req'd rates of return
- Structure of Report
  - system s/b single integrated multi-purpose reporting package taht provides all relevant data via fewest pages of reports
  - all report elements s/b generated as a routine by-product of the acctg and info gathering process (ideally)
  - data warehouse - allows mining
  - top mgmt need less detail fo results of operations and more analysis from lower mgmt
  - exception reporting - reports only detail matters that have varied from the plan
  - reports sould include explanations for any deviations and propose corrective action (if needed)
- Reporting for Cost Control
  - needs good historical data
  - best accomplished through techniquies of responsiblity level reporting
- Elements of Responsibility Reporting
  - forms basic design of complet mgmt control system
    - focuses on individual manger who has primary responsibility for revenues/cost
  - recognized cause and effect relationship between decisions made an dactions takes and economic results of such decisions and actions
  - procedures shoudl provide for direct and indirect cost indentification and techniques for their allocation to benefiting functinos
  - levels of cost containment shoudl take into account
    - operational responsibilities of dept fro whom cost accumulated
    - other cost centers from which work rec'd
    - otehr cost centers benefiting from work performed
    - plans of ins or major types of ins served by function
- Report Design for Responsibility Control
  - only report results that can be directly controlled
  - objective negated if info reported is outside their authority
  - managers can only utilize a level of report detail commesurate w/ style of mgmt, authority and info needs
  - many orgs re-designing chart of accts & cost centers so they "roll-up" better
  - reports generally provide net operating results on
    - contribution to income by LOB function or
    - contribution to overhead
  - reports show results for period, comparison w/ budget and forcasts and variances
- Analytical Reporting
  - great deal of add'l info that is financial or statistical in nature
  - add'l elements - control of performance
    - policy counts and avg volumes
      - w/ explanations for deviations (both fair and unfair)
    - changes in acq costs - all deviations s/b explained
    - trend analysis of Stat and GAAP reserve/$1m
    - clerical cost control reports
      - % of perforance std achieved for each work element, volume of processing, volume of backlog
    - mgmt info systems control
      - expansoin or decline of units of work completed for users, improvement or degradation of user value rec'd
  - add'l elements - Planning
    - historical trend analysis
    - persistency
    - comparison of ins inforce
    - A/E mort and morb analysis
    - model of sample block of business
    - stratified A&H claims
    - recoverability analysis of DAC
    - investment yield analysis
    - inv yield on new funds
    - repayments and maturities of investments
    - cash flow projections

Reporting to the SEC

SEC
- one of their primary functions - examine registration statements and annual and periodic reports filed by publicly held co's to determine if appropriate disclosures made
Reporting under Securities Act of 1933
- disclosure statute concerned primarily w/ registration and disclosure before public selling
- Securities Registration Statements
  - approval of registration statement and prospectus prior to sale of securities
  - public document (except for a few confidential sections)
- Form S-1
  - principal registratoin statement
  - Part I - same stuff as prospectus
    - selected fin data - 5 year comparison revenue/income/assets/LT obligations/divs
    - supplemental fin info - quarterly
    - MDA
    - financial statements
  - Part II - stuff we don't care about
- Other Registration Forms
  - S-2 S-3 S-4 S-8
- Shelf Registrations
  - Reg C allows registering early and waiting to sell
- Regulation S-X
  - principle acctg regulation
  - supplemented w/ FRRs (replace ASRs) and SABs
  - same as GAAP w/ additional footnotes
  - Important Parts
    - Article 3 of S-X - fin stmt rules for when and what
    - Article 4 Rule 4-08 - general notes - lists additional disclosures
    - Article 7 - Inc Co Fin Statements - GAAP rules w/ addtional req's
- Application of Regulation S-K
  - objective: standardize disclosure reqs for SEC filings
  - 9 major sections - 8 relate to insurance
    - buisness
    - financial info
    - securities of the registrant
    - mgmt and certain security holdings
    - registrant statemnt and prospectus provisions
    - exhibits
    - misc
    - list of industry guides
Significance of FRRs
- designed to communicate SEC's position on acctg and auditing principles and practices
- SABs - informal rulings and interpretations
Reporting under Securites Exchange Act of 1934
- registration under 1934 act - certain public cos not on an exchange must register w/SEC if they meet size reqs
- Ins Cos exempt from 1934 act b/c under control of state depts/agencies
- annual reporting under 1934 Act - annually 10=K
- other periodic reporting - 10Q, 8K, proxy statement
Regulation S-B
- small business
- forms SB-2 10QSB 10KSB 10-SB
Electronic Filing
- EDGAR
- Reg S-T details reqs and procedures for electronic filing

Reporting to Other Regulatory Agencies

Reporting to Stock Exchanges
- Form 10 to SEC and Applicatoin for original listing w/ exchange
- reqs for original listing
  - varies for each exchange, most stringent for NYSE
- listing application
  - original listing or subsequent issuance of additional securities
- periodic reporting reqs
  - annual audited and quarterly unaudited w/ exchange and 10K to SEC
Periodic Reporting to State Ins Depts
- annual and most states quarterly
- some states have reqs for special reports
Statutory Codificatoin
- report beginning 1/1/2001 in accordance w/ revised NAIC Acctg Practices and Procedures Manual
- designed to provide consistency between cos and states
- 3 objectives: conservatism, consistency, recognition
- provides guidance where Stat had been silent and changes stat in some areas
IRIS
- NAIC database designed to give early warning re: cos w/ fin difficulties
- Financial TEsts
  - Ratio 1 - Net change in cap & surplus - delta cap & surplus / delta cap & surp (-1) >1/2 <-1/10 warning
  - Ratio 1a - gross change in capital and surplus
  - Ratio 2 - Net gain to Total Income - NGO (incl real g/l) / gross income <=0 warning
  - Ratio 3 - Comm adn exp to Prems and Depostis - >60% - supplemental ratio only
  - Ratio 4 - Adequacy of Inv Income - NII / Int Req'd <125% >900%
  - Ratio 5 - Nonadmitted Assets to Admitted Assets - >= 100%
  - Ratio 6 - Real Estate to Cap & Surplus >100% ($5mill or less of cap&surp), >200% rest
  - Ratio 7 - Inv in Affiliates to cap and Surp - >100%
  - Ratio 8 - Surplus Relief - net reins somm & exp allow / cap & surp - >10%<-10% smaller co >30%<-99% rest
- Stability Tests - exceptions require evaluation of mgmt strength to control dramatic change
  - Ratio 9 - chagne in premium - >= 50% < -10%
  - Ratio 10 - Change in product mix - >= 5%
  - Ratio 11 - Change in Asset Mix - >= 5%
  - Ratio 12 - Change in reserving ratio - agg incr indiv life resv / indiv life renewal and single prem - >= +/- 20%
- Co should monitor these ratios since automatically calculated from AS filings
MDA
- include all material and significant changes and events
- specifically must address
  - financial position
  - results of operations - unusual or non-recurring events, favorable or unfavorable trends
  - cash flow and liquidity - include any planned capital expenditures w/ purpose and funding
Special Reporting to the IRS
- 1099 - reports int, divs and certain other payments and taxes withheld
- withholding rules - mandatory in some cases
- special rules

Copyright © 2004 Steve Welander.
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