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Roadrunner
10-26-2001, 04:48 PM
New question, or really discussion topic on the case study:

Though we may not really see these on the exam, it may help us to focus on the case study and a new approach to looking at exam topics if we can discuss what we see as possible questions they can use the case study for.

For example, they could ask us to compare and contrast several different items about the companies, such as their ways of marketing their products. I have other possibilities if others want to discuss this topic.

Double High C
10-26-2001, 05:20 PM
They might ask about possible optimization of their allocation of capital in light of ROEs, ROIs.

Also, they might ask about crediting strategy (for interest sensitive policies),

Also, they might ask about emerging experience.

Loads of other possibilities. Dat's all for now.

Minerva
10-26-2001, 05:46 PM
Does anybody think its worthwhile doing value-based income ahead of time for the case studies? (I was planning to do it, but never got around to it - dont know whether I should waste my time, or if it will be the best hour or two of the weekend.)

Double High C
10-26-2001, 06:00 PM
On 2001-10-26 17:46, Dr Mom wrote:
Does anybody think its worthwhile doing value-based income ahead of time for the case studies? (I was planning to do it, but never got around to it - dont know whether I should waste my time, or if it will be the best hour or two of the weekend.)


Dyoo it! Dyoo it!!!!!

They asked it last time, but I think that they can and will hit Value Based (Embedded Value) reserves again - this time and on every exam in the future.

Perhaps they will do it in the context of the calculation of an acquisition this time, with Goodwill and a question about whether it is worth it for the prospective buyer (possible list from latter part of Ch. 16 of A&D).

Minerva
10-26-2001, 06:17 PM
Do you mean the list of why Value Added / Embedded Value may become a key driver of life insurance stock prices?

Double High C
10-26-2001, 06:32 PM
Actually, that wasn't what I was thinking about, but certainly it is crucial to be able to answer such a question.

I was thinking more about a question in which, considering EV as well as PV[new business], perhaps using moderately aggressive assumptions and "forward pricing" - in particular, a plan by mgmt to reduce expenses, the calculations come out supporting the decision to acquire the business being sold. Come up with a list of intangibles that might make the deal not as attractive (or perhaps more attractive) than the #s suggest.

Things that immediately come to mind are low employee morale and fear (which might cause valuable employees to leave), overall complexity of synergizing the companies, including the difficulty of synergizing systems - including perhaps many legacy systems in place at both companies.

Roadrunner
10-26-2001, 07:51 PM
I had thought about earlier on in reading the case study (haven't really looked at it in this way again) about the possibility of one company acquiring the other or a merger of the 2 companies. I realize that they are totally different - stock vs. mutual. Would they mutual have to demutualize? Or a possibility would be a block of business sold from one company to the other. Possibility of reinsurance question on how this would be done?

Double High C
10-26-2001, 09:09 PM
On 2001-10-26 19:51, Roadrunner wrote:
Would they mutual have to demutualize?


Mutual would not have to demutualize to acquire stock company; if it were being acquired, its policyholders would have to agree to it. (I am not sure if it would have to go through a full-fledged demutualization, but that is probably not a critical issue w.r.t. this exam.)


Or a possibility would be a block of business sold from one company to the other. Possibility of reinsurance question on how this would be done?


I think that would be at most a small part of a larger question.

Minerva
10-28-2001, 06:52 PM
BPC - Saturn and Mercury
Is the key to the VB calcs on the one year of issue to add one year of income to the end so the PVFProfits @ ROI = 0? (I think that the notes said that, but.......) Once I did that, everything worked like it was supposed to.

As far as the inforce stuff (all years) goes, am I correct that we can't do it because we only have income reserves and profits, and not statutory? (We can do a GAAP ROE, just not VB.) If not - I'm lost.

Double High C
10-28-2001, 08:23 PM
On 2001-10-28 18:52, Dr Mom wrote:
BPC - Saturn and Mercury
Is the key to the VB calcs on the one year of issue to add one year of income to the end so the PVFProfits @ ROI = 0? (I think that the notes said that, but.......) Once I did that, everything worked like it was supposed to.


I'm not sure if I understand or if I am answering your question, but after looking at last year's question on VB, I think that you would need PVFProfits @ the hurdle rate at issue for this product - or alternatively all years of distributable earnings - to calculate how much value is added by business issued in the current year.

Adding the extra year of dist earnings on to the end (in this case, 2010), if solved for properly, certainly is one way to cause the value added by the business to be zero, but only if the ROI is equal to the hurdle rate.

If the hurdle rate is not equal to the ROI, then the actual timing of the dist profits matters, so adding the year onto the end would give a different answer for value added than would a different stream of dist profits (e.g. ending 50 years later, when the last person might realistically be expected to die).

