Steeneck

Question 1

Formula for ambivalence point in US

Answer 1

AP = (AP - Tax Basis Reserve) x Tax Rate + ( PV of Liability - PV of unwind of discounts)

Question 2

2 examples about how the commutation can distort the sellers reserving

Answer 2

1. The incremental & cumulative payments will be higher

2. Case reserves will reduce to 0

Question 3

Difference between commutation and mergers & acquisition transaction

Answer 3

The market value of the reserves in M&A should be significantly less than the discounted reserves at the risk free rate, as the buyer in these types of transactions is targeting a high economic return

Question 4

Describe the similarities or differences between a commutation & novation

Answer 4

A commutation can be thought of as a novation, as the original obligations are settled for a consideration, and a new agreement (the commutation) is established