InvYld
Hi,
I have been doing the problems and usually the Inv Income used in the denominator and numerator are the same.
Here is the formula in the wiki:
InvYld = 2 x ( Net.InvInc + OCI ) / ( Invested Assets [start of yr] + Invested Assets [end of yr] - Net.InvInc )
I am wondering if that formula is correct. I think we should not include OCI in the numerator if it is not in the denominator. In the problem that it refers to, OCI = 0.
Gene
Comments
This is the ADJUSTED investment income.
You also need to substract the OCI from the denominator.
Note that this MSA ratio does not have the Pooled funds Investments like our new Investment yield
Hi,
for "invested assets" above -> do you know what's included?
based on Questions it looks like it includes: Bonds, shares, debentures, real estate, cash
(doesn't include items like receivables) ? Anything else i've missed?
thanks
From page 20.10 of the sample quarterly statement (asset side of the balance sheet), investments include:
Investments:
Cash is listed on a line separately above the investments, and receivables are listed separately below the section on investments.
This should be consistent with the solutions to the exam problems. If not, please let me know.
in 2019 spring Q21, looks like cash is also included?
Ok, I see what's going on now. There is an error in the examiner's report solution to 2017.Fall Q13a.i that I didn't notice before. In that problem they specifically included cash as part of investment income but this is not correct. There was a similar problem in 2019.Spring Q21 and it appears the CAS corrected themselves in that solution. Cash should be part of the calculation, but it should be listed separately from investment income.
This is the formula they're using from the CCIR annual statement instructions and does indeed list cash as a separate component from investment income:
They get the correct answer in both cases but the formula looks different. I will edit the wiki article to reflect this. Thank you for bringing it to my attention.
hi, Do you know what formula are they using in 2019fall Q16 to calculate inv yield?
I used the formula above and got different answer..
If you're referring to the 5% investment yield, I'm not sure you can calculate that from the given information. You would need the value of V at year-end 2017, but they only give you year-end 2018. Am I interpreting your question correctly?
sorry, so my question is I think they used "INV yield" to calculate NII (net inv income),
do you know how did they do that? what formula was used.
Now that I'm looking at this question again, it looks like something isn't quite right. It looks like they are mixing 2018 and 2019.
All of this implies the treaty was purchased on Jan 1, 2019 which doesn't make sense. The catastrophe has already happened in 2018. (They also say the reinsurance premium is paid at inception but they don't say when that is.)
I wrote to the CAS exam committee about it. I'll let you know if I get an answer. Please let me know if you think I misread the question myself.
hi Graham, thanks -
One follow up question - this is how I calculated the NII (net inv income):
5% = 2*NII (Invested assets curr yr+ Invested Assets prior yr - NII)
-> invested assets curr yr = 700 K + 100K = 800K
-> invested assets prior yr = 0 (not given)
-> NII = 19512
for your comment below:
"then subtracting the reinsurance premium and reinstatement charge" -> how is this part of the inv yield formula?
where did the "2" from 2*NII go ?
thanks
Ok, you made the assumption that invested assets from the prior year was 0 because it wasn't given but I'm not sure that's a valid assumption. I checked the statement of the problem because sometimes they say something like: "This insurer began operations on Jan 1, 2018". (If that were true, you could assume investment income for the prior year is 0.) If you wanted to know the investments from the prior year, you could use the formula for investment yield and work backwards. If you do that then investments from the prior year works out to 806,925.
Anyway, I think I see now where you're having trouble. There are different ways of calculating investment income. You tried using the above formula but it won't work because you are missing the prior year investments. But there is another way to do it. If you're given the investment yield, you can calculate investment income directly just by multiplying your investments by the yield. That's what was done in the examiner's report.
I still don't think the problem entirely makes sense but that's their reasoning for the investment income piece.
ahh - makes sense. Haven't seen that formula before - thanks for the explanation!
hi @graham , in the investment yield formula, can i know is the logic of substracting the inv income from the denominator?
Hi @KiwiBO,
This formula is only an approximation to the true investment yield. To calculate the exact value, you would have to examine each investment separately and calculate some sort of weighted average across all your investments.
But we're not going to do all that so here's an example of an extremely simple way to approximate investment yield that uses Vb as the basis:
But that's a bit too simple. We can get a slightly better approximation using the formula further up in this thread:
The formula uses (Vb+Ve-I) as the basis. The reason this formula is better is that it takes into account premiums (and other non-investment income) the insurer may receive during the year. For example:
So instead, the formula basically takes an average of the beginning and ending cash balance as the basis for calculating investment yield:
But they don't want this basis to include investment income they received during the year. They want the basis to be just the non-investment cash they receive from premiums during the year (and investment income from prior years). If they didn't subtract I from the denominator, their investment yield would appear lower than it really is, especially if the investments did really well in that year. So the short way of answering your question is:
(Note that these investment earnings would be rolled into Vb for the next year.)
@graham Thanks for the step-by-step explanation. This makes a lot of sense to me.
Part of where I came from is the inconsistency to the definition of RoE = 2*net income / (E_b+E_e). Isn't the net income need to be taken out for a similar consideration?
Oh, I see. One thing to remember is that these are not mathematical definitions or theorems so in that sense there is no right or wrong. Instead, you can think of them as "useful" or "not useful" in providing information about the company.
Here are my comments about ROE:
So, there is no definitive answer as to why the formulas are the way they are. You have to look at several different metrics and consider all the information carefully to really understand the financial state of a company.
Got it. Thanks again: ) @graham
Hi @graham,
Sorry for the inconvenience but I do not see any difference between the solution S2017Q13 and S2019Q21.
In both, we calculate
Invested Assets = Cash + (Bonds & Debentures) + (Common Shares) + (Real Estate)
Please let me know what I am missing here.
Thanks,
Andrew
Edit: After reading this post, https://www.battleactsmain.ca/vanillaforum/discussion/868/invested-asset#latest, I think I now get it.
From my understanding, V is not equal to invested assets.
Is there a specific term to call V?
I'd maybe call it investable assets (?) Since cash is investible but is not really being invested currently