Coinsuring America's Future

Coinsuring America’s Future: A Proposal to Strengthen the Financial Stability of Social Security
Honor Capstone
By: Matt Farmer
Email: FarmerMatt11@outlook.com
Capstone Advisor: Bryan Snyder, Economics, Bentley University
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ABSTRACT
This paper proposes the unconventional strategy of using pension risk transfers to shore up America’s
pension plan, Social Security. In a pension risk transfer (“PRT”), one party, in this case a reinsurance
company, assumes the liabilities of another party, in this case the United States government. While their
domain has been limited to the private sector in practice, PRT’s could be a viable solution in this
context. This is because a comparative advantage of interest rates exists between the private and public
sector. Since the private sector yields higher returns than the public sector, the private sector has a
comparative advantage of interest rates. Therefore, higher returns could be generated when capital is in
the hands of the private sector. In this paper, PRT’s were modeled as a coinsurance reinsurance
transaction with a valuation date as of December 31st, 2019. The model measured the impact from the
two perspectives, the acquirer’s, and the US government’s perspective. This model encompassed benefit
projections using Social Security Administration data as well as regulatory, tax and interest rate
assumptions. In addition, sensitivities were run on key assumptions, including two Covid-19
sensitivities. The baseline results indicate that PRT’s could be a viable proposal as the US government
yielded a 3.58% internal rate of return from the deal. However, Covid-19 complicates the feasibility of
this deal.
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TABLE OF CONTENTS
I. Introduction ................................................................................................................. 4
II. Background ................................................................................................................ 5
a. The Social Security Program ................................................................................. 5
b. Pension Risk Transfers .......................................................................................... 7
III. Methods ..................................................................................................................... 8
a. Transaction Overview ............................................................................................ 8
b. General Assumptions ............................................................................................. 9
c. Sell-Side Model ........................................................................................................ 9
d. Buy-Side Model ..................................................................................................... 10
IV. Baseline Model Results .......................................................................................... 11
a. Initial Valuation .................................................................................................... 12
b. Ceding Commission Calculation ......................................................................... 12
c. Final Adjusted Baseline Results........................................................................... 13
V. Sensitivities ............................................................................................................... 15
a. Covid-19 ................................................................................................................. 15
b. Description of Accompanying Sensitivities ........................................................ 15
c. Sensitivity Results ................................................................................................. 16
VI. Conclusions ............................................................................................................. 18
VII. References .............................................................................................................. 20
VIII. Appendix .............................................................................................................. 24
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I. Introduction
Social Security, the United States’ public pension, is collapsing as its trust fund slowly runs out of
money. In their 2020 report, Social Security’s Board of Trustees projected that the trust fund will
become depleted in 2035 (SSBT, 2020). And this figure does not even account for Covid-19’s negative
impact. To put the gravity of this situation into context, Social Security provides retirement benefits to
millions of Americans. In 2019, the program was distributing benefits to 64 million people (SSBT,
2020). Despite the severe consequences of Social Security’s impending depletion, little help is found
from Washington D.C. as political dissent runs rampant among the two parties. Republicans favor
benefit decreases while Democrats favor tax raises (Brandon & Mohr, 2019). Republicans may
introduce solutions to increase the retirement age because life expectancy has increased significantly
since Social Security’s creation (Diamond, 1996; Kessler, 2019). On the other hand, Democrats may
favor proposals that increase payroll tax rates to close the gap. Both solutions are unpopular as who
wants less benefits or more taxes? Thus, the optimal solution for politicians is to do absolutely nothing.
John Turner describes this trend as political inertia where policymakers avoid making beneficial policies
if the short-term costs are unpopular with the electorate (Turner, 2017). To get around polarizing
American politics, it would be best to pick the low hanging fruit, or a solution angering the least amount
of people. The question becomes how can we improve the trust fund’s stability without raising taxes or
reducing benefits? This is where we turn to pension risk transfers (“PRT”), a practice common in the
private sector for support.
