This is about Q2 of practice exam 1, morning session. (The case with UniLife) I am a bit confused as to the function of each segment. (Please refer to Schweser) 1. What is the credited rate (5%)? Is it the actuarial rate with the insurance company? 2. Why are the credited rate (5%) and total expenses on business operations (2%) put to the second segment, which is the long-term, fixed-income portfolio? - sticky
don’t have Schweser but the required return would be 7% which is the creditied rate plus the expenses which are paid out of the portfolio. The credited rate is their borrowing rate I believe.
bigwilly Wrote: ------------------------------------------------------- > don’t have Schweser but the required return would > be 7% which is the creditied rate plus the > expenses which are paid out of the portfolio. The > credited rate is their borrowing rate I believe. Why is this NOT put to the short-term portfolio (which seems to be the minimum return segment)? - sticky
The short-term portfolio is more for supplemental income than trying to meet the returns fo the entire portfolio. The ST portfolio is surplus funds I believe so the value of the ST portfolio can vary widely and thus is not a stable source of income. The required return of the ST portfolio is that of whatever it is benchmarked to.
Wouldn’t the short term portfolio be for liquidity purposes rather than surplus funds or supplemental income?
the long term portfolio will be duration matched to meet liquidity expectations based on actuarial estimates on the lives of the insured. the short term portfolio is strictly for returns enhancement… it’s the extra sizzle
see this is what confuses me. Schweser says there are 3 segments: 1. minimal return — using ALM matching liquidity requirements based on actuarial assumption. Q: is this what the ST portfolio in the question is doing? 2. enhanced margin — using “spread management”, and I have no idea as to what that means. Q: is this what the LT portfolio in the question is doing? 3. surplus growth — this sounds like the 3rd segment in the question, so that’s fine. Any idea on (1) and (2)? - sticky
minimal return is what teh LT portfolio or ALM is doing Enhanced margin is making a profit from say lending at 6% but borrowing at 5%. Surplus Growth - is what is sounds like growing your surplus, this is mroe ST in nature.
bigwilly, I think you need to take a look at the question. They have three things - 1. Short term portfolio of bonds 2. Long term portfolio of bonds 3. Equity Portfolio. Now, which one is for minimal return, which one of enhanced margin and which one for growth.
Equity - Growth ST Bonds - Enhanced LT bonds - minimal Just my thoughts.
bigwilly Wrote: ------------------------------------------------------- > Equity - Growth > ST Bonds - Enhanced > LT bonds - minimal > > Just my thoughts. do u mind checking with the description of these segments from the question first? This is very important to me. - sticky
I dont have Schweser, sorry.
genuinely appreciate your guts Bigwilly…
hi sticky i had a look at the question and here are my thoughts 1. the credited rate is the interest earned on the cash surrender value of the account. in universal life and whole life policies there is both a life insurance component and an ‘equity’ component, which is excess earnings credited to you. this will grow annually just like a deposit in a savings account. the rate charged is the ‘credited rate’. In order to maintain their long term viability, they need to not only meet liabilities but also generate enough returns to cover the credited rate that they pay to their policyholders. 2. schweser says that the return objectives can be segmented into three sections, but i don’t think they mean that there should be three separate portfolios to meet each one individually. the ST portfolio was given to be for liquidity and that makes sense (that satisfies part of objective #1 as per schweser’s notes). they will calculate the estimated amount of deaths and also make a guesstimate to how many of their policyholders will take out loans from their policies the long term portfolio will sustain objective # 2 (enhanced margin), and a part of objective #1 (minimum return). they need to match liabilities because of regulatory requirements (objective #1), but they also need to earn an adequate return to cover operating costs and also their credited rate (objective #2). spread management simply means investing and getting a rate higher than the rate you pay out. ok, going to press “post” now. let me know if i’m totally off the mark or if this makes some sense…
Thanks for the long reply. Questions below. eklypse Wrote: ------------------------------------------------------- > hi sticky > > i had a look at the question and here are my > thoughts > > 1. the credited rate is the interest earned on the > cash surrender value of the account. in universal > life and whole life policies there is both a life > insurance component and an ‘equity’ component, > which is excess earnings credited to you. this > will grow annually just like a deposit in a > savings account. the rate charged is the > ‘credited rate’. In order to maintain their long > term viability, they need to not only meet > liabilities but also generate enough returns to > cover the credited rate that they pay to their > policyholders. no problem with above. > 2. schweser says that the return objectives can be > segmented into three sections, but i don’t think > they mean that there should be three separate > portfolios to meet each one individually. What I get from Schweser is otherwise. Since the return objective is different for different segment, it seems that there are 3 separate portfolios for the 3 segments: 1. ALM for #1 (minimum return, ie matching liability obligation). In the schweser question, the ST portfolio seems not to be doing ALM, but seems to be targeting to “match” liquidity requirement. So do you think if it is doing the “minimal return” job? 2. “spread management” for #2 (enhanced margin), so credited rate + operating costs can be covered. 3. aggressive type of investment, targeting growth for #3 (the surplus portfolio) >the ST > portfolio was given to be for liquidity and that > makes sense (that satisfies part of objective #1 > as per schweser’s notes). they will calculate the > estimated amount of deaths and also make a > guesstimate to how many of their policyholders > will take out loans from their policies > > the long term portfolio will sustain objective # 2 > (enhanced margin), and a part of objective #1 > (minimum return). they need to match liabilities > because of regulatory requirements (objective #1), I thought the minimal return portfolio already covers matching the liabilities? ie LT portfoio target is simply to generate return = credited rate + operating cost. No ALM here. > but they also need to earn an adequate return to > cover operating costs and also their credited rate > (objective #2). spread management simply means > investing and getting a rate higher than the rate > you pay out. > > ok, going to press “post” now. let me know if i’m > totally off the mark or if this makes some > sense…