First, I should probably clarify that my post above was ignoring PVIF, ie I was assuming there are no expected future profits in order to keep things simple. This means that the expected future investment return in the projection basis must be the risk-free rate, as would be the case if we were doing the EV on a market-consistent basis. If the expected investment return in the projection basis exceeds the risk-free rate used to discount the BEL, there would be some PVIF - and it all gets more complicated! So if it's OK with you, let's continue to work on that basis for now.
Hence, with PVIF = 0, what we are effectively doing is (broadly speaking) an analysis of surplus. Except that in this case, because we are doing an EEV, we have to split the 'net assets' component (= assets - BEL here) between free surplus (FS) and RC.
Your process as described above will give us just the experience variance items for the analysis of surplus, where (as noted above) here we have surplus = FS + RC.
For the full analysis of surplus, we need to include the actual return on the start year surplus (ie on the assets backing FS + RC) and any changes in assumptions or other miscellaneous items of change over the period, such as a change in model.
Now: in order to move from doing an analysis of surplus to doing an analysis of change in EEV (still assuming PVIF = 0) there is one further item that we need to take into consideration: the COHRC. A change in that amount over the period will contribute to the change in EEV, since COHRC is deducted from EEV. If PVIF = 0, then basically EEV = 'net assets (surplus)' (FC + RC) - COHRC. We've thought about analysing the change in surplus - now we have to think about analysing the change in COHRC.
Therefore, for example, if the company has to put aside more (or less) regulatory capital as a result of changes in its risk profile, or due to its actual experience over the period, or due to changes in assumptions underlying the regulatory capital calculations, then the proportion of 'net assets' that comprises RC will increase (or reduce), with FS reducing (or increasing) correspondingly. If the amount of 'net assets' that is locked-in as RC changes, so will COHRC, and thus so will EEV. Furthermore, if there are any changes to the pattern of release of RC, this will also impact the COHRC calculation - and hence will be part of the change in EEV.
Another way to think about this is: if something happens that means that the amount of capital that is locked into the company changes, or if the pace of release of that locked-in capital to shareholders changes, then this will impact shareholder value - and hence is part of understanding the change in EEV.
Has this helped?
I think you might be in danger of trying to over-analyse this concept. It might be worth making sure that you can stand back from it and understand the concepts of the components of EEV and also how an analysis of EV relates (closely) to an analysis of surplus, rather than getting too absorbed in details? The full analysis of change of an EEV (including of the COHRC and PVIF elements) is a complicated process, and doesn't lend itself particularly well to a short bullet pointed list of steps!
Click to expand...