X4 Q2(v)

[studentactuary15]

Dear tutors,

I really do not understand what this question is exactly asking and what the mark scheme is saying. Can I please have a very simplified statement of what the Q is asking and a high level explanation of what the answer is?

The MS says about the 100m and 105m. How can one (not all) block of business be worth more than its entire 100m worth of assets in the company?

Is this Q just saying how the block for sale will be defined in the EV published report? Then the buyer and seller agreeing on what methodology was used (e.g. tax, assumptions, etc)? I didn't really understand when the MS had all those bullet points and what they were meaning towards.

Thank you in advance!

 

[Lindsay Smitherman]

Hi: the question is asking 'Why might a block of business be sold for a different amount than its embedded value?'

The solution covers two angles on this:

- Firstly, the concept of the EV of just a block of business (rather than of the whole company) isn't necessarily obvious. It will depend on how much of the total assets held within the company is allocated to that particular business line as the starting point for the {partial EV} calculation. Since a sale value isn't necessarily going to be based on an EV calculation, the amount of assets being transferred across won't necessarily exactly equate to that theoretical hypothecated amount - so there already could be a difference.

- Secondly (and most significantly), there are lots of reasons why a negotiated sale price might differ from a theoretical EV calculation. This includes considering the negotiating environment (is the company desperate to sell? is the purchaser desperate to buy?) and that the two entities might each put a different value on the expected future profits when determining how much they are prepared to accept / offer (different assumptions, different tax position, etc). These reasons (and many more) comprise the bulk of the solution.

Hope that helps with understanding what the solution is getting at.