A 60% CHANCE OF GIFTING $1.75 MILLION IN REAL VALUE TO ESTABLISH A...

2. A 60% chance of gifting $1.75 million in real value to establish a foundation in 10 years in memory of her late spouse. All goals are assumed to be in real terms and there are no other issues such as taxes to consider. D. State and justify which model portfolio would be selected for goal 1 and for goal 2. Each goal is to be treated separately. Grading GuideAnswer for Question 6-D For goal 1, use Delta; over 20 years at 95% probability has the highest return at 3.24%. For goal 2, use Zeta; over 10 years at 60% probability has the highest return at 8.96%. Candidate discussion: 1 point each for the two correct selections and two correct justifications. (Study Session 8, LOS 17.c, d, e, g) Norton has revised the analysis and determined he will use a new module for goal 1 that will earn 3% and a new module for goal 2 that will earn 6%. All other factors and information remain the same. E. Determine and justify whether Anton has sufficient financial assets to provide for both of her goals. Show your calculation. Answer for Question 6-E For goal 1, at a 3.00% return, the required capital is: N = 20; I/Y = 3.00; PMT = -300,000; FV = 0 → CPT PV = 4,463,242 For goal 2, at an 6.00% return the required capital is: N = 10; I/Y = 6.00; PMT = 0; FV = -1,750,000 → CPT PV = 977,191 Required capital is: $5.44 million. She only has $5 million, so her capital is insufficient. Candidate discussion: Goal 1 is in the form of a level annuity of 300,000 for 20 years. Goal 2 is in the form of accumulating 1,750,000 in 10 years. 1 point each for the two correct capital amounts and 2 points for showing her capital is insufficient. QUESTION 7 HAS ONE PART FOR A TOTAL OF 14 MINUTES A1 Casualty, Inc. writes property and casualty insurance policies for individuals, homeowners, and small businesses located in the Southeastern portion of the United States. For the last three years, market forces have caused A1 to more competitively price their policies to increase underwriting volume. This competitive pricing environment coincides with a somewhat slowing general business cycle. Two months ago, a massive hurricane hit the panhandle of Florida and southeast Alabama, causing unprecedented damages to property. Approximately 50% of A1's homeowners' policies are written in that geographic region, but as of yet, claims processing has been much less than expected from the area. Stan Carnay, A1's CEO, has been busy preparing the latest investment portfolio report for the Board of Directors' meeting in two weeks and has asked Eileen Carlyle, CFA, A1's most recent addition to the investment group, for assistance in updating a decades-old investment policy statement. In preliminary discussions, Carlyle indicated the following:  "Underwriting activity, although somewhat improved over the past decade, has not been as profitable as expected during the last three years. The competitive marketplace in which we operate has directly impacted our ability to profitably price our insurance products."  "We should count our blessings that so few claims from the recent hurricane have been submitted. Actuarial estimates indicate our potential exposure from this weather event is approximately $75 million, which represents 75% of our surplus portfolio. Since claim submission has been almost non-existent, we can transition our investment portfolio into a greater proportion of common stock, taking our stock to surplus ratio from 90% to close to 100%. That action should help strengthen our long-term competitive position."  "Recent economic conditions have slowed, but numerous other comparable casualty companies are optimistic that economic conditions will improve over the next 9 to 12 months. Although market economists continue forecasting a slightly longer downturn in the national economy, we consider those forecasts overly pessimistic." ... Without using calculations, formulate an investment policy statement appropriate for A1. Answer for Question 7

Investment Policy Statement for A1 Casualty

Objectives Return

A1 should follow a total return investment objective that

maximizes after-tax return and their ability to maintain a

competitive policy pricing, reduce volatility in overall

profitability, and achieve a reasonable growth in surplus.

There are two important factors affecting the risk tolerance of

Risk

A1 in this case: the uncertain cash flow characteristics of their

claims and the stock-to-surplus ratio. The primary objective is to

meet policyholder claims, and the overall level of risk tolerance

is low. An ALM approach focused on surplus volatility is

appropriate.

Constraints Time Horizon

Short, given that the duration of A1's liabilities is relatively

short.

Liquidity

The timing of the underwriting cycle, combined with the

prospect of hurricane-related claims increases liquidity needs.

Legal/Regulatory

A1 is subject to legal and regulatory requirements that vary from

state to state.

Taxes

Casualty companies, such as A1, are taxable entities.

Unique

Circumstances

Significant claims outstanding and geographical concentration

of policies in Florida and Alabama.

Candidate discussion: 4 points each for the return and risk components. 2 points for the liquidity component. 1 point each for all other components of the IPS. Note: Parts of this answer are generic to a property/casualty company because the case is mostly non-quantitative. The goal in the answer is to use specifics of the case where pertinent and given. (Study Session 6, LOS 13.i) QUESTION 8 HAS ONE PART FOR A TOTAL OF 12 MINUTES Bailey Investments is a U.S.-based investment management firm. The firm and composite began operations on January 1, 2009. Their client base has grown considerably over the last few years and in order to ensure accurate and consistent performance data they have decided to pursue GIPS

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compliance. The following includes composite data and notes relating to the first presentation for one of their composites in which they claim GIPS compliance.

Benchmark

Composite

Total Firm Asset

Number of

Year Total Return

Return

Dispersion

(%)

Portfolios

($ millions)

2010 6.54 7.25 15 2.5 86

2011 8.74 9.25 19 3.2 135

2012 9.45 8.67 28 4.1 276

2013 7.53 7.45 35 4.5 332

Bailey Investments claims compliance with the Global Investment Performance Standards (GIPS

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) and has prepared and presented this report in compliance with the GIPS Standards. Notes: