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

THE APPLICATION OF FUNDAMENTAL VALUATION PRINCIPLES 291ANW, unless also assumed to impact SC 0 for DCF, thereby affectingFC 0 , will cause the EVA and DCF valuation results todiverge. The direction (positive or negative) of the differencebetween the EVA and DCF valuation result will be dependenton the direction (positive or negative) of the tax-affected adjustmentsfor items 2, 3, 4, and 5.1. Loss reserve adequacyFor a property/casualty insurance company, policyholderclaim obligations are usually the largest liability on the statutorybalance sheet. As a result, it is critical to assess the reasonablenessof the carried loss and loss adjustment expense (LAE)reserves as of the valuation date to meet unpaid claim obligations.Adjustments for the loss reserve position should be made directlyagainst statutory equity as of the valuation date for bothDCF and EVA valuations. Adjustments to the carried loss reserveswill impact ANW for an EVA valuation and FC 0 for aDCF valuation.2. Market value of assetsTraditionally, the majority of the investment portfolios forproperty/casualty insurance companies have been placed inbonds, especially U.S. Treasury or other federal agency instruments.SAP requires bonds “in good standing” to be valued atamortized cost. For the purpose of a valuation, however, bondsshould be valued at market value in order to reflect what anindependent buyer would actually pay to purchase the securities.Common and preferred stocks, which represent the nextlargest portion of most property/casualty insurance companies’portfolios, are recorded at values provided by the National Associationof Insurance Commissioners’ (NAIC) Securities ValuationOffice. These values are typically equal to market valueand thus are less likely to require an additional adjustment. Otherinvestable assets should also be adjusted to market value, but are