Okay, let me try a long winded explanation here:
Valuations involve working out the reserves.
The reserves here are the present value of the net liabilities.
1. Consider the following example: At a particular valuation since the launch of the product, the following is observes: (time 0 is valuation date)
At time 0, 1, 2, 3, 4 the net liabilities are:
10, 5, -5, -15, -20.
Or, I can say, loss of 10 at time 0, loss of 5 at time 1, profit of 5 at time 2, profit of 15 at time 3 and profit of time 20 at time 4
2. Let's say valuation interest rate = 0 (i.e. discounting factor =1)
3. If I bring the loss at time 1 and the profits at time 2, 3 and 4 to time 0, then the total cashflows are a profit of 25 (10+5-5-15-20).
4. This profit can be thought of as a "negative liability", i.e. a negative reserve.
5. In practice, what will happen is that the company has a loss of 10 at time 0. To recover that loss, it will look at positive reserves elsewhere in the company and cover-up the loss. So, it has in effect, taken a loan from the positive reserve. This loan has to be paid back. It will be paid back the cash-flows of 5, 15 and 20 at times 2, 3 and 4.
To answer your second question: regulators don't think it is prudent to bring future profits forward as these are not guaranteed. So, they don't want companies taking advance credit for profits that may arise in the future.
Note - taking advance credit for future profits = holding negative reserves = overall reserves held reduced = not prudent.
Hope this helps. Sorry if I've mentioned stuff you alreay knew and just missed your question completely.
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