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Securities Act Industry Guide 6 and Exchange Act Guide 4. DISCLOSURES CONCERNING UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES OF PROPERTY CASUALTY INSURANCE UNDERWRITERS
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Exchange Act Guide 4. DISCLOSURES CONCERNING UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES OF PROPERTY CASUALTY INSURANCE UNDERWRITERS
The Guide applies to the description of business portion of registration statements filed on Form 10 (Item 1), in proxy and information statements relating to mergers, consolidations, acquisitions, and similar matters (Item 14 of Schedule 14a and Item 1 of Schedule 14c), and in reports filed on Form 10-K (Item 1).
[The balance of the Guide is identical to Securities Act Guide 6.]
[Editor's note: See SEC staff guidance reproduced at end of Guide 6.]
Securities Act Guide 6. DISCLOSURES CONCERNING UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES OF PROPERTY CASUALTY INSURANCE UNDERWRITERS
1. General Instructions
The Guide applies to the description of business portions of registration statements of companies with property-casualty ("P/C") insurance reserves for which financial statements are required.
The information should be furnished if reserves for unpaid P/C claims and claim adjustment expenses of the registrant and its consolidated subsidiaries, its unconsolidated subsidiaries and its 50%-or-less-owned equity basis investees, taken in the aggregate after intercompany eliminations, exceed one-half of the common stockholder's [sic] equity of the registrant and its consolidated subsidiaries as of the beginning of the latest fiscal year. For purposes of this test, only the proportionate share of the registrant and its other subsidiaries in the unpaid claims and claim adjustment expenses of 50%-or-less-owned equity basis investees shall be taken into account.
Information should be presented separately for (a) the registrant and its consolidated subsidiaries, (b) unconsolidated subsidiaries and (c) 50%-or-less-owned equity investees. If ending reserves in category (a), (b), or the proportionate share of the registrant and its other subsidiaries in (c) above are less than 5% of the total ending reserves in (a), (b), and the proportionate share in (c), the information called for by Instruction 2B with respect to that category may be omitted.
Information furnished in accordance with this Guide should generally be presented in the form appearing below. However, an alternative presentation, such as inclusion of the information in Management's Discussion and Analysis, may be used if in management's opinion such presentation would be more meaningful to investors.
Except where noted, the information furnished pursuant to this Guide shall be for the latest annual period for which financial statements are required. However, information for any additional interim periods should be provided to the extent necessary to keep the annual information from being misleading, such as where a material change in the information presented or the trend evidenced thereby has occurred.
2. Description of the Business
A. Discussion Topics
The following should be among the matters discussed in the description of business.
(1) The nature of current year adjustments to loss reserves recorded in prior years.
(2) Reinsurance transactions (including "swaps" of reserves, portfolio loss transfers, etc.) which have a material effect on earnings or reserves.
(3) Significant reserving assumptions and recent changes therein.
(4) The nature of recent changes in the terms under which reinsurance is ceded to other insurers.
(5) Changes in the mix of business, including but not limited to changes in the location of business, geographic mix, and types of risks assumed.
(6) Changes in payment patterns due to portfolio loss transfers, structured settlements and other transactions and circumstances.
(7) Unusually large losses or gains.
(8) The effect of currency fluctuations.
B. Disclosures
The following (all presented in accordance with generally accepted accounting principles) should be among the items included in the description of business.
(1)Reconciliation of claims reserves
An analysis of changes in aggregate reserves for property casualty insurance claims and claim adjustment expenses for each of the latest three one-year periods in the following tabular format:
(a) Amount of reserves for unpaid claims and claim adjustment expenses at the beginning of each year.
(b) Incurred claims and claim adjustment expenses:
(i) Provision for insured events of the current year
(ii) Increases (decrease) in provision for insured events of prior years Total incurred claims and claim adjustment expenses
(c) Payments
(i) Claims and claim adjustment expenses attributable to insured events of the current year
(ii) Claims and claim adjustment expenses attributable to insured events of prior years
(d) Other (provide an explanation of each material item)
(e) Amount of reserves for unpaid claims and claim adjustment expenses at the end of each year.
(2)Loss reserve development
A table that presents
(a)Amounts of reserves for unpaid claims and claim adjustment expenses as of the end of each of the ten years prior to the latest fiscal year.
(b)The cumulative amount paid as of the end of each succeeding year with respect to each of the reserve amounts presented in response to (a) above.
(c)The retroactively reestimated liability for unpaid claims and claim adjustment expenses as of the end of each succeeding year with respect to each of the reserve amounts presented in response to (a) above.
(d)The difference between the latest reestimated liability presented in response to (c) with respect to each of the year-ends reflected in (a) above and the liabilities set forth in (a).
The amounts presented in (b), (c), and (d) above may be in dollars or expressed as a percentage of the amounts in (a).
The registrant should include an explanation of the data which will disclose the effects of unusual circumstances, for example changes in reinsurance agreements, which might distort the data.
(3) If the registrant makes explicit provision for the effects of inflation or for the combined effects of a number of factors (including inflation) that are expected to cause future changes in claims severities, describe briefly registrant's method of estimating the amount of that provision. An explicit provision is one in which the reserving system requires the estimation of a separate provision for inflation. The rates may be generated by the system or obtained from other appropriate sources. If the registrant makes implicit provision for the effects of inflation or for the combined effects of a number of factors (including inflation) that are expected to cause future changes in claims severities describe the circumstances on which management relies in concluding that the implicit provision is adequate. Provisions for inflation for this purpose may be taken to mean provision for any change in average claim severities if this permits more meaningful disclosure.
(4) State the amount of the difference, if any, between GAAP basis P/C reserves for claims and claim adjustment expenses for each of the groups mentioned in the next to last paragraph of Item 1 of this Guide and statutory P/C reserves for claims and claim adjustment expenses in total for each of those groups. Explain briefly the nature and amount of principal differences.
(5) State the amount (estimated if necessary) by which GAAP basis claim reserves have been discounted. State also the effect (estimated if necessary) on pre-tax income (loss) of discounts accrued and the effect of discounts amortized. Describe briefly the principal types of business for which reserves are discounted.
[Editor's note: Industry Guide 6 provides disclosure guidance for registrants with material property casualty insurance operations. The Guide calls for tabular information depicting the activity with respect to loss reserve estimates and revisions to those estimates over time. ASC 944 "Financial Services - Insurance" changed the longstanding practice of reporting loss reserves net of related reinsurance benefits, and requires that loss reserves be reported gross in the financial statements with reinsurance recoverables separately reported as an asset. The SEC staff has not objected to the continued presentation of Guide 6 tables on a basis that is net of reinsurance, notwithstanding ASC 944. However, for periods in which the income recognition provisions of ASC 944 have been applied, the SEC staff believes that additional quantitative and narrative disclosure is necessary to fully inform investors regarding the effects of a registrant's reinsurance programs.
At a minimum, the SEC staff believes additional data should be provided that (a) reconciles the net end-of-period liability (the original reserve estimate in the 10 year loss development table) with the related gross liability on the balance sheet, and (b) presents the gross re-estimated liability as of the end of the latest reestimation period, with separate disclosure of the related re-estimated reinsurance recoverable.
Guide 6 calls for a discussion of reinsurance transactions that have a material effect on earnings or reserves. The SEC staff would expect that the additional data outlined above, and the disclosures of ceded losses specified by ASC 944-605-50-1, will be used as a basis for discussion of the effects of a registrant's reinsurance programs. The SEC staff also would expect a registrant to explain changes in patterns of net loss recognition resulting from the application of ASC 944. Material historical and expected effects of trends and uncertainties in loss reserves and reinsurance recoverables on registrants' results of operations, liquidity and capital resources also should be disclosed in MD&A.]
[Editor’s note: A registrant that provides the claims development tables required by ASU 2015-09, Disclosures about short-duration contracts, does not have to separately provide the ten-year loss reserve development table identified in Securities Act Industry Guide 6 and Exchange Act Industry Guide 4, but may opt to do so. See SEC FRM 11310.1.]
This is a work of the U.S. Government
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