CAS Exam 7 Spring 2014, Question 17
Study guide: Exam 7
Given the following financial data for an insurer:
| 2014 | 2015 | 2016 | |
|---|---|---|---|
| Beginning U.S. GAAP Equity | $3,000,000 | ||
| Forecasted Net Income | $420,000 | $500,000 | $550,000 |
In order for the insurer to maintain its A+ Rating, it must meet a minimum capital requirement for each year equal to 5% above the beginning U.S. GAAP equity for the given year.
Part a (1 point)
Calculate the Free Cash Flow to Equity (FCFE) for 2016.
Part b (0.5 points)
Explain why the FCFE valuation is unaffected by whether the insurer's loss and loss adjustment expense reserves increased in 2014.
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution