Annual report 2006 - Dexia.com

Regarding reserves for the files already opened Dexia performs
runoff calculations, using estimates for the claims handling
expenses.
For the assessment of loss burden for the insurance portfolio,
Dexia conducts a reasoning that is based on percentages
(average loss burden of the last 5 years and administrative
expenses of the last year).
FSA activities
Financial guaranty insurance generally provides an unconditional
and irrevocable guaranty that protects the holder of
a financial obligation against non-payment of principal and
interest when due. Upon a payment default on an insured
obligation, Dexia is generally required to pay the principal,
interest or other amounts due in accordance with the obligation’s
original payment schedule or, at its option, to pay
such amounts on an accelerated basis. The contract may be
considered a derivative or an insurance contract depending
on certain legal characteristics.
Gross and ceded premiums received in upfront payouts are
earned in proportion to the amount of risk outstanding over
the expected period of coverage. Deferred premium revenue
and prepaid reinsurance premiums represent the portion of
premium that is applicable to coverage of risk to be provided
in the future on policies in force.
Dexia establishes provisions for losses liabilities based on its
estimate of specific and non-specific losses. Dexia also establishes
provisions for loss adjustment expenses (LAE), consisting
of the estimated cost of settling claims, including legal
and other fees and expenses associated with administering
the claims process. Dexia calculates a loss and loss adjustment
expenses liability based upon identified risks inherent
in its entire insured portfolio. If an individual policy risk has a
probable loss as of the balance sheet date, a specific reserve
is established. For the remaining policy risks in the portfolio, a
non-specific reserve is established to account for the inherent
credit losses that can be statistically estimated.
Dexia establishes a specific reserve for the present value of
the estimated loss, net of subrogation recoveries, when, in
management’s opinion, likelihood of a future loss on a particular
insured obligation is probable and reasonably estimable
at the balance sheet date. When an insured obligation has
met the criteria for establishing a specific reserve and that the
transaction pays a premium in installments, those premiums,
if expected to be received prospectively, are considered a form
of recovery and are no longer earned as premium revenue.
A specific reserve is determined using cash flow or similar
models that represent Dexia’s estimate of the net present
value of the anticipated shortfall between:
• scheduled payments on the insured obligation plus anticipated
loss adjustment expenses; and
• anticipated cash flow from and proceeds to be received on
sales of any collateral supporting the obligation and other
anticipated recoveries.
The estimated loss, net of recovery, on a transaction is discounted
using the risk-free rate appropriate for the term of
the insured obligation at the time the reserve is established.
Dexia records a non-specific reserve to reflect the credit
risks inherent in its portfolio. Non-specific reserves in addition
to specific reserves represent Dexia’s estimate of the
total reserves. Generally, when an insured credit deteriorates
to a point where claims are expected, a specific reserve is
established.
The non-specific reserve amount established considers all levels
of protection (e.g., reinsurance and over-collateralization).
Net par outstanding for policies originated in the current
period is multiplied by loss frequency and severity factors.
The loss factors used for calculation are the product of default
frequency rates obtained from Moody’s and severity factors
obtained from S&P. Moody’s is chosen due to its credibility,
large population, statistical format and reliability of future
update. Dexia applies an experience factor to the results of
the statistical calculation.
Liability Adequacy Test
An insurer applies a Liability Adequacy Test for its insurance
products, in accordance with IFRS 4. Dexia assesses at each
reporting date whether its recognized insurance liabilities are
adequate, using current estimates of future cash flows under
its insurance contracts. This test is applied to all insurance
contracts.
For nonlife insurance, the Liability Adequacy Test is a sufficiency
test within IFRS 4 that examines if the premium and
provisions are sufficient to cover any open claim files and
claims that are expected to occur within the contractual duration
of the contracts.
1.11.2. Reinsurance
Dexia’s reinsurance contracts with third parties that contain
enough characteristics to be classified as an insurance contract
continue to be accounted for in accordance with local GAAP.
A reinsurance asset is impaired if, and only if:
• there is objective evidence, as a result of an event that
occurred after initial recognition of the reinsurance asset, that
the cedant may not receive all amounts due to it under the
terms of the contract; and
• that event has a reliably measurable impact on the amounts
that the cedant will receive from the reinsurer.
To measure the solvency of a reinsurer, Dexia refers to its
attributed credit rating and the impairment rules.
1.12. NETWORK COSTS
This heading records commission paid to intermediaries associated
by exclusive sales mandate for bringing in transactions
with customers.
RAPPORT DE GESTION
CONSOLIDATED
FINANCIAL STATEMENTS
COMPTES SOCIAUX
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