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Flashcards in Robbin - IRR Deck (48)
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1

Measures of return (3)

(Robbin - IRR)

1. IRR on equity flows
2. Growth ROE model
3. PVI/PVE

2

Indicated premium

(Robbin - IRR)

premium where expected return = target return

3

Appropriateness of fixed vs. variable premium-to-surplus (P/S) ratio

(Robbin - IRR)

required surplus should vary with unpaid loss estimates

>> fixed P/S ratio is not appropriate, but used for simplicity

4

UW income

(Robbin - IRR)

UW income(j) = EP(j) - incurred loss(j) - GAAP incurred expense(j)

incurred expense includes fixed & variable expenses

5

Difference in GAAP equity and statutory (SAP) equity at time 0

(Robbin - IRR)

deferred acquisition costs (DAC)

6

Expenses in GAAP vs. statutory (SAP) accounting

(Robbin - IRR)

GAAP - expenses are incurred as premium is earned

SAP - expenses are incurred according to a fixed pattern

7

Deferred acquisition costs (DAC)

(Robbin - IRR)

DAC = statutory incurred expenses(0) - GAAP incurred expenses(0)

8

Relationship between GAAP equity and statutory (SAP) equity at each point in time

(Robbin - IRR)

time 0: GAAP equity = statutory equity + DAC

all other times: GAAP equity = statutory equity

time n: GAAP equity = statutory equity = 0

9

Total assets

(Robbin - IRR)

assets(j) = UEPR(j) + loss reserve(j) + statutory expense reserve(j) + statutory equity(j)

10

Unearned premium reserve (UEPR)

(Robbin - IRR)

UEPR = premium - EP to date

11

Loss reserve (LRSV)

(Robbin - IRR)

loss reserve = incurred losses to date - paid losses to date

initial loss reserve = 0

loss reserve may need to be discounted

12

Statutory expense reserve (XRSV)

(Robbin - IRR)

statutory expense reserve = statutory incurred expenses to date - paid expenses to date

13

Invested assets (IA)

(Robbin - IRR)

invested assets(j) = assets(j) - amounts receivable(j)

14

Amounts receivable (RECV)

(Robbin - IRR)

amounts receivable = premium - premium paid to date

15

Investment income (II)

(Robbin - IRR)

investment income(j) = investment rate * invested assets(j - 1)

16

Pre-tax income (INCPTX)

(Robbin - IRR)

pre-tax income(j) = UW income(j) + investment income(j)

17

Tax amount (TAX)

(Robbin - IRR)

tax(j) = UW tax rate * UW income + II tax rate * investment income

18

After-tax income (I)

(Robbin - IRR)

after-tax income(j) = pre-tax income(j) - tax(j)

19

More realistic tax assumptions (3)

(Robbin - IRR)

1. utilize carry-forwards & carry-backs
2. apply reserve discounting & unearned premium disallowance
3. deferred tax balance to reflect differences b/w tax basis & accounting basis income

20

Equity flows (definition) & signage

(Robbin - IRR)

flows of money b/w equity investor and company

negative CF = investor > company
positive CF = company > investor

21

Sources of equity flows (3)

(Robbin - IRR)

1. purchase of stock
2. payment of dividends
3. repurchase of stock

22

Equity flow formula

(Robbin - IRR)

equity flow = income - change in GAAP equity

initial equity flow = - initial equity (b/c initial income = 0)

23

Reasons that the initial equity flow is always negative (2)

(Robbin - IRR)

1. initial commitment of equity is needed to fund initial surplus
2. commitment of equity associated with DAC

24

IRR on equity flows

(Robbin - IRR)

rate (IRR or y) that makes the PV(equity flows) = 0

25

Assumption of the IRR on equity flow method

(Robbin - IRR)

assumes any capital shortfall will be corrected by equity capital

26

Objections to IRR analyses (2)

(Robbin - IRR)

1. may be multiple solutions to the IRR equation
2. implicit assumption that proceeds can be reinvested at the IRR (which may not be true)

27

Situations when there will be multiple solutions to the IRR on equity flows (2)

(Robbin - IRR)

multiple equity flow sign changes, such as with:
1. earning of investment income
2. release of surplus

28

PVI / PVE measure of return

(Robbin - IRR)

measure of single policy ROE

29

Present value of income (PVI)

(Robbin - IRR)

PVI = (1 + income interest rate) * PV(income discounted at income interest rate)

**discounted to time 1

30

Present value of equity (PVE)

(Robbin - IRR)

PV(equity flows discounted at the equity discount rate)

** discounted to time 0