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Performance for Investors

Performance for Investors. Using Valuation Concepts for Measuring Performance. Setting. Investor has agreed to support a new company for one year. Will review at end of year to determine whether company is meeting cost of capital requirements

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Performance for Investors

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  1. Performance for Investors Using Valuation Concepts for Measuring Performance

  2. Setting • Investor has agreed to support a new company for one year. • Will review at end of year to determine whether company is meeting cost of capital requirements • Company formed by experienced insurance executive

  3. Annual Policies Risk Free Rate = 6% Premiums paid .3 yrs after policy is written Expenses paid same time Losses paid over 9 yrs, average loss paid .833 years after occurrence. Taxes paid according to 1986 TRA Example assumes no market risk Security Fund is investable assets less market value of liabilities Prem/Security Fund Ratio is 2/1 Assumptions

  4. Underwriting Statistics

  5. Operating Return Statistics

  6. Nominal Investor Flows

  7. Discounted Investor Flows

  8. Review Time • The company writes a million dollars worth of premiums during the first year. • All investor cash flows are discounted at 6% • Standard Accounting Documents show rotten results • Shareholder Value Accounting (SVA) shows everything right on schedule.

  9. Ratio Measures to Security Fundand Total Equity

  10. Ratio Measures to Security Fundand Total Equity

  11. Ratio Measures to Security Fundand Total Equity

  12. Growth Rate Comparison

  13. Effect of Risk onCost of Capital

  14. Accounting Numbers are Incomplete • Accounting Profits change with growth. • Such changes are not related to performance • Writing typical standard auto policy requires incorporating future value. • Taking on investment risk may be inappropriate for P/C Insurance Companies

  15. Security Fund Operating Return SVA Standard Profit SVA Profit Invested Assets less funded liabilities Sum of Insurance Cash Flows (Premiums, Losses, Expenses and FIT) including Investment Income earned on those cash flows Shareholder Value Accounting Operating Profit plus Investment Income from Capital Standard Profit plus (minus) change in Future Value Glossary of Terms

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