ASO - Administrative Services Only. A service offering by companies where only services are provided for a customer that chooses to self-insure. With an ASO arrangement, the insured maintains sole responsibility for funding claims payments.
ATOE - After-tax Operating Earnings. Premium income, net investment income, and other income less benefits and change in reserves for future benefits, interest and debt expense, net deferred acquisition costs, commissions, administration and general operating costs, and income taxes. The value excludes net realized investment gains and losses.
AVR - Asset Valuation Reserve. An explicit liability reserve required by statutory accounting principles. The AVR is intended to provide an invested asset reserve for potential equity and credit losses. To accomplish this, reserves are maintained for stocks, bonds, real estate, mortgages, and similar types of invested assets. Realized and unrealized equity and credit capital gains and losses are credited to or debited against this reserve. Amount of reserves required to be maintained for each invested asset is determined by actuarial formula.
Benefit Ratio. A ratio comprised of a product line’s total value of benefits or claim payments and changes in reserves within a given period (numerator) as a proportion of premium earned for the same product line within the given period (denominator).
BTOE - Before-tax Operating Earnings. Premium income, net investment income, and other income less benefits and change in reserves for future benefits, interest and debt expense, net deferred acquisition costs, commissions, and administration and general operating costs. The value excludes income taxes and net realized investment gains and losses.
DAC - Deferred Acquisition Costs. DAC can be thought of as simply the capitalized costs of acquiring new business. It principally represents agents’ commissions, marketing costs, and underwriting costs related to new sales. Under Generally Accepted Accounting Principles (GAAP) in the United States, DAC is designed to achieve matching between premium revenue on the one hand and the recognition of expenses on the other.
Disintermediation. The withdrawal of funds from financial intermediaries such as banks, thrifts, and life insurance companies by depositors or policyholders so that they can directly invest in the markets.
Dividends (Insurance Company). Dividends paid by an insurance company to its owner(s), often a holding company. Ordinary dividends are generally restricted by state regulation to either 10% of insurance company surplus, or 100% of prior year’s statutory net gain from operations (though these regulations vary by state). Amounts greater than this are considered extraordinary and require state regulatory approval.
Economic Capital. The amount of risk capital, assessed on a “best estimate” basis, which a firm requires to cover the risks that it faces as a going concern, such as market risk, credit risk, and operational risk.
EPS - Earnings per Share. Basic earnings per share represent net income during a given period divided by the average number of shares of common stock outstanding during that period. Diluted earnings per share is calculated similar to basic earnings per share but adjusting the number of shares for the effects of dilutive options and other dilutive potential common stock.
ERISA - Employee Retirement Income Savings Act. A law passed by Congress
in 1974 which serves to regulate and protect the standards protecting the employees that participate in private pension and welfare plans.
ERM - Enterprise Risk Management. ERM provides an organizational framework for risk management, which typically involves identifying particular events or circumstances relevant to the organization's objectives (risks and opportunities), assessing them in terms of likelihood and magnitude of impact, determining a response strategy, and monitoring progress.
Financial Flexibility. Financial flexibility refers to a company’s ability to take advantage of unforeseen opportunities or their ability to deal with unexpected events. A company’s financial flexibility depends on its financial policies and financial structure.
FSA – Financial Services Authority. FSA is an independent non-governmental organization responsible for regulating financial service companies in the United Kingdom.Financial Strength Rating. Financial strength ratings are specific to each individual insurance subsidiary and reflect each rating agency’s view of the overall financial strength (including capital levels, earnings, growth, investments, business mix, operating performance, and market position) of that insuring entity and its ability to meet its obligations to policyholders.
GAAP - Generally Accepted Accounting Principles. The common set of accounting principles, standards and procedures that companies use to compile their financial statements in the United States. GAAP is a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information.
Holding Company. A holding company is a company that owns other companies' outstanding stock. It usually refers to a company which does not produce goods or services itself; rather its only purpose is owning shares of other companies.
Holding Company Liquidity. Cash and short term investments held at the holding company and any intermediate holding company subsidiaries. Does not include cash held at operating company subsidiaries.
IBNR - Incurred But Not Reported. Claims relating to insured events that have occurred, but have not yet been reported to the company as of the financial statement date.
