Feldblum.Surplus

This wiki article was substantially modified on March 9, 2025. But note that it is essentially a REVIEW article. There was never any new material in this reading – I just decided to expand it when I made the video so that it now serves as a more comprehensive review of material from the Odomirok's financial reporting text.

Reading: Statutory Surplus: Computation, Pricing and Valuation,” CAS Study Note, June 2003, pp. 1-10, including errata. Candidates are not responsible for the endnotes.

Author: Feldblum, S.

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VIDEO → (7:00) → Statutory Surplus - General Overview    (Click here for all currently available videos.)

BA Quick-Summary: Feldblum - Surplus It explains how different accounting methods can change the reported financial health of a company. Through examples, it shows how premiums, expenses, and investments are recorded and how these affect the company’s financial statements.

Pop Quiz

Multiple Choice (mini BattleQuiz 1) ← for general review of topic

Study Tips

This reading is a good review of concepts already covered in Odomirok.6-7-BS and Odomirok.8-9-IS. Given the removal of material on pages 11-16 as described below, there isn't anything here that isn't already covered in the Odomirok text on Financial Reporting.

Updates in Fall 2023 The only syllabus change for 2023-Fall is the pages you're responsible for: → Previously you had to study the entire reading, pp. 1-16 → Currently you only have to study pp. 1-10 The material on double-taxation on pp. 11-16 has been removed and this was a a substantial portion of the testable material so this is now a much easier reading to study. The material from pp. 1-10 is covered in Odomirok.6-7-BS and Odomirok.8-9-IS so this Feldblum reading provides a good review.

Estimated study time: 2 hours (not including subsequent review time)

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• miscellaneous items from related chapters (see footnotes to BattleTable)

reference	part (a)	part (b)	part (c)	part (d)
E (2018.Spring #12)	invested capital: - calculate x	PV(future income): - calculate x	shareholder preference: - liquidation/continuance x
E (2017.Spring #15)	surplus: - calculate 3	impact on surplus/income: - ABs 2 → 90 days past due
E (2015.Spring #12)	statutory income: - calculate 1	reserve adequacy: - supporting exhibits

^x This type of calculation problem is no longer on the syllabus.

¹ This is a good review of the statutory net income material from chapters 8 & 9 of Odomirok.

² AB's refers to: uncollected premiums and Agents’ Balances in the course of collection

³ Recall from chapter 6 of Odomirok that another way to calculate surplus is to calculate assets MINUS liabilities. But this means you have to be good at recognizing which line items are assets MINUS liabilities and which are neither. (You can learn this by practicing the location quiz from quiz #2 available here).

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In Plain English!

Review: Balance Sheet and Income Statement

Recall from chapter 6 of Odomirok that the balance sheet approach to calculating statutory surplus is based on this formula:

Surplus  =  Assets  –  Liabilities

And according to Fledblum, the income statement approach is based on this:

Surplust  =  Surplust-1  +  (Net Income)

Now, if you learn just one thing from this reading, it is this:

They’ll match up if all changes in surplus flow through the income statement — meaning there are no direct adjustments to surplus (like capital contributions, surplus notes, or certain valuation changes) that bypass the income statement. In other words, if every shift in assets or liabilities shows up in net income, the balance‐sheet “assets minus liabilities” approach and the income‐statement “rollforward” approach arrive at the same result.

Note 1: The version of the income statement formula from chapter 8-9 of Odomirok has an extra term:

• Direct Charges to Surplus

(This extra term is to force the income statement calculation to match the balance sheet calculation. The Feldblum version of the income statement calculation does not have this term.)

Note 2: To use the balance sheet approach you have to be good at recognizing which line items are assets, which are liabilities and which are neither. (You can learn this by practicing the location quiz from quiz #2 available here).

Overview of Source Text

This reading contains 14 subsections as indicated in the table below, many of which have a numerical example to illustrate a particular point. The table provides the main concept under each subheading and indicates whether a numerical example is included.

Suggested Review Exercise: Read through the examples in the source text. They are easy to follow and each one should only take a few minutes. This is a good review of concepts discussed more fully in Odomirok's Financial Reporting Text.

