Income from subsidiaries

jc2018jc2018
in MSA.Ratios

Hi Graham,

The only time I see the income from subsidiaries mentioned separately is in the formula for ROR.
However, in Fall 2017 Q25, they seem to include the IncFrSub in the NI calculation.
Is IncFrSub considered to be a part of "other income" from NI = (1-tax rate)*(U/W inc + Inv Inc + Other Inc)?
If not, why is it included in the NI calculation? If it is, are there other examples of "other income" that could come up in the exam?

Also, for a) it seems to calculate the NI in the first sample using the above formula. However, there is no tax rate given.
When this happens, are we to assume that tax = 0 and continue calculating? (I ended up calculating using ROA and Inv yield)

Thanks,

Comments

  • grahamgraham

    It would be good if there were a single reference for all of these formulas, and I will work on putting something like together in the future. (I know that doesn't help you now.)

    For exam questions like these, you can usually take an educated guess and be right most of the time. So:

    • When no tax information is given, you have no choice but to ignore it and/or assume it's 0. (It might be wise to include a note in your solution saying you are ignoring taxes because no tax info is given. That's indeed what the solution seemed to do.)

    • Regarding whether "income from subs" is included in NI, it isn't explained clearly in the MSA reading. If you look at the reading, they do not provide a formula for ROE, except to say it equals NI divided by Equity. They just assume you already know how to calculate NI from the income statement. But they do provide a formula for ROR, and they specifically include "income from subs". This makes it seem like "income from subs" is not part of NI. Otherwise, why didn't they just write the numerator of the ROR formula as NI minus capital gains? I think this is just sloppy writing. "Income from subs" is part of NI, as they assumed in 2017.Fall Q25.

    • In your other question, I think you meant to say the examiner's report calculates NI in part (a) in sample answer 2 using adjusted investment yield. Then since they give you ROA and since ROA has the same numerator as ROE, you can calculate ROE. But note you get a different answer from sample answer 1. This is because the given information is not internally consistent. They don't include taxes here either.

    Anyway, for an insurer, income is going to always include mainly U/W income and Investment Income. Anything else like "income form subs" would go into "Other Income". Regarding examples of "Other Income", I honestly don't know - probably miscellaneous items that are specific to the company.

    In general, I wonder about the accounting expertise of the people writing the questions. I have to admit that I feel a little fuzzy myself on some of these accounting calculations because my own knowledge is based mainly on an accounting class I took in university and the 6C syllabus, and as you well know, the 6C syllabus is large and confusing. But in the future, it will be FCAS's like you creating these exam questions! If you ever write questions for 6C, you should ask your company's accounting department for their experise!

  • bkmlocksbkmlocks

    Hello @graham, regarding your discussion above about whether Income from Subsidiaries should be part of the Net Income or not, I must admit I also got confused.

    I went back to the Sample Quarterly Return and they seem to have it separate from Other revenue.

    All of that to say that Income from Subs is indeed part of Net Income and other types of revenues are those in the sample quarterly return (I guess?).

    I also went back to the calculation template that you have in the MSA battlecard, the Net Income before tax doesnt seem to be consistent with the provided information. (UW Income + Net Investment Income + Income from Subs). Please let me know your thoughts!

    Thank you very much.

  • grahamgraham

    Yes, if you look at the quarterly return, "Income from subs" is listed under "Other Income". And since "Other income" is part of Net Income, that means "Income from subs" is part of Net Income too. I should have just looked in the quarterly statement before. Not sure why I didn't.

    I see your point in the MSA web-based problem about "Net income before tax" not being consistent with the other information that's given. That's because the given information is generated mostly randomly. That was one of the first web-based practice problems I coded and I would have done certain things differently now. Among other things, I would have made sure the information was internally consistent. It wouldn't change how you do the problem but people who are observant would notice that. I will make a note of it for my to-do list. We do a round of updates and upgrades after each sitting. Thanks!

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