In general, PRT’s arise when a company is struggling to pay for its pension plan. At inception, these
plans seemed like perfectly reasonable ideas. Fast forward to the present, and these pension liabilities
are now consuming balance sheets as mortality has significantly improved and interest rates have
decreased since inception (Kessler, 2019; Blake, Cairns, Dowd, & Kessler, 2019). So, the pension
sponsor cedes it liabilities to another party, known as the acquirer. The beauty about PRT’s is that they
are mutually beneficial to both parties. The acquirer will receive assets from the seller. Whereas the
seller improves its financial position by jettisoning these liabilities elsewhere and reducing future
expenses. In addition, the U.S. government has a valuation rate than the private sector. The assets in the
trust fund garner low risk-free returns (42 U.S.C. § 401(d)), partially explaining the lower valuation rate
(the nature of government also does some explaining). This relationship was called a “comparative
advantage of interest rates” where one party can earn higher returns than another and therefore should
hold capital. There are several ways for a pension plan to structure this risk transfer. Coinsurance, a form
of indemnity insurance (Tiller & Tiller, 2015) is the structure presented in this proposal. As for potential
acquirers, reinsurance companies are a good suitor to manage longevity risk. A reinsurance company’s
customers are insurance companies as reinsurers sell insurance contracts to insurance companies. Since
reinsurance companies garner higher returns than the US government, it is possible to leverage this
comparative advantage of interest rates.
Some may detest this proposal and label it as a privatization scheme. In John Quiggen’s book,
“Zombie Economics”, Quiggen mocked the privatization schemes seen in history. He asserted that
governments incompetently undervalued their income generating assets and sold them to the private
sector at low prices (Quiggen, 2012). However, this PRT approach is not a typical privatization scheme.
Unlike past failures, this proposal seeks to transfer liabilities, not assets. This is feasible because of the
comparative advantage of interest rates. Therefore, the private sector can better absorb these liabilities
because the private sector earns higher interest rates (see appendix A.1 for a simple example). One may
still contest that this proposal is risky, which technically, it is, but not for retirees. First off, this proposal
argues that the U.S. government should guarantee all ceded benefits so beneficiaries will receive their
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Social Security benefits even if the acquirer defaults. This is part of the reason indemnity reinsurance
through coinsurance is desired as the ultimate responsibility for paying beneficiaries still lies on the
government’s shoulders. In addition, the proposal does not argue for converting Social Security into a
defined contribution system as proposed in the 1990’s up until the financial crisis (Quiggen, 2012). This
idea lost its luster when the housing bubble burst, sending equities roaring down. Lastly, the acquirer
will be a reinsurance company and reinsurance companies do not tend to invest in risky equity assets as
insurance is a heavily regulated industry. Just like a defined benefit plan, this proposal seeks to ensure
that beneficiaries do not bear the market risk.
Before discussing the structure of this paper, it is important to discuss why preventing Social
Security’s impending insolvency matters. As stated before, the program provides retirement security to
millions of elderly Americans. Further, it has been credited as one of the main factors for reducing
elderly poverty. From 1959 to 2008, elderly poverty was slashed by roughly 25 percentage points, from
35.2% to 9.7% (DeNavas-Walt et al. as cited in Arno et al., 2011). In addition, Arno et al. (2011)
credited Social Security for dramatic mortality improvements seen in the 1940s and the 1970s which
were two periods following Social Security expansions. As for the future impacts, if the trust fund
becomes depleted, retirement benefits will be reduced. A reduction should be avoided because Social
Security makes up a significant portion of retirement income. In statistical terms, Social Security equates
to more than half of total retirement income for roughly 52% of Americans based on the 2014 Current
Population Survey. (Dushi, Iams, & Trenkamp, 2017). It is fair to claim a significant amount of well-
being is at stake here.
The overall structure of this paper is as follows. Background information will be provided about
Social Security and PRT’s in section II. Section II’s topics will range from the history of the program
and its logistics to how the US government can use coinsurance to execute a PRT. Section III presents
the methods used to model this coinsurance transaction as well as the assumptions of the deal. Section
IV presents and analyzes the baseline results. Afterwards, section V discusses the impact of certain
sensitivities. Lastly in section VI, concluding remarks will be made. In addition, an appendix is located
at the end of the paper with supplementary material and will be referenced throughout.
