Feldblum: Surplus

Question 1

2 definitions of surplus

Answer 1

• Admitted assets - liabilities

- Prior years surplus + current years income

Question 2

Ten direct changes to surplus

Answer 2

• Change in provision for reinsurance
• Change in nonadmitted assets
• Change in unrealized capital gains
• Change in unrealized foreign exchange capital gains
• DTA/DTL
• Dividends to stockholders

Question 3

2 methods for nonadmitted assets

Answer 3

• write off as an expense at time 0 in income statement (GAAP and SAP)
• classify asset as nonadmitted and charge surplus directly (only GAAP)

Question 4

Nonadmitted portion of interest due and accrued

Answer 4

> 90 days overdue

Question 5

Nonadmitted portion of retrospective premium

Answer 5

10% of unsecured premium

Question 6

Nonadmitted portion of realestate

Answer 6

Permanent excess of book value over market value (BV - MV)

Question 7

Surplus for realestate

Answer 7

Increase/decrease in value of asset
- DTL (or add DTA)
+ Taxed income (rental income*(1-tax rate))

Question 8

Equation for the cost of double taxation after tax

aka. cost of holding capital

Answer 8

Investment yield * corporate tax rate * (1- personal tax rate)
(before tax: investment yield * corporate tax rate)

Question 9

Equation for total amount of capital which is subject to the cost of holding capital

Answer 9

Surplus + equity in the UEPR (acquisition costUEPR) + equity in the discounted reserves (undiscounted reservesdiscount rate) - DTA

Question 10

Premium paid by policyholder

Answer 10

UW profit margin = (capital/premium) * ((investment yield * corporate tax rate) / (1-corporate tax rate)) / (1 + investment yield)^.5
Premium= L&LAE / (1- variable expense ratio-UW profit margin)

Question 11

Atkinson and Dallas

Cost of holding capital

Answer 11

Coston of equity capital - after tax investment yield

Question 12

A company’s significant increase in liabilities for L&LAE could be due to what reasons and which financial statements would back this up

Answer 12

• Notes to financial statements: increase in intercompany pooling
• Schedule F Part 3: decrease in retroactive reinsurance
• Schedule F Part 1: increase in assumed reinsurance
• Five year historical data exhibit: significant growth in net premium

Question 13

PV of future net income

Answer 13

Pre tax income earned * (1 - tax rate) / cost of capital %