Overall net leverage ratio

cgc2018

Hello,

at 2017 spring Q13, answer gives
Net Liabilities = Total Liabilities - Unpaid Claims And Adjustment Expenses Recoverable –
Unearned Premiums Recoverable; or I could say, net liabilities = total liabilities - reinsurance recoverable(claim+premium)

if I applied this logic to question Fall2012, Q21, C, total liability should be 226.5% equity, and net claim is 185%equity, so the ratio is =185/226.5 =81.7%

is it correct?

Thank you!

graham

I looked at 2017.Spring Q13c and 2012.Fall Q21c and I agree there is an inconsistency between the CAS solutions to those problems. In both cases, the term Total Liabilities refers to (claims + premium) liabilities, but

• in the 2017 problem, Total Liabilities also means gross of reinsurance (and the solution requires that you subtract reinsurance recoverables to get the value for net liabilities, which you need as an intermediate step in the calculation.)

• in the 2012 problem, Total Liabilities means net of reinsurance. We know this because in their solution, they calculate Net Liabilities using the following MSA ratio formula for (Overall Net Leverage) but then just use it as the total liabilities value:

  • (Overall Net Leverage) = (NWP + Net Liabilities) / Equity

This is all explained below...

In 2012 you have to calculate:

• (net claims liabilities) / (total liabilities)

Your solution for 2012 is: 185% / 226.5% = 81.7%

• The numerator, 185% is (Net Loss Reserves) / Equity, which was given.
• The denominator, 226.5%, is calculated in 2 pieces:
  • See the examiner's report to see how they got (Net Liabilities / Equity) = 220%.
  • If we interpret Total Liabilities to be gross of reinsurance then we should add the given reinsurance recoverables of 6.5% to get 226.5%.

The CAS solution for 2012, however, was 185% / 220% = 84.1%

• The numerator, 185%, is the same as yours, and was given in the problem.
• The denominator, 220%, is the net of reinsurance value.

What this shows is that the CAS solution for 2012 treated everything as net of reinsurance. And as you correctly pointed out, this is inconsistent with their use of the term Total Liabilities in the 2017 problem.

The CAS never makes corrections to examiner's reports, and this isn't the first time more recent reports have contradicted earlier examiner's reports. For this reason, you should usually abide by the most recent examiner's report if there is an inconsistency.