II. Background
a. The Social Security Program
In 1935, Franklin Delano Roosevelt signed the Social Security program into law with the intention
of providing stable income to elderly Americans. After its creation, Social Security grew rapidly, and
became the largest social program in the United States. Structurally, Social Security is a defined benefit
pension plan. A retiree’s benefits are determined by a formula, not market returns like its defined
contribution counterpart. Social Security benefits are calculated using the average of the highest 35
years of earnings (OCA(a)). In addition, this average is adjusted progressively so that people with lower
lifetime earnings receive relatively higher benefits. Further, benefits are annually increased by a cost-of-
living adjustment (“COLA”) (OCA(b)). In addition, Social Security provides disability income as well
as other unique benefits (SSBT, 2020). There are three main sources funding Social Security. They are
payroll taxes, interest income and taxes on benefits. Individuals pay a payroll tax on their first 137,700
in earnings (OCA(c)) and their employer matches (this maximum increases annually). The payrolls
collected each year are distributed to current beneficiaries and the excess goes into the trust fund. The
trust fund invests in special US government assets to generate interest income (42 U.S.C. § 401(d)).
Lastly, a tax is collected Social Security benefits based on a beneficiary’s total retirement income
(AARP, 2019).
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The financial condition of Social Security is analyzed by the Social Security Board of Trustees (“the
Trustees”). The Trustees publish an annual report about the financial stability of Social Security. As for
managing the program, that responsibility falls on the shoulders of the Social Security Administration
(“SSA”). The SSA models Social Security by leveraging future demographic, economic, mortality and
several other assumptions. These models support the figures and conclusions presented in the Trustees’
annual report. In the 2020 Report, the impact of Covid-19 was not modeled because there was
significant uncertainty surrounding the virus (SSBT, 2020). To return attention to the “pre-Covid”
report, the Trustees projected that Social Security’s trust funds will be depleted in 2035 (SSBT, 2020).
This brings up a common misconception. Trust fund depletion does not entail bankruptcy or zero
benefits after 2035. But rather, it means the program will no longer be able to pay out full benefits.
Thus, benefits will be reduced as projected payroll taxes get overwhelmed by projected future benefits.
Figure 1.1 Social Security trust fund Assets

Special Issue Treasury Yields Over Time
Year Yield Year Yield
1990 8.375% 2006 4.500%
1991 7.375% 2007 4.000%
1992 7.000% 2008 2.750%
1993 5.875% 2009 2.875%
1994 8.000% 2010 2.375%
1995 6.000% 2011 1.750%
1996 6.250% 2012 1.375%
1997 6.125% 2013 2.250%
1998 5.125% 2014 2.000%
1999 6.375% 2015 2.125%
2000 5.625% 2016 2.375%
2001 5.000% 2017 2.375%
2002 4.500% 2018 3.000%
2003 4.375% 2019 1.875%
2004 4.375% 2020 0.750%
2005 4.625%
Source: SSA Historical Interest Rates.
https://www.ssa.gov/OACT/ProgData/intRates.html
This next paragraph explores the causes of the program’s dwindling financial condition. Three
main causes will be discussed, and they are the baby-boom demographic, increased longevity, and low
interest rates. The sheer size of the retiring baby-boom demographic is arguably the biggest risk factor.
Furthermore, Social Security’s pay-as-you-go system hamstrings its ability to adapt to this demographic
trend. A pay-as-you-go-system means the payrolls of current workers are used to cover the benefits of
retired workers. According to the Trustees, there are not enough new workers entering the workforce
(partially due to lower fertility rates) to replace the retiring baby-boom population (SSBT, 2020). This is
not a new problem coming to fruition, but rather one known for quite some time. As the 1990 report
states, “the number of persons born in the two decades after World War II, rapid growth is expected in
the aged population after the turn of the century” (SSBT, 1990, p. 6). Second, there is longevity risk, or
the risk of individuals outliving their expected lifespan. According to a 2015 actuarial note, the SSA
underestimated the mortality improvements in the early 21st century (Goss et al., 2015). When people
live longer, the government’s liability increases (Even though increased longevity has benefits to
society). The last factor is low interest rates earned by assets in the trust fund. The yields on trust fund
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assets are linked to the average of prevailing market treasury rates, rounded to the nearest 1/8 of a
percent (42 U.S.C. § 401(d)). Above, figure 1.1 shows the yields on trust fund investments decreasing
over time. Notice that the rates were above 8% in 1990 and fell to 2% in 2019.
