LIPF Chat 14 Free Cash Flow

[uni]

I am having trouble reproducing the free cash flow numbers in the examples. I used both

FreeCashFlow = LiabCashFlow + InvIncome + IntReceived - IntPaid - IncReqCap

and

FreeCashFlow = AssetEnd + AssetCashFlow - AssetReq

For Excercise 14.7, it looks like for the 1st policy year, FreeCashFlow = CumCashFlow - IncAssetReq, but it doesn't work for the 2nd policy year.

[uni]

hope someone can answer this questions, considering the importance of the topic...

[RichieGB]

I don't see where the 2nd year numbers you're trying to replicate are. In exercise 14.8, they do the fourth policy year, but it's the same thing, FCF = CumCF - IncAssetReq.

In this example, though, they include Investment Income on RC inside the Cumulative Cash Flow. In other notes, I've seen this investment income on RC outside of the cumulative cash flow...something to the effect of:

FCF = Statutory Earnings + InvIncReqCap - IncReqCap

[phdmom]

The formula on page 750 is FCF = CumCF + InvIncome - AssetCF - SolvResIncr - ReqCapIncr.

Example 14.3.7 first policy year, there is no investment income and no asset cash flow. So FCF = CumCF - IncAssetReq.

Problem 14.7, same situation.

Problem 14.8, InvIncome = AssetCF so the simplified formula works.

In Example 14.3.7 for the second policy year, AssetCF <> InvIncome. FCF = 1.31272 - 2*.06882 + .12 - 1 = .29508.