CAS Exam 7 Spring 2019, Question 16
Study guide: Exam 7
Given the following financial information for an insurance company as of December 31, 2018:
- Beginning US GAAP equity as of January 1, 2019 = $195 million.
- US GAAP net income forecast for 2019 = $43 million.
- Change in reserves included in net income forecast for 2019 = $11 million.
- Capital needed to maintain target rating at December 31, 2019 = $220 million.
- Risk free interest rate = 3.0%.
- Expected equity market risk premium = 6.5%.
- Insurance company equity beta = 0.8.
Part a (0.5 points)
Calculate the Free Cash Flow to Equity (FCFE) for 2019.
Part b (0.5 points)
Calculate the reinvestment rate for 2019.
Part c (0.5 points)
Briefly describe two reasons why the FCFE approach is preferred to the Free Cash Flow to the Firm (FCFF) approach for valuing insurance companies.
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