Free CAS Exam 6-U.S. (Regulation and Financial Reporting) Primary Statements & Statutory Accounting Practice Questions

E is correct. Under statutory accounting, investment-grade bonds (NAIC designations 1-2) are reported at amortized cost, so interim price changes do not flow through surplus. The same bonds classified as available-for-sale under GAAP are carried at fair value, with unrealized gains and losses recorded in other comprehensive income.

B is correct. Statutory accounting is an entity-level basis: every licensed insurer files its own annual statement, because the regulator's charge is the solvency of the legal entity that owes the policyholders, not the economics of the group. The parent therefore does not roll the subsidiary's premiums, reserves, and invested assets into its own lines; it holds the subsidiary as common stock in its investment schedule, valued on an equity basis from the subsidiary's audited underlying statutory surplus (SSAP No. 97), with any goodwill and admissibility limits applied. GAAP, serving investors assessing the enterprise as a going concern, consolidates the controlled subsidiary line by line and eliminates intercompany balances. The choice describing statutory omission of the holding states a real consequence of failing to obtain the required audited underlying information, applied outside its condition, since an audited subsidiary supports an admitted investment. The choice consolidating on both bases and the choice reversing the two bases mis-scope consolidation, which statutory reporting does not use for the filing entity. The choice putting both on a single-asset basis misstates GAAP, which consolidates a wholly owned subsidiary rather than carrying it as an investment at cost.

B is correct. Statutory premium is earned in proportion to the expired portion of each policy term, and the unearned premium reserve carries the unexpired portion as a liability. Policy A was written in 2024 and had 10 of its 12 months unexpired at December 31, 2024, so $1{,}800 \times 10/12 = 1{,}500$ was carried into 2025 and expired entirely on October 31, 2025, earning $1,500,000 in 2025. Policy B ran 9 of 12 months during 2025: $3{,}600 \times 9/12 = 2{,}700$. Policy C ran 6 of its 24 months: $9{,}600 \times 6/24 = 2{,}400$. Policy D ran 3 of its 6 months: $2{,}400 \times 3/6 = 1{,}200$. Total 2025 direct earned premium is $$1{,}500 + 2{,}700 + 2{,}400 + 1{,}200 = 7{,}800$$ or $7,800,000. The roll-forward confirms it: beginning unearned of 1,500, plus 2025 written premium of $3{,}600 + 9{,}600 + 2{,}400 = 15{,}600$, less ending unearned of $3{,}600 \times 3/12 + 9{,}600 \times 18/24 + 2{,}400 \times 3/6 = 900 + 7{,}200 + 1{,}200 = 9{,}300$, gives 7,800. Wrong paths: subtracting the ending unearned reserve from written premium while omitting the beginning unearned balance gives $15{,}600 - 9{,}300 = 6{,}300$; reporting the December 31, 2025 unearned premium reserve itself gives 9,300; earning the 24-month policy over a 12-month term replaces its 2,400 with $9{,}600 \times 6/12 = 4{,}800$ for a total of 10,200; treating written premium as fully earned when written gives 15,600.