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

320 THE APPLICATION OF FUNDAMENTAL VALUATION PRINCIPLES31, 2001, and loss and LAE incurred in 2002 and subsequentaccident years.² Lag of one month in collection of direct premium.² Lag of three months in paying ceded premium.² Lag of one month in collection of ceded loss recovery.Federal income tax is the final component for computing netstatutory income. The PSIC model followed the 2001 instructionsfor computing federal income tax for U.S. property/casualtyinsurance companies.Total income for valuation equals net statutory income plusunrealized capital gains as shown in Exhibit 8. Unrealized capitalgains are computed as total annual capital gains in equity investmentsless realized capital gains. The capital gain percentagesare the following:Preferred Stocks 11.0%Common Stocks 9.5%A.3.Sensitivity TestingTable 7 shows the sensitivity of DCF and EVA value estimatesto changes in underlying assumptions. Exhibit 21 showsadditional detail related to each of these alternative scenarios.For ease of reference, the assumptions underlying the basecase follow:² Starting capital as of December 31, 2001 = $42:13 million.² Surplus/RBC ratio = 2:0.² Workers compensation loss ratio = 70%.² Auto liability loss ratio = 64%.² General liability loss ratio = 68%.