CAS Exam 7 Spring 2017, Question 20
Study guide: Exam 7
Given the following financial information ($000) for an insurance company as of December 31, 2016:
| Item | ($000) |
|---|---|
| Beginning US GAAP equity | 100,000 |
| Net income | 20,000 |
| Minimum capital to maintain S&P AA rating | 110,000 |
| Minimum capital to meet management's year-end growth target | 115,000 |
| Change in loss and expense reserves | 25,000 |
| Advertising expenses (cash charge) | 3,000 |
| Amortized office furnishings expense | 2,000 |
| Net borrowing | 10,000 |
Part a (0.75 points)
Determine the company's Free Cash Flow to Equity as of year-end.
Part b (0.5 points)
Briefly describe two reasons why the Free Cash Flow to Equity method is preferred over the Free Cash Flow to the Firm method when valuing property and casualty insurance companies.
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