PROCEEDINGS May 15, 16, 17, 18, 2005 - Casualty Actuarial Society

282 THE APPLICATION OF FUNDAMENTAL VALUATION PRINCIPLESof policyholders, assets and liabilities are generally valued conservativelyon the statutory balance sheet, although the result isdependent on specific company or financial conditions.Historically, noteworthy differences between GAAP and SAPfor property/casualty insurance companies are related to1. Deferred acquisition costs (DAC),2. Deferred tax assets (DTA) and liabilities (DTL),3. Premium deficiency reserve (PDR), and4. Valuation of bonds.1. Deferred acquisition costsThe asset associated with DAC recognizes that the unearnedpremium reserve (UEPR) may be overstated because it fundsexpenses (e.g., agents’ commissions) that are typically paidat the beginning of the policy period and have already beenincurred on the income statement. As the unearned premiumreserve is earned, this overstatement disappears. 19 Statutoryaccounting does not permit recognition of the value of thisasset until it materializes in future statutory earnings. In isolation,this difference in the treatment of the DAC asset wouldcause GAAP equity always to be greater than or equal to SAPequity.2. Deferred tax assets and liabilitiesDeferred tax assets and liabilities are created primarily fromtaxes resulting from discounted loss reserves and unrealizedgains and losses. For a growing company, the tax calculationresults in an “overpayment” of taxes initially related todiscounted incurred losses, offset by a lower payment in subsequentyears when claims are paid. This difference is solely a19 For a going concern, we acknowledge that it is replaced by equity in the unearnedpremium reserves for the following year’s business.