b. Pension Risk Transfers
In the context of the trust fund becoming depleted, it is possible to pick the low hanging fruit to
solve this problem by leveraging comparative advantage of interest rates. There exists a comparative
advantage of interest rates as more value will be created if the trust fund transfers funds elsewhere to an
entity who can generate higher returns. To capitalize on this comparative advantage, a PRT was adopted
because PRT activity surged over the past decade (Kessler 2019; Blake, et al, 2019) and the private
sector tends to out-earn the government. This PRT will be executed through a coinsurance reinsurance
transaction. In this subsection, comparative advantage of interest rates will be defined and background
on PRT’s and coinsurance will follow.
From economics, one party has a comparative advantage if they can produce something more
efficiently than another party. In this case, the private sector has a comparative advantage in interest
rates as it “produces” higher yields than the public sector. Therefore, the private sector should hold
capital. The SSA invests in special US government treasury securities (SSBT, 2020) while private sector
reinsurance companies generally invest in corporate bonds, yielding higher returns (See Appendix A.2).
Since the private sector earns higher interest rates the total “interest income pie” expands and the US
government would benefit from this larger pie as it will receive benefit payments from the acquirer.
Since the US government has lower returns it will have a lower valuation rate. Valuation rates are the
rates at which an entity calculates present values at and are based on risk. Higher risk implies a higher
valuation rate. Thus, Social Security’s valuation rate will be lower than a reinsurance company’s rate
because the government is less risky and is backed by the US taxpayers.
As stated in the introduction, pension risk transfers arise when the original pension sponsor wants to
remove its pension liabilities from its balance sheet. They seek out an acquiring company to absorb the
risk, often an insurance-like entity. To provide context, the need for PRT’s can be seen by looking at the
early 2000s. Assumption makers underestimated longevity and overestimated future interest rates
(Manzou, Yue, & Lanlan, 2019). When life expectancy ascended and interest rates plummeted,
liabilities ballooned. To solve their financial woes, some pension sponsors executed a PRT. A notable
example was the GM and Prudential’s $25 billion deal (Blake et al, 2019). Further, the US PRT market
increased from below $2 Billion in 2010 (McDonald & Hyten, 2019) to $30 billion in 2019 (Aon, 2020).
Before going further, the nature of reserves will be discussed for readers who are non-actuarial.
Fundamentally reserves are calculated as the present value of the future liabilities a company owes less
the present value of future premiums a company will receive. Reserves are a liability on the balance
sheet as they represent an amount that an entity must set aside to fund its future expenditures. Reserves
in US life insurance are regulated at the state level. Each state derives its insurance laws from the
National Association of Insurance Commissioners (“NAIC”). In the context of Social Security, the
“reserve” is the trust fund balance. Social Security reserves are inadequate as the projected unfunded
liability is estimated to be $16.8 trillion (SSBT, 2020). The unfunded liability represents the present
value of projected benefits that Social Security will not be unable to pay.
