PROCEEDINGS May 15, 16, 17, 18, 2005 - Casualty Actuarial Society

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288 THE APPLICATION OF FUNDAMENTAL VALUATION PRINCIPLES² Capital needed to support the entire book of business, and² Federal income taxes applicable to earnings.The primary contributors to investment earnings are the timingdifferences between the collection of the premium and thepayment of claims and loss adjustment expense. For most linesof business, there is little delay in premium payment by the policyholder.When premiums are paid in installments, however,or when audit premiums represent a significant portion of theultimate collected premium, it is important to evaluate the lagbecause of the resulting impact on the investment income calculation.Reinsurance recoveries may need to be projected on acontract-by-contract basis if the indemnification terms vary significantly.In determining the future earnings from new and renewalbusiness, projected loss and expense ratios are the most importantcomponents to be modeled. As Miccolis [<strong>17</strong>] and Ryan andLarner [19] note in their papers on valuation, issues to be consideredin the projection of future loss and expense ratios include² Changes in price levels;² Trends in loss severity, claim frequency, and exposure base;² Historical industry results;² Underwriting cycles;² Target rates of return;² Expected future growth rates;² Degree of competition in market;² Regulatory environment;² Exposure to catastrophes; and² Changes in ceded reinsurance (coverage, terms, pricing).
THE APPLICATION OF FUNDAMENTAL VALUATION PRINCIPLES 2894.5. Present Value of Future EarningsOnce the future earnings stream (including gains and lossesin capital that do not flow through earnings) from running offthe existing balance sheet and future written business has beenestimated, it is discounted to present value at the selected hurdlerate. For an EVA valuation, the future earnings stream is used directlywithout consideration of capital infusions or distributions.For a DCF valuation, the future earnings stream (i) less earningsretained for capital growth or (ii) plus additional capital releasedrepresents free cash flows.4.6. Adjusted Net WorthIn valuing a company, it is common practice to adjust theequity of the firm at time zero to consider value (positive ornegative) associated with reserve deficiencies or redundancies,market value of assets, nonadmitted assets, and statutory provisionsfor reinsurance, among other factors.The adjustments to statutory equity in the computation ofANW for an EVA valuation (and free cash flow at time 0, FC 0 ,for a DCF valuation) represent an effort to adjust the startingstatutory balance sheet to its true market value. These adjustmentsdescribed by Miccolis [<strong>17</strong>] and Ryan and Larner [19] andsummarized below represent an attempt to recognize the marketvalue of some items on the statutory balance sheet. For example,common adjustments include reflecting assets at market valueand eliminating goodwill. In contrast, there are usually no comparableadjustments for liabilities. For loss reserves and unearnedpremium reserves, market value would reflect future investmentincome plus a provision for risk. Instead of market value adjustments,any value associated with the liabilities (other thanadjusting reserves to their actuarially indicated amount) is recognizedthrough the present value of future earnings.Since statutory accounting determines free cash flows to investors,one could support the position that adjustments to the
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VOLUME XCII NUMBERS 176 and 177PROC
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FOREWORDActuarial science originate
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2005 PROCEEDINGSCONTENTS OF VOLUME
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2005 PROCEEDINGSCONTENTS OF VOLUME
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Editorial Committee, Proceedings Ed
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AN EXAMINATION OF THE INFLUENCE OF
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RISKINESS LEVERAGE MODELSRODNEY KRE
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DISCUSSION OF A PAPER PRESENTED AT
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RISKINESS LEVERAGE MODELS 79REFEREN
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RISKINESS LEVERAGE MODELS 81EXHIBIT
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ADDRESS TO NEW MEMBERS 151ateship a
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ADDRESS TO NEW MEMBERS 153You shoul
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ADDRESS TO NEW MEMBERS 155strength
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MINUTES OF THE 2005 CAS SPRING MEET
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MINUTES OF THE 2005 SPRING MEETING
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Volume XCII, Part 2 No. 177PROCEEDI
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ARCHITECTURE FOR RESIDENTIAL PROPER
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ESTIMATING THE WORKERS COMPENSATION
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INCORPORATION OF FIXED EXPENSESGEOF
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DISCUSSION OF PAPER PUBLISHED INVOL
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THE “MODIFIED BORNHUETTER-FERGUSO
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ADDRESS TO NEW MEMBERS-NOVEMBER 14,
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ADDRESS TO NEW MEMBERS 743Now to an
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PRESIDENTIAL ADDRESS-NOVEMBER 14, 2
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MINUTES OF THE 2005 CAS ANNUAL MEET
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REPORT OF THE VICE PRESIDENT—ADMI
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REPORT OF THE VICE PRESIDENT-ADMINI
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2005 EXAMINATIONS—SUCCESSFUL CAND
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OBITUARIESROBERT GRANT ESPIECLYDE H
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OBITUARIES 825SIDNEY M. HAMMER1931
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OBITUARIES 827J. GARY LaROSE1947—
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OBITUARIES 829PAUL J. SCHEEL SR.193
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OBITUARIES 831LEO M. STANKUSCirca 1
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INDEX TO VOLUME XCIIPage2005 EXAMIN
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835GRAVES, CLYDE H.INDEX—CONTINUE
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837INDEX—CONTINUEDREPORT OF THE V
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PROCEEDINGS May 15, 16, 17, 18, 2005 - Casualty Actuarial Society

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