IFRS - International Financial Reporting Standards. Accounting and reporting standards and interpretations adopted by the International Accounting Standards Board (IASB).
Incidence. A measure of new claim incurral activity usually tracked as a percentage of new claims submitted and payable within a specific reference period.
Investment Grade. Investment grade refers to the quality of an investment security’s credit. In order to be considered an investment grade security, the company must be rated at 'BBB-' or higher by Standard & Poor's or ‘Baa3’ or higher by Moody's or equivalent rating by another major rating agency. Anything below these ratings are considered non-investment grade.
Issuer Credit Rating. Issuer credit ratings reflect a rating agency’s opinion of the overall financial capacity of an issuing company to meet its senior debt obligations.
Leverage. Leverage references debt and is usually discussed as a percentage of the amount of debt held as a percentage of equity.
ModCo – Modified Coinsurance. A form of reinsurance in which part or all of the
policy risks—mortality risk, persistency risk, investment risk—are transferred to the company providing the reinsurance, the reinsurer. The term “modified” relates to the fact that the assets that support the reinsurance liabilities as well as the reinsurance liabilities, which would normally be transferred to the reinsurer, stay on the books of the primary insurance company.
NAIC - National Association of Insurance Commissioners. The NAIC is the organization of state insurance regulators for all 50 of the United States, Washington DC, and five US territories. The NAIC aims to promote uniformity and consistency in US insurance regulations and statutory accounting.
Net Income. Net income is equal to the income that a firm has after subtracting costs and expenses from the total revenue. It differs from ATOE in that it includes net realized investment gains and losses.
Non-GAAP Reconciliation. Reconciliation of non-GAAP financial measures which exclude certain items and the related tax thereon from net income with financial information as provided in a company’s financial statements prepared in accordance with GAAP.
Operating Income. Same as BTOE defined above.
Persistency. A term which references the continuation of a customer relationship with a company. Higher persistency rates are indicative of lower customer turn-over and therefore, higher customer retention.
Price-to-Book (P/B) Ratio. The P/B ratio compares the market's valuation of a company expressed as price per share of common stock to the value of that company as indicated on its financial statements expressed as its book value per share.
Price-to-Earnings (P/E) Ratio. The P/E ratio is equal to a stock's market capitalization divided by its after-tax earnings over a 12-month period (earnings can either be in the form of estimated earnings or can be actual earnings).
Rating Agency. Agencies that provide a “rating” on debt or securities issued by a company and in the case of an insurance company ratings related to the financial strength of an insuring company. There are four major rating agencies: A.M. Best, Fitch, Moody’s, and Standard & Poor’s.
Reinsurance. Reinsurance is best thought of as "insurance for insurance companies." It is a way for a primary insurer to share risk or protect against unforeseen or extraordinary losses. Reinsurance can be used to limit liability on specific risks, to increase individual insurers' capacity, to share liability for losses that might otherwise overwhelm the primary insurer's resources, and to help insurers stabilize their business in the face of the wide swings in profit and loss margins inherent in the insurance business.
RBC - Risk-based Capital. An approach developed by the NAIC to measure the minimum amount of capital that an insurance company needs to support its overall business operations. The risk-based capital formula is used to set capital requirements considering the level and degree of risk assumed by an insurer. As the current formula stands, there are four major categories of risk that must be measured to arrive at an overall risk-based capital amount—Asset Risk, Credit Risk, Underwriting Risk, and Off-Balance Sheet Risk.
SAP - Statutory Accounting Principles. Accounting standards, separate from GAAP, established by the NAIC and used for regulatory purposes. The NAIC requires insurers to use these standards in the insurers’ preparation of financial statements filed with state insurance departments. Statutory accounting principles tend to be more conservative in nature and more prescribed than GAAP. For example, policy acquisition costs are immediately expensed under statutory accounting; under GAAP, such costs are capitalized as deferred acquisition costs, or DAC.
Statutory financial statements are uniform, i.e., they follow the same format from company to company. Minor pagination differences may exist, but for the most part, large and small insurers alike report their statutory statements identically.
XBRL - eXtensible Business Reporting Language. A standards-based way to communicate business and financial information. XBRL provides a method for standardizing financial reporting, thereby increasing the transparency of financial analysis.
