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

THE APPLICATION OF FUNDAMENTAL VALUATION PRINCIPLES 283timing issue, as the total amount of taxes that will be paid forprofits associated with a block of business or block of assetsdoes not change. The prepayment of taxes (or tax credit forunrealized losses) is corrected as the business runs off or theassets are sold.With the introduction of DTA and DTL for statutory accounting,these assets and liabilities are now recognized on the balancesheet before the business runs off or the assets are sold.For many companies, this change increases their statutory capital.3. Premium deficiency reservesThe PDR is required when the unearned premium reserve isexpected to be insufficient to fund the future loss and expensepayments originating from those policies. This reserve willreduce statutory capital.4. Valuation of bondsIn general, SAP requires bonds to be held at amortized cost(although bonds that are not “in good standing” are carriedat market value). GAAP, on the other hand, uses amortizedcost for only “held-to-maturity” bonds, which the companyhas both the intent and ability to hold to maturity. For thosebonds in the company’s active trading portfolio, GAAP requiresmarket value treatment on the balance sheet.With the codification of statutory accounting principles, whichbecame effective January 1, 2001, deferred tax assets, deferredtax liabilities, and premium deficiency reserves were recognizedon the statutory balance sheet. The most significant differencethat remains relates to deferred acquisition costs.As stated in Actuarial Standard of Practice (ASOP) No. 19[1], for insurance companies, statutory (or regulatory) earningsform the basis for determining distributable earnings, since theavailability of dividends to equity owners is constrained by the