Subheading	Main Point	Numerical Example
Balance Sheets and Income Statements	Surplus can be derived from the balance sheet or prior surplus plus current-year income, aligning only when all transactions appear in both statements.	Basic Surplus Reconciliation
Non-Admitted Assets	Overdue or intangible assets are excluded from admitted assets, directly reducing surplus without affecting income.	Non-Admitted Assets
The Asset Exhibit	Shows year-to-year changes in non-admitted assets, which directly affect surplus.	None
The Statutory Balance Sheet	Splits assets into total vs. non-admitted to find net admitted assets, reconciling them with surplus changes.	None
Surplus Adjustments	Certain items (e.g., reinsurance provisions) bypass the income statement and go directly to surplus.	None
Office Furniture	Statutory accounting can require immediate expensing or non-admission of such assets, both reducing surplus.	Office Furniture
Accrued Retrospective Premiums	Typically, a portion (e.g., 10%) is non-admitted, directly reducing surplus.	None
Statutory Liabilities: Provision for Reinsurance	Changes in the Schedule F provision go straight to surplus, not through net income.	Provision for Reinsurance
Unrealized Capital Gains	Market value increases (net of tax) credit surplus directly, rather than flowing through operating income.	Unrealized Capital Gains
Audit Premiums	Estimated vs. actual premiums affect written and earned premium calculations.	Audit Premiums
Deferred Policy Acquisition Costs and Premium Deficiency Reserve	GAAP defers acquisition costs, while statutory expenses them unless a deficiency reserve is needed.	DPAC & Premium Deficiency
Interest Due and Accrued	Interest overdue beyond 90 days is non-admitted, reducing admitted assets and surplus.	Interest Due & Accrued
Real Estate	Any amount by which book value exceeds market value is non-admitted, reducing surplus.	Real Estate
Stockholder Dividends and Capital Contributions	Dividends reduce surplus directly; new share issuance raises surplus via paid-in capital.	Stockholder Dividends & Capital Contributions

Speed Round 1

Here is a quick quiz that covers each subsection in pages 1-10, which is all that you're responsible for.

#	Question	Answer
1	What is the balance sheet definition of surplus?	• Assets minus liabilities.
2	Is premium uncollected past 75 days necessarily considered a non-admitted asset.	• No, it must be 90 days due.
3	How can you reconcile the income statement surplus with balance sheet surplus?	• Adjust income statement surplus for transactions and statutory accounts that do not flow through the income statement.
4	How does the statutory balance sheet expand on a normal balance sheet?	• It includes columns for total assets, non-admitted assets, and prior-year figures.
5	Why are some surplus adjustments not shown on the income statement?	• They bypass net income and directly affect surplus based on statutory rules.
6	Under statutory accounting, how can office furniture purchases impact surplus?	• They can be expensed immediately or treated as a non-admitted asset, both lowering surplus.
7	What portion of accrued retrospective premiums is often non-admitted?	• Typically 10% of the unsecured portion.
8	How does an increase in the provision for reinsurance affect surplus?	• It reduces surplus directly, without appearing in the income statement.
9	How are unrealized capital gains handled under statutory accounting?	• They are credited directly to surplus (net of tax).
10	Why are audit premiums important to final premiums?	• They reconcile estimated premiums with the actual premium owed.
11	Does statutory accounting defer acquisition costs like GAAP does?	• Generally no, unless there’s a premium deficiency reserve.
12	What happens to overdue bond interest in statutory accounting?	• It’s non-admitted, reducing admitted assets and thus surplus.
13	How is real estate valued if its market price falls below its book value?	• The excess book value is non-admitted, lowering surplus.
14	How do dividends and capital contributions change surplus?	• Dividends reduce surplus; new equity investments increase it.

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Speed Round 2

#	Questions on GAAP vs SAP	GAAP	Statutory Accounting
1	How is office furniture handled?	Capitalized and depreciated over time.	Typically expensed immediately or treated as non-admitted, reducing surplus.
2	How are deferred policy acquisition costs handled?	Deferred and amortized to match revenues.	Generally expensed upfront unless a premium deficiency reserve is needed.
3	How is real estate handled?	Carried at cost (minus depreciation) or fair value.	Non-admits any amount above conservative book or market value.
4	How are unrealized capital gains handled?	Reflected in comprehensive income, affecting equity.	Recognized as direct credits or charges to surplus (net of tax).
5	How are non-admitted assets handled?	They remain on the books if they meet recognition criteria.	Excluded from admitted assets, reducing surplus directly.

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Old Exam Questions

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