Asset share Price Model (After Tax)

[goodluckexam]

TIA
Feldblum, "Personal Automobile Premiums: An Asset Share Pricing Approach"
New problem #5, page 49.
For Year 1, Before tax, insurance company's profit is -150, after tax becomes -97.5. How to understand this. Insurance company get some money from government?

For detail, please check the attachment PDF.

[CHACAL7781]

I would say just a credit for the following years. Not a tax expert here, or expert at anything for that matter :)

[Hiu]

I think it's a good question. Sure the 1st year loss can be carried forward in the following years. But I think in the tax cash flow perspective, the After-Tax Profits should be:

BT Prof / Tax / AT Prof
-150 / 0 / -150
81.88 / 0 / 81.88
91.09 / 8.04 / 83.05 ( Note: 8.04=(91.09+81.88-150)*0.35 )
98.74 / 34.56 / 64.18

Total: 121.71/ 42.60 / 79.11

Since the After-Tax Pforifs are changed, the PV of AT Profit=58.75 rather than 62.29, I think.

[SMMBB]

Remember that when we do asset-share pricing, we're not looking at the profit/loss for the whole company but rather on a particular product that is part of the company's entire book. Since income tax is determined for the company as a whole and I think we can assume that in any given calendar year, the company expects to make a profit overall, the loss realized in Calendar year 1 on these policies will reduce the tax payable on profits from other segments of the company's total book in that calendar year. In other words, the government doesn't have to pay the insurance company money in order to reduce the loss to after-tax level.

In Canada, I think company can recover an amout up to the sum of taxes paid in the previous three years (effectively paying a negative tax) if it makes a loss.