Now it becomes time to answer the question, “How can the US government execute a PRT?” This is
where reinsurance or more specifically coinsurance comes into play. In coinsurance, there are two
parties the cedant, (i.e., the US government) and the acquirer (i.e., a reinsurance company). To execute
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the deal, the cedant transfers assets and reserves as well as future premiums to the acquirer and the
acquirer pays the future claims and other liability cash flows to the cedant. In addition, the reinsurance
company pays the acquirer a premium, called a ceding commission (Tiller & Tiller, 2015). If the block
is unprofitable, then the ceding commission could be negative. In PRT space, coinsurance is a buy-in
and contrasts with the more popular buy-out (Kessler, 2019). In a buy-out the acquirer becomes fully
responsible for these liabilities whereas a buy-in keeps the cedant responsible if the acquirer defaults
(Kessler, 2019). A buy-out is not desirable because in the event of default, there is no guarantee. Since
coinsurance is a form of indemnity reinsurance, the cedant or the US government would still bear the
ultimate responsibility (Tiller & Tiller, 2015). There are other variants of coinsurance such as modified
coinsurance (“ModCo”) (Tiller & Tiller, 2015). In ModCo, a ceding commission is transferred but no
assets or reserves are transferred (Tiller & Tiller, 2015). This means the acquirer pays the net of the
liability cash flows less a ModCo Adjustment. The ModCo adjustment credits the acquirer for a decrease
in reserves plus interest income earned on assets (Tiller & Tiller, 2015). The problem with ModCo is it
prevents the comparative advantage of interest rates effect since the asset management responsibility
still belongs to the US government. Further, the ModCo adjustment may be complicated or even
impossible since Social Security does not have regulated reserves.
III. Methods
a. Transaction Overview
To test the proposal, a coinsurance transaction was modeled from two points of view, the sell-side
and buy-side. The sell-side is from the point of view of the US government. The buy-side is from the
point of view of the acquirer which was assumed to be a reinsurance company. The sell-side cedes its
liabilities and assets to the buy-side. In return, the buy-side pays future benefits to the sell-side. The goal
is to test the resulting profitability from both points of view. If both sides, reach adequate profitability
levels, then the proposal is feasible. In general, profitability was measured by two metrics: net present
value and internal rate of return (“IRR”). Net present value represents the value today of a series of cash
flows while IRR represents the yield on a series of cash flows.
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This next paragraph will be an overview of the modeling process. As stated in section II, the deal
will be modeled as a coinsurance reinsurance transaction. Above, figure 3.1 is a visual representation of
the process. The starting point, the sell-side model, is simple, as only benefits ceded, assets transferred,
and expenses were modeled. The acquirer incorporates benefits and the assets from the sell-side model
as well as other buy-side specific factors to calculate the ceding commission, the additional premium
that the buy-side pays the sell-side. However, in this model it was negative so the sell-side would pay
the buy-side. This ceding commission is calculated so that the acquirer reaches its target yield from the
transaction. This ceding commission is fed back into the sell-side model to determine the profitability
from the sell-side’s point of view by measuring the IRR yielded from the transaction. The following
subsections will go into more depth about the process as well as the underlying assumptions.
b. General Assumptions
The three assumptions discussed in this subsection are contract, valuation rates and treasury
curve assumptions. To make this deal more short-term oriented the contract length was set to 10 years
meaning the acquirer would only be liable for 10 years of life contingent payments. A short-term
solution was selected as the trust fund is projected to become depleted in 2035 (SSBT, 2020). Further,
interest rates are low which means reserves will be relatively high. If the term is increased, starting
reserves will increase, putting a strain on the reinsurer (see sensitivities and appendix C.1). In addition,
COLA’s will not be included in the deal which means the US government would remain responsible for
COLA’s after the transaction, not the acquirer. The baseline valuation date was December 31st, 2019 as
this is the valuation date for the latest available data. This deal modeled 10,000 policies. This number
was chosen to achieve a relatively large deal size. For more assumptions see appendix D.1.
The valuation rate represents the desired yield earned on a transaction and is based on risk. As
discussed in section II, the buy-side and the sell-side have different valuation rates. For each side, three
interest rates were selected, to represent the range of risk tolerances. For the sell-side, the baseline
interest rate was set to 4.0%, assuming the SSA’s long term nominal interest rate of 4.7% (SSBT) was
too high for this 10-year period. The low and high-risk valuation rates were set to 3.0% and 5.0%
respectively. As for the buy-side, the valuation rate was determined using the Capital Asset Pricing
Model (“CAPM”). The CAPM model assumes that an investment’s required return is equivalent to the
risk-free rate plus a risk premium (Burrows & Lang, 1