Exam 2003 Question 19

[ChrisW]

We are asked to calculate "change in surplus"

With the given information, it should be
dS = Net underwriting gain or loss + Net investment income + Net unrealized capital gains or losses - Dividends to stockholders - Federal taxes

however, the answer from CAS, "Dividends to stockholders" is replaced by "Dividends to Policyholders".... in which "Dividends to Policyholders" is never mentioned in the paper by Roth

Can anyone help???

Thanks!!!

[carrytheCrøss]

. . . however, the answer from CAS, "Dividends to stockholders" is replaced by "Dividends to Policyholders".... in which "Dividends to Policyholders" is never mentioned in the paper by Roth (emphasis added) I would not be so certain (see the calculation on page 446 of Roth).

[frank_exams]

We are asked to calculate "change in surplus"

With the given information, it should be
dS = Net underwriting gain or loss + Net investment income + Net unrealized capital gains or losses - Dividends to stockholders - Federal taxes

however, the answer from CAS, "Dividends to stockholders" is replaced by "Dividends to Policyholders".... in which "Dividends to Policyholders" is never mentioned in the paper by Roth

Can anyone help???

Thanks!!!

Dividends to PH are parts of the costs of writing business, so they should be subtracted from surplus. For dividends to SH (as well as changes in paid-in capital), though, it depends on the context.

If you're asking about the return on surplus for the company, then SH dividends should not be subtracted from surplus and paid-in capital should be removed. On the other hand, if you're look at literally "change in surplus", then you do need to subtract dividends and allow for paid-in capital: this is because you're not asking about how efficiently the company is run, but rather what actually happened to surplus.

Note that CAS accepted both methods (subtracting dividends to SH (the way I would've done it) as well as not subtract SH divs) for this question.

Sorry, don't have time to go into more detail. Please ask if something is unclear and I'll check later.

Frank

[ChrisW]

Dividends to PH are parts of the costs of writing business, so they should be subtracted from surplus. For dividends to SH (as well as changes in paid-in capital), though, it depends on the context.

If you're asking about the return on surplus for the company, then SH dividends should not be subtracted from surplus and paid-in capital should be removed. On the other hand, if you're look at literally "change in surplus", then you do need to subtract dividends and allow for paid-in capital: this is because you're not asking about how efficiently the company is run, but rather what actually happened to surplus.

Note that CAS accepted both methods (subtracting dividends to SH (the way I would've done it) as well as not subtract SH divs) for this question.

Sorry, don't have time to go into more detail. Please ask if something is unclear and I'll check later.

Frank
Thanks Frank
That means if we are asked something about "return on surplus" then we need to substract Surplus dividend
However, if we are asked something about "total return" then we need to substract both Policyholder dividend and surplus dividend (if given)
right?

[bg23516]

According to Page 446:
Change in surplus including stockholder dividends and excluding paid in capital.
dS = net underwriting gain or loss
+ net investment income
+ net realized capital gains or losses
+ other income
- dividends to policyholders
- federal taxes
+ net unrealized capital gains or losses
+ change in non-admitted assets
+ change in liability for reinsurance
+ change in foreign exchange
+ change in excess statutory reserves
+ other write-in items
= total economic income

All of these values (I believe) come from the statutory income statement. However, this is not the change in accounting surplus.
After calculating the change in surplus in this way (or as Roth calls it "total economic income"), the company will often:
1. Get capital from stockholders - this is paid-in capital
2. Return capital to stockholders - via stockholder dividends.

So, if you are calculating ds from the difference in annual statement valuations of surplus, the change in accounting surplus already includes includes additional paid-in capital and the return of capital to STOCKholders via dividends. So we add back the stockholder dividends and subtract the paid-in capital to get us back to what Roth called "total economic income."