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

300 THE APPLICATION OF FUNDAMENTAL VALUATION PRINCIPLESchange the value estimates derived from the methods describedin this paper, with value estimates increasing if accelerated revenuesare higher than accelerated expenses and value estimatesdecreasing when the reverse is true. 25For example, any embedded value associated with investmentincome on the loss and LAE reserves or profit in the unearnedpremium reserve would be reflected in fair value accounting atthe time the loss or unearned premium reserve is reported. However,fair value accounting, at least initially, may not considercash flows and associated profits from policy renewals or newbusiness. Therefore, the fair value accounting net worth of aninsurance company, initially, may approximate its runoff value.5.2. Regulatory ChangesRisk-Based Capital RequirementsIn 1993, the NAIC adopted RBC standards for property/casualtyinsurers. These standards are used by regulators to help toidentify insurers that require regulatory attention and, as a result,the standards may be viewed as minimum capital requirements.As such, these requirements affect valuation because they canform a key determinant in the amount of capital a company musthold. Further changes in RBC could affect insurance companyvaluations if there are changes in required capital levels.Gramm-Leach-Bliley ActThe Financial Services Modernization Act of 1999 (Gramm-Leach-Bliley Act or GLBA) enabled closer alignment of insurancecompanies and other financial institutions such as banksand securities firms. A primary feature of GLBA is that a bankholding company or foreign bank that meets certain eligibilitycriteria may become a financial holding company (FHC). FHCs25 The impact on value is relevant whether these accelerated revenues and expenses arerecognized in the income statement or solely as a direct adjustment to surplus. As bothafter-tax operating income and amount of capital affect free cash flows, either changecould influence value.