Financial statements of Life Insurance Companies (A Conceptual Overview)

Life insurance companies offer products that allow people:
(1) to protect themselves or their loved ones from catastrophic events such as death or disability or
(2) to provide greater financial protection and flexibility for situations such as retirement.

A life insurer pools the individual risks of many policy holders.

The life insurers then strives to earn a profit by taking in and/or earning more money than it is required to eventually pay out to its policyholders.

A bizarre fact of the industry is that when an insurer sells a policy, it doesn't really know how to effectively price that policy because it doesn't really know how much it will eventually cost.

Despite the best efforts of a life insurer's actuaries to estimate variables such as future investment returns, policy persistency rates (the length of time that customers keep their policies), and life expectancy, it can take years before the insurance company knows whether it made money on the policy.



Financial statements for life insurers (A conceptual overview).

BALANCE SHEET

ASSETS
On the asset side of the balance sheet are two major items:
(1) investments (the accumulated premiums and fees that an insurer builds up before having to pay out benefits to its policyholders) and
(2) deferred acquisition costs, which is the capitalized value of selling insurance or annuities policies.

For firms that sell variable annuities, separate account assets, which represent the funds that variable annuity owners have invested, constitute a third important asset type.

LIABILITIES
Because variable annuity owners manage their own investments, these assets are segregated and the separate account assets are offset by an equivalent amount of separate account liabilities on the opposite side of the balance sheet.

A life insurer's other liabilities basically consist of the actuarially estimated future benefits that need to be paid to the insurer[s policyholders.


INCOME STATEMENT

REVENUE
The two main sources of revenue are:
(1)  recurring premiums and fees and
(2) any earned investment income.

EXPENSE
The two main expenses are:
(1)  benefits and dividends paid to policyholders and
(2) amortization of the deferred acquisition costs.

Given how few revenue and expense lines there are, it is vital to keep track of their growth trends.