INSURANCE companies are prominent institutional investors. As mobilizers of savings, insurance companies aim to invest in a broad range of asset classes that will maximize rates of return, both for their policyholders and their shareholders. They also aim to achieve the proper matching of their assets and their liabilities.
The nature of insurance is quite peculiar, in that special accounting standards, better known as regulatory accounting procedures, have been developed. This explains why there are two sets of financial statements—the annual statement and the audited financial statements—that are required to be submitted by insurance companies to the Insurance Commission (IC) on or before April 30 of each year. With these two sets of financial statements are two sets of presentations, according to the types of assets and the applicable valuation methodology.
Although the IC has been open to the adoption of the new Philippine Accounting Standards governing the accounting treatment of invested assets, the New Insurance Code contains provisions on how the investments of insurance companies shall be valued. It may be noted that valuation rules, in general, are anchored on the principle of conservatism, which, to a certain extent, is considered to provide some allowance for safety.
Under Section 214 (c) of the code, the equity investments of an insurance company, if listed, shall be valued at market value and periodically adjusted to reflect market changes through a special valuation account to reflect their realizable value when sold, while unlisted stocks shall be valued at adjusted book value, based on the latest unqualified audited financial statements of the company that issued those stocks. On the other hand, the stocks of a corporation under the control of an insurer shall be valued using the equity method, which is equivalent to the acquisition cost, plus or minus the share of the controlling company in the earnings or losses of that firm after the acquisition of such stocks.
As to the stocks of an insurance company, the same shall be valued at the lesser of its market or book value, as shown by its latest audited financial statements or approved synopsis, whichever is more recent. The book value per share of a common stock of an insurance company shall be obtained by dividing the amount of its paid-up capital and surplus, less the value of all its preferred stocks, if any, by the number of common shares of stocks issued and outstanding.
Notwithstanding the foregoing provisions, an insurer may choose to value its holdings of stocks in a subsidiary insurance company in an amount not less than the acquisition cost.
For the subsidiary of an insurer, the stock is valued on the basis of the greater of the value of the assets of that subsidiary as would constitute lawful investments of an insurer, if acquired or held directly by it; or such other value, as may be determined, pursuant to standards and cumulative limitations promulgated by the insurance commissioner.
The code further states that real estate acquired by foreclosure or by deed shall not be valued at an amount greater than the unpaid principal of the defaulted loan at the date of the said foreclosure or deed, together with any tax and expense paid or incurred by the insurer at such time in connection with such an acquisition, and the cost of additions, improvements or assessments paid thereafter. Once the title of the real-estate property has been already transferred in the name of the insurance company, an adjustment in the valuation may be requested from the insurance commissioner, based on the appraisal of a duly accredited appraiser.
For purchase-money mortgages received on the disposition of real property, the valuation is equivalent to 90 percent of that property’s value that is determined by an appraisal at or about the time of its disposition. A purchase-money mortgage represents the uncollected portion of the consideration of the sale of real estate owned by the insurance company, whereby the title to the property is still in the name of the seller and is the subject of the deed of sale or mortgage.
Valuation based on amortized cost using an effective interest method, less impairment and unreasonable amount, is applied to bonds that are amply secured or other instruments of indebtedness that have a fixed term and rate of interest.
In all cases, if the insurance commissioner finds that the interests of policyholders require it, he may permit or require any class or classes of insurers authorized to do business in this country to value their investments of any class or classes as of any date in accordance with the applicable valuation method that he so chooses.
For insurance companies, the forgoing asset or investment-valuation methods can impact the proper matching of assets with the company’s liabilities. Currently, however, this is being looked into for statutory accounting to be aligned with that of the prevailing new accounting standards.
The Technical Services Group of the Insurance Commission