Odomirok.12-5yr

Reading: Financial Reporting Through the Lens of a Property/Casualty Actuary - Chapter 12 - Five-Year Historical Data Exhibit

Author: Kathleen C. Odomirok, FCAS, MAAA, Liam M. McFarlane, FCIA, FCAS, Gareth L. Kennedy, ACAS, MAAA, Justin J. Brenden, FCAS, MAAA, EY

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VIDEO → (5:00) → Five-Year Historical Exhibit - General Overview    (Click here for all currently available videos.)

BA Quick-Summary: Five-Year Historical Data Exhibit The Five-Year Historical Data exhibit summarizes 5 years of key financial statistics from past Annual Statements aiding in trend analysis and health evaluation of the company.. (Most other annual statement exhibits show only 1 or 2 years of data.) It includes: → written premiums, income statement information, balance sheet information, RBC data, operating percentages, loss development Example, Fictitious Insurance Company saw a shift from liability to property lines, consistent net income, and favorable reserve developments, although it experienced an underwriting loss in 2018 likely due to catastrophe events.

Study Tips

Study the examiner's report solution to (2018.Spring #13) very carefully. It's a good question. Information from Odomirok.13 may also be useful here. It's valuable to spend up to 2 hours on this chapter. The RBC calculation uses GWP from the Five Year Historical Exhibit in computing the excess growth factor for R₄ and R₅. Click R₅ excess growth factor for an example.

BattleTable

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

• how to use general knowledge to interpret information on the 5-year historical exhibit

reference	part (a)	part (b)	part (c)	part (d)
E (2018.Spring #13)	financial health - area of concern #1	financial health - area of concern #2	financial health - area of concern #3	financial health - area of concern #4

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In Plain English!

General Information

The syllabus provides online examples of annual statements for Travelers and Liberty Mutual, but the Liberty Mutual example didn't include this exhibit. Check the Travelers annual statement for a real-life example of the 5-Year Historical Data Exhibit. The example of Fictitious Insurance Company in the appendices of Odomirok also provides an example.

The way I think of this exhibit is that it pulls together information from many other exhibits and shows it all in 1 place, plus it shows you 5 years. It's a very useful exhibit to get an overview of the company.

Here are some examples of the types of data that are shown:

• premiums - gross & net
• balance sheet information - assets, liabilities...
• income statement information - U/W gain, investment gain,...
• operating ratios
• RBC - total capital & ACL (Authorized Control Level Capital)

Something Interesting: The 5-year historical exhibit shows a line-of-business breakout by liability (long-tail) versus property (short-tail).

Implication: If there has been a mix-shift from long-tail to short-tail or vice-versa, this could have implications for how you interpret reserves. Long-tail lines have higher reserves and settle more slowly. Recall part (b) the following exam problem from Feldblum.Surplus:

E (2015.Spring #12)

You were asked to identify an annual statement exhibit to support the actuary's assertion that the reserve increase was not due to prior inadequacy. One possible answer is a mix-shift from short-tail to long-tail lines. This would cause the reserves to increase because long-tail lines have higher reserves (not necessarily because of prior AY inadequacy.)

Spring 2018 #13 – Financial Health Assessment

The E (2018.Spring #13) exam question doesn't require you to have any special knowledge concerning the 5-Year Historical Data Exhibit. This question is testing a broader understanding of how to use financial statement data to understand a company. It was a rare question directly involving the Five-Year Historical Data Exhibit and tested general interpretation skills rather than specific exhibit memorization.

Sample Response Strategy

• You're asked to evaluate the company's financial health. Pick 4 issues and explain why each is a concern.

Possible Areas of Concern

• Negative Net Income:
  • Indicates the company is unprofitable. (Persistent losses erode surplus and threaten solvency.)
• Growing Premium Volume + Negative UW Income:
  • Rapid growth while losing money may suggest underpricing or adverse selection.
• Shift to Property Lines:
  • Increases exposure to catastrophe risk, especially if not well diversified.
• High Liability Exposure:
  • Long-tail lines increase reserve estimation risk and potential for adverse development.

Bonus Ideas

These are additional valid concerns. Any combination is acceptable as long as the reasoning is sound and clearly tied to financial health.

Bonus Idea	What It Suggests	Related Section
High leverage (Premium-to-Surplus ratio ↑)	Overexposed relative to capital; increases financial risk.	Balance Sheet / RBC
Conservative investment return not offsetting UW losses	Low investment income fails to cover underwriting losses.	Statement of Income
Shrinking Net Premiums	May signal reinsurance reliance or competitive weakness.	Written Premiums
Surplus declining over time	Weaker capital cushion to absorb shocks.	Balance Sheet / RBC

Exam Tips

• Link each point to its impact on surplus or solvency.
• Use plain but precise language—clarity matters more than buzzwords.
• Mention if a trend (e.g., declining net income or growing liabilities) could worsen over time.

This question rewards practical interpretation over rote recall. The Five-Year Exhibit gives you a snapshot – your job is to connect the dots.

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