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

THE APPLICATION OF FUNDAMENTAL VALUATION PRINCIPLES 321² Average investment yield = 4:26% (weighted average of yieldsby asset type).² Premium growth = 3%.² Hurdle rate = 15% for explicit forecast period and subsequentyears.TABLE 7Sensitivity Testing of Alternative AssumptionsDCF ModelEVA Model2001— 2012 2001— 20122011 to 1 Total 2011 to 1 TotalBase Case 54.7 33.3 88.0 73.9 14.1 88.0Change in AssumptionSurplus/RBC ratio = 2:5 43.1 34.7 77.7 67.3 10.4 77.7Base loss ratios + 2% points 46.0 30.4 76.4 66.0 10.4 76.4Base loss ratios ¡2% points 63.3 36.2 99.5 81.8 17.7 99.5Investment yield +100 basis pts 67.6 39.8 107.5 86.9 20.6 107.5Investment yield ¡100 basis pts 41.6 26.8 68.4 60.9 7.5 68.4Premium growth = 0% 58.1 26.3 84.4 72.5 11.9 84.4Premium growth = 6% 52.4 37.3 89.8 74.6 15.1 89.8Hurdle rate +3% points 48.3 20.9 69.3 63.2 6.1 69.3Hurdle rate ¡3% points 62.5 56.4 118.9 87.5 31.4 118.9Table 8 shows the changes in value implied by the alternativeassumptions. Section 3 discusses the similarities and differencesof the models’ structure and results using varying assumptions.These tables show that company value is very sensitive tochanges in the assumptions underlying the valuation. Every sensitivitytest alters value by at least 10%, except for the premiumgrowth assumptions. Large changes in premium growth assumptionshad a small impact on value because the underwriting prof-