COURSE 8: Fall 2003 1 GO TO NEXT PAGE
FINANCE
Morning Session
**BEGINNING OF EXAMINATION**
FINANCE
MORNING SESSION
Questions 1-5 pertain to the Case Study.
Each question should be answered independently.
1. (8 points) Mr. Newman has just given J. Peterman the unaudited line-of-business and
consolidated financials of NADA for 2002 along with projections for 2003-2005. In
addition, NADA has supplied Peterman with an extensive business plan detailing the
growth potential and opportunity for each of its business units.
The business plan contains an emphasis on growing the GIC business. Mr. Newman
plans to do this through the addition of Funding Agreements with 12-day put options.
The Funding Agreements will be sold to institutional investors other than retirement
plans.
Peterman is concerned about NADA’s growing reliance on GIC sales. Peterman has
questions about the profitability, liquidity, and investment risks of the GICs.
Mr. Newman has asked you to address the rating agency’s concerns.
(a) Explain why Peterman may have concerns about increased Funding Agreement
sales and their effects on profitability, liquidity, and investment risk.
(b) Peterman has recently adopted a view of interest rate risk similar to Moody’s
Investor Service. Summarize Moody’s view of interest rate risk, and describe the
impact that such views could have on Peterman’s evaluation of NADA’s current
and planned GIC business.
COURSE 8: Fall 2003 2 GO TO NEXT PAGE
FINANCE
Morning Session
Questions 1-5 pertain to the Case Study.
Each question should be answered independently.
2. (10 points) In preparation for the upcoming rating agency meeting with J. Peterman,
Chief Actuary Kramer has been asked to look into improving the RBC ratio of the term
life block. His preference is to change the asset mix backing the product.
Manzier Reinsurance has offered to coinsure 35% of NADA’s term life block.
(a) (1 point) Calculate the required capital for year-end 2003 for the term life block
of business prior to any reinsurance. Show your work.
(b) (2 points) Propose terms for the reinsurance transaction with Manzier that would
optimize NADA’s RBC ratio for the term life block of business.
(c) (3 points) Calculate the required capital for year-end 2003 for the term life block
if the reinsurance deal you proposed is consummated. Show your work.
(d) (2 points) Calculate the impact of your proposed reinsurance arrangement on
NADA’s year-end 2003 RBC ratio. Assume no change to available surplus.
Show your work.
(e) (2 points) Predict Manzier’s response to the terms of the reinsurance arrangement
proposed in part (b).
COURSE 8: Fall 2003 3 GO TO NEXT PAGE
FINANCE
Morning Session
Questions 1-5 pertain to the Case Study.
Each question should be answered independently.
3. (12 points) NADA’s business plan projects increased sales of GICs beginning in 2003.
To achieve this plan, the Marketing Department has instituted a commission scale for
GIC products sold in 2003, as follows:
•a commission payment of 1% of deposits for GICs with 5-year interest rate
guarantees
•a commission payment of 0.2% of deposits for GICs with 1-year interest rate
guarantees
•commissions are paid at the time of sale to the broker.
Von Nostrum has recommended that NADA start deferring acquisition costs with respect
to its new business. Elaine Benes has put you in charge of creating a methodology to
capitalize and amortize acquisition costs in accordance with U.S. GAAP.
You start by focusing on the GIC line. Assume the following:
•NADA’s GICs are FAS 97 investment contracts.
•All GICs are sold at the beginning of the year.
•There are no withdrawals prior to maturity.
•Interest earned is paid to the contract holder on December 31 of each year.
•For assets backing the GIC business sold in 2003, NADA expects to earn an
investment return of 4.295%.
•Expenses are 5 basis points per year.
(a) Describe the procedure for determining the capitalization of the acquisition
expenses and the subsequent amortization of the DAC asset for the GIC line.
(b) Calculate the DAC asset for new business planned to be written in 2003 for the
GIC line. Show your work.
(c) Calculate the amortization schedule for the DAC asset from part (b). Show your
work.
COURSE 8: Fall 2003 4 GO TO NEXT PAGE
FINANCE
Morning Session

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