A key thing to remember is that at the end of 2000 (in the case of Mercury and Saturn), the PVFProfits @ ROI for 2001 through the end of time is equal to the (absolute value of the) distributable earnings in 2000.



As far as the inforce stuff (all years) goes, am I correct that we can't do it because we only have income reserves and profits, and not statutory? (We can do a GAAP ROE, just not VB.) If not - I'm lost.


You are correct (I think) that you can't do the inforce stuff without addition information.

To calculate VB ROE, you would need

Begin major edit

VB Reserves (which is equal to Required Assets which equals reserves under any accounting system + req capital and surplus under that same system)
- PV (Dist Profits)

Alternately, VB Equity is equal to Total Assets minus VB Reserves.


Note that if required assets are equal to total assets, then VB Equity = PV Dist Profits.

End major edit

However, in reality (and in the example) assets are not equal to stat reserves plus required stat surplus (unless this happened to be true by coincidence), so Assets equal total Liab, Capital, and Surplus (under any accounting system), and again, you would need PV Future Profits to determine VB Equity and VB ROE.

<font size=-1>[ This Message was edited by: battery park city on 2001-10-29 13:23 ]</font>

Minerva
10-29-2001, 05:20 AM
Whew!

Thanks. I forgot about the timing aspect for the PVFProfits at ROI - I was so relieved to get something that worked that I forgot about that whole "why you won't get your ROE" topic.

On the inforce side, were your GAAP ROEs odd?
(Like high)

Double High C
10-29-2001, 01:24 PM
Note that I corrected errors in my prior post.

Anonymous
10-29-2001, 03:48 PM
Dr Mom,

How did you calculate ROEs for the in-force?

In this year's case study, they removed the inv inc on ReqCap info. Don't you need that for the numerator?

What did you use for the denominator?

The reason I ask is that in last year's case study the ROEs (also removed this year) were based on a denominator of Avg DAC + Avg ReqCap - .5*AftTax GAAP earnings (#2 on 2000 exam).

Unless told otherwise, I would use Avg or BOY (Total Assets(incl. DAC) - GAAP Liab). Right?

Minerva
10-29-2001, 06:09 PM
If the investment income includes the income on Required Capital, then everything is fine. The same is true if the Required Capital figures include the interest.

According to most of the study notes this year, you'd do an ROE based on the previous year end's equity (not the mean).

I'm definitely having a problem doing the GAAP ROEs for the inforce case study, since we don't have solvency reserves.

For Saturn, if I assumed that we held assets exactly equal to solvency reserves + required capital, then equity was Assets - Liabilities (on an income basis), and I got "reasonable" numbers, ranging from 6 - 9.25%. That's a big assumption, but I plan to use it if they ask that kind of question and don't give any more info (unless someone has a better suggestion . At least I should get some credit (wishful thinking).

For Mercury, when I use the same assumption, I get outrageous ROEs, ranging from 51 - 61%. (And that's when I use After-Tax Earnings less increase in required surplus as the numerator [for 1996 37,000 - 24,000 + 20,500 = 33,500] and previous year's Total Capital and Surplus (60,500) as the denominator.

:???: ? Definitely.

Unless one of you has a break-through on this, I guess I'll just go back to memorizing those !?*% lists.

Double High C
10-29-2001, 10:23 PM
On 2001-10-29 18:09, Dr Mom wrote:

I'm definitely having a problem doing the GAAP ROEs for the inforce case study, since we don't have solvency reserves.



I don't have the case study in front of me now, but you should not need solvency reserves to calculate GAAP ROE.

GAAP Equity = (Total)Assets - GAAPRes(Net of DAC)

Equity is what you have minus what you need, under any accounting system.

Earnings are Cash Flows - Change in (Net) Reserves, under any accounting system.

(I intend to look at the case study and crunch these GAAP #s, time permitting.)

Minerva
10-30-2001, 05:49 AM
BPC

I took the approach you mentioned (equity = total assets - liabilities) for the income-based system (see the detail on my earlier note) since I think that's the only reasonable approach, given what we have. My concern with not having solvency reserves is that one definition for equity is (Solvency reserves + Required Capital - Income reserves), I'm not sure whether or not to include unassigned surplus. On the other hand, it appears reasonable to me that Liabilities + Required Capital under a solvency system should = Liabilities + Required Capital under an income system, just that the two Required Capitals are different.

If you get around to it - see if you get odd numbers for Mercury, or if I just can't do arithmetic.

