2018 Fall #11
Maybe I'm misreading something.
"Net Investment Income earned"
But using your formulas:
net investment income = (investment revenue) – (investment expenses)
= (net investment income earned) + (net realized capital gains)
whereas it looks like they're calculating "net investment income".
Comments
Based on the part b sample answers, it looks like they use the formula above assuming they actually calculated NII earned = 450 in part a (and not NII=450), since they add net realized capital gains to get NII = 450 + 100 = 550.
Am I interpreting correctly?
I think I figured it out
On Exhibit of Net Inv Income (NII):
17. NII = gross investment income - (investment expense + TLF (not fed))
On Statement of Income:
9. NII earned (Exhibit of Net Investment Income, Line 17)
So NII earned == NII.
Net Investment gain = NII earned + net realized capital gains (-tax)
Using this their answers make sense.
I think your formulas would be clearer if you changed "net investment income" to "net investment gain"
and NII [earned] = gross investment income - (investment expense + TLF (not fed))
at https://www.battleacts6us.ca/wiki6us/Odomirok.8-9-IS#Statutory_Income_.282018.Spring_.2310a.29
Yeah, I think might you have a point. I will look at that tomorrow.
Hey, I saw staff commented on my other post, but just wondering if you're looking at it too? It looks like the wiki hasn't updated
Sorry, I forgot to do it. It's done now.
I'm just now seeing this change to the NII formula that I had memorized for a long time and I'm confused by a footnote #2 in the Total Net Income table on the wiki.
It says: "Investment revenue includes realized capital gains but excludes unrealized capital gains"
If this is the case, why is the NIG = NII + net realized capital gains - taxes? Isn't this double counting the realized capital gains, since the investment revenue, which is part of NII calculation, includes capital gains? I've managed to get myself pretty confused two days before my test on a topic I thought I understood well, so any help would be appreciated haha.
Since your exam is next week, the simplest thing for you to do is ignore footnote 2 and make sure you can get the right answer to the old exam problems. For example, there is an exam problem (2019-Spring Q9b) that gives you this information:
They then ask you calculate "Net Investment Income Earned". The answer is just:
and this does not include realized gains.
Take a quick look also at part (a) of this problem: (It's pretty easy.)
A slightly longer answer (which you should probably ignore at this point): There are some inconsistencies in terminology between the Odomirok source text, the annual statement examples, and some exam problems. This is ultimately the source of some of the confusion here. If you consider the excerpts below, they seem to imply that:
but that doesn't fully make sense.
From Odomirok:
From the annual statement examples:
In any case, as long as you can do the old exam problems, you should be fine as it's normally clear what they are asking by the way the information is provided.
Thanks for the quick and detailed response! That was helpful
Graham says sure, good luck.
Reviewing this question currently and I have some confusion (maybe).
I might just be dumb here but the solution for part b in the examiners report has 2 sample solutions that seem at odds with each other and I'm not sure how to make sense of it:
Sample 1 is a final answer of 50 while Sample 2 is a final answer of 250. Looking at the solutions, it seems like the difference is how the change in the provision for reinsurance is treated. In Sample 1, the change in provision is treated as a change in the positive direction (it's adding to the current - prior yr surplus) where as Sample 2 it's being treated as a negative.
Is this the CAS just accepting both answers on the basis of "change in provision" being vague enough to interpret either way, or is there some other reason both of these solutions would have been accepted?
"Change in provision for reinsurance" is the name for a specific line in SOI - line 28. This line is defined as provision(last year) less provision(this year). It is added on to surplus(last year) in getting surplus(this year).
So, when provision increases from last year to this year, surplus(this year) decreases. This makes sense: you're tying up more of your surplus in provision, so you're available surplus is less.
Ordinarily, you would think of "change" as this year less last year. But line 28 does the opposite, so that it's additive to surplus(last year).
The two sample answers interprets "change" in these opposing senses. Sample 1 uses it in the sense used in Line 28.
I am not sure if the Examiner means that both interpretations are acceptable by way of supplying them both, or if this was their oversight. To be safe, I would use it in the sense of Sample 1, and state in a footnote that you do so, because that is the sense sued in Line 28 of SOI.
So I think I understand everything that you're saying about the change being last year - this year, but I feel I must be missing something because it seems like you mean to say that Sample 2 is the one in line with this?
Both sample answers are using the concept that the UW income + Investment Income + Chg in Surplus = Curr Surplus - Prior Surplus
Sample 1 has a solution for UW income that is lower because it is interpreting the 100 change in provision as contributing to surplus, lowering the difference in surplus left for UW income to explain (Curr - Prior), thus UW income is lower (50).
Sample 2 has a solution for UW income that is higher because it is interpreting the 100 change in provision as detracting from surplus, thus UW income needed is higher (250) as UW income has even more of a gap to fill between Curr and Prior surplus.
Unless I'm missing something?
Sample 1 adheres to the SOI Line 28 definition, because it is adding the given 100 to surplus(last year), as it is done with Line 28.
Your explanations for Sample 1 and Sample 2 are correct.
I see, that makes sense now. Thanks!
Sure, good luck.
I'm sorry to add to the confusion, but I am all sorts of confused now. Graham's comment in the following post says that investment income does not include realized gains but that contradicts the answer to part a of this problem (fall 2018 #11) as well as the other comments on this thread. So does investment include or not include realized gains?
https://www.battleacts6us.ca/vanillaforum6us/discussion/comment/151#Comment_151
"Investment income" does not include realized gains; "investment gain" does. The sample solution of 2018.F.11.a solves it as such.
Oohhh okay, I think the wording of this question is where my confusion is. So I'd only add investment income + realized gain if they asked me for the investment gain.
Yep, correct.