A.1 IMR & AVR

Question 1

IMR Purpose and asset types included

Answer 1

IMR = capture realized capital gains and losses resulting from changes in the IR level. then amortize the change into investment income over the remaining life of the investments

• this allows the company to realize the full gain/loss impact over time by amortizing impact
• only applies to IR related gains/loss on fixed income investments
• asset types: debt, mortgages, derivatives, preferred stocks
• a bonds rating did not change by more than one classification (so as to not capture credit related impact)

Question 2

Methods for amortizing IMR

Answer 2

Two methods:
1. Seriatim Method
- amortized amount = a - b
a = income that would have been reported in that year if asset hadnt been sold
b = income that would have been reported had the asset been repurchased at its sale price

2. Grouped Method
   - calculate gains and losses along LOB
   - group capital gains in 5-year bands according to the number of years of expected maturity
   - sum capital g/l
   - apply factors for prescribing in SVO manual

• Negative IMR can only be reported to offset any positive IMR
• negative IMR = non admitted asset

Question 3

AVR

• components and sub-components
• purpose

Answer 3

AVR = hold a reserve for credit losses to minimize the stat surplus impact of defaults

• 2 components, and sub-components
• Each sub component has a maximum reserve amount
• transfer excess into sister-sub-components
• if there is still an excess; release into surplus or transfer into the other component

1. Default Component
   a. Bonds, preferred stock, short term investments
   - grouped by rating
   - each group has a max reserve factor
   - max reserve amount = statement value * Max reserve factor
   b. Mortgages
   - groupings: farms, residential, commercial
   - grouped further: good standing, overdue, foreclosing
   - max reserve amount = mortgage loan * max reserve factor
2. Equity Component
   c. Common stock
   - 6 classes, each with own max reserve factor
   - max reserve = statement value * max reserve factor
   - reserve factor is based on the company weighted average portfolio beta

d. Real Estate
- 3 groupings
- max reserve amount = max reserve factor for grouping * (property value + outstanding encumbrance)