Also, I'm trying to figure out why I get perfect Value-based ROEs for the issues when I set the profits in Year 11 (for both companies) equal to the PV of future profits under the pricing ROI that will give PVFProfits @ issue at ROI = 0, and then calculate the VB stuff, when I agree with you that the incidence / pattern of profit is important.

Double High C
10-30-2001, 04:31 PM
On 2001-10-30 05:49, Dr Mom wrote:
BPC


If you get around to it - see if you get odd numbers for Mercury, or if I just can't do arithmetic.


I got odd numbers also; note (as I think you might have mentioned already) that the Income Statement says "Ignores provision for deferred taxes and the tax on required surplus investment income". The deferred tax liab would lower both GAAP Income and GAAP Equity; note that income taxes seem very low, so this liability (and the yearly change in it) is likely positive in most / all years. Of course, tax on inv income on req surplus would also depress earnings.


Also, I'm trying to figure out why I get perfect Value-based ROEs for the issues when I set the profits in Year 11 (for both companies) equal to the PV of future profits under the pricing ROI that will give PVFProfits @ issue at ROI = 0, and then calculate the VB stuff, when I agree with you that the incidence / pattern of profit is important.



You do get perfect results in only one case: the one you chose (in which hurdle rate is set to the ROI). In fact, it has to work out that way because you solved for it.

If the hurdle rate <> ROI, then different patterns would give you different results.

Minerva
10-30-2001, 05:09 PM
Actually, the 11th year profit I chose was NOT at the hurdle rate, it was the PV @ issue of Stat Profits @ ROI, accumulated at ROI to year 11. {When I added that to year 11, PV Stat Profits @ ROI = 0 at issue.) That's why I don't understand.

Oh well, it's probably not worth worrying about, it's just puzzling.

I have lists to memorize------

Good luck on the last 36 hours!

<font size=-1>[ This Message was edited by: Dr Mom on 2001-10-30 17:12 ]</font>

Roadrunner
10-31-2001, 08:39 AM
Good luck to everyone on the last day of studying and tomorrow on the exam.

Double High C
10-18-2002, 07:49 PM
Bump

(come on, setters and spikers!)

Abducens
10-19-2002, 11:41 AM
Do both Saturn &amp; Mercury employ a vanilla "Net yield less spread" approach to crediting their products? It appears so? If so then seems like a screamer for a question to me. Thoughts, reactions...

Abducens
10-19-2002, 11:44 AM
Mercury is not in any variable products = EIAs would be a good way to get started due to any expertise they have in fixed DAs? Any note on whether their resources could handle complexity/admin demands of EIAs?

Not likely to be tested since they hit this, with Mercury even, in 2001 I think...

Abducens
10-21-2002, 11:24 AM
Awright, now come on, every time I post to these exam threads they die. Is it my breath? Underarm deodorant?

Double High C
10-21-2002, 12:07 PM
I'll be baaaack!!!
(when I have time; after I reread the case study; I have just reread the Saturn portion.)

One thought about Mercury (a Mutual, incorporated in 1900); possible discussion on demutualization? (about methods of raising capital / desire for M&amp;A?)

As for EIA, you never know what they test next time; I wouldn't put it past them to throw the same (or a similar) pitch twice in a row.

Abducens
10-21-2002, 01:55 PM
I'm just hoping they lay off the Value-Based Measurement crack pipe this time. I kind of doubt it since it seems like pretty relevant stuff... Maybe they will ask a question on it in actual English this year, however. We can dream.

I give it better than 2-in-3 chance that they ask something regarding Mercury demutualization, such as:

Mercury has decided that being an independent mutual is not a good way to stay competitive and grow the company. It sucks. They want to look at merging with a bigger company, or possibly demutualizing. Which should they do, and why. What considerations need to be taken into account.

Double High C
10-21-2002, 06:07 PM
They might ask a question regarding Mercury considering buying Saturn; or perhaps, another company might want to buy Mercury.

They might ask about methods of raising capital to do so. Also, they might relate the sellers evaluation of the "purchase price" to that of the buyer.

The "Value Based" (or Embedded Value) will come into play in the evaluation of the value of the inforce business.

Then, given the Embedded Value (after it has already been calculated), the agreed upon purchase price, tax, transaction costs, and required capital, what is the Goodwill.

I believe that Mercury has par WL policies; also consider ASOP#37.

Also, they might ask about MoS or PPM; PPM due to its being "nation specific", and MoS due to the interest in Fair Value reporting. And given the SOA's tendency to sometimes go a little beyond the syllabus (e.g. with the Stochastic DAC stuff last year), my guess is that Fair value might come into play (whether or not the question will be entirely "Fair").