I have read that under Revalorisation method the equity investment is not ideal for the company because the provision of the Terminal bonus is not possible or in other words, the deferral of profit distribution is not possible. Why is profit deferral being associated with equity investment? Given the equities are volatile and as a result the Asset values will be volatile, there should be the need for smoothing of the market values rather than the need for the deferral of profits (deferral may be required as well to absorb the long term losses). The smoothing under the Revalorisation method can be achieved by writing up and down of the book values of assets(if regulation allows) then what is the need of profit deferral? It is also said that under Reval method, the company has a floor of 0 on -ve bonus but that is true under any bonus system then why is it specifically mentioned for this method? Thanks for reading such a lot !!
I think smoothing and profit deferral often go together. Eg say you you expect average investment returns to be 6% and invest in equities. If returns in one year turn out to be 10%, then yes you could smooth and artificially reduce this return by using a written-up book value, but that's equivalent to deferring the real returns that have been made. That sounds OK but of course returns could also be 2% or even minus 10%. You could hope that things would average out but that would be a huge risk, especially as you can't pay -'ve bonuses. If you plan to pay TB then you effectively build up a cushion, by keeping some profits back, against adverse experience. This cushion could theoretically be taken away (by reducing TB), subjec to the usual provisos of PRE etc.
