EV

Question 0

Allowing for credit risk in EV in 9 points

Answer 0

Net assets
1 implicit in the market value
Pvfp
2 group bonds by credit rating and term to maturity
3 make assumptions about future defaults using last experience
4 allow for recover rates
5 highest defaults apply to worse credit rating and highest term
6 adjust each bond yield by default rate, so yield is risk free rate plus liquidity Premium (credit risk removed)
7 these rates used to determine investment return assumptions on corporate bonds (lower yield so lower investment return, so allow for default possibility)
8 parameter risk and secondary risk like catastrophe risk remain, could be accounted for in discount rate adjustment
9 allowing for all credit risk in discount rate is unlikely

Question 1

EV Methodology - split between misc, np, WP, np in WP, shareholder fund - 23

Answer 1

1 pvfshp + shareholder share of net assets
2 net assets at market value
3 net assets are assets minus liabs where liabs on same basis as pvfp calc
4 might discount the MV as not all distributed at once and will earn investment return
Non profit-
5 best estimate projection of future Cashflows
6 discount profits at risk discount rate
7 profit is expense - charges-benefits above unit res-increase in non unit res+int on non unit res
8 pvshp will be 100% pvfp from UL business
With profits
9 pvfp is PV future sht from bonus distributions
10 bonuses projected be
11 option A bonuses adjust to make payout equal assert share
12 option B bonuses remain fixed
13 1/9 cost of rev bonus plus 1/9 TB on stat valn basis
14 discount the sht on risky disc rate
Np in WP fund
15 pvfp of this contributes to profit and so bonuses
16 could be done by changing AS to allow for it or include in free assets
17 should be at realistic valuation
WP fund net assets
18 net assets will be the free estate
19 free estate is assets minus liabs including future bonuses
20 shareholder part of free estate valued as..
A) 10 percent MV of estate
B) above discounted to allow for not immediate distribution
C) adjust bonuses so no free estate
Shareholder fund
21 valued at MV, all distributed to shareholders
22 may be discounted for holding allowance
23 discount at discount rate minus expected investment return on shareholder fund assets

Question 2

Items in analysis of change in EV in 8 points

Answer 2

1 unwind of risk disc rate over year on pvfp
2 effect of model changes / corrections
3 effect of change in discount rate
4 effect of change in stat reserving basis
5 effect of change in lt assumps e.g. Economic or demographic
6 value of new business of year
7 effect caused by difference between actual and expected in..
A. Investment return including shareholder funds and net assets
B. Decrements including lapse and mortality
C. Expenses
D. Bonuses e.g. Rb and tb
E. Tax
8 any capital injected or dividends paid
9 unexplained (aim to minimise)