Fall 2006 8IU #5 (embedded value)

[phdmom]

This questions refers to "European Embedded Value". Is that just Embedded Value? (LIPF says it is used in Europe, but doesn't call it European). Anyway.

In the exam problem, we are given:
PV future shareholder cash flows for in-force business = 850
Required capital = 500
Market value of allocated capital & surplus = 800

I think EV = 850 + 800 - 500 = 1,150.

(LIPF def'n: present value of distributable earnings including any excess capital).

However, we are also given:
surrender value guarantees = 50
statutory surplus = 350
cost of equity capital = 16%
cost of debt capital = 6%

Should I have used any of that?

[NFL]

I almost posted the same question yesterday. I took the exam in November, and I think I did it the same way you did, but it's hard to imagine that's correct when it's a 4 point problem.

I'm thinking maybe there was another study note that was on that exam that talked more about European Embedded Value, but I don't know that for sure. So, long story short, I really don't know how to do that problem.

[appleapple]

I don't think it is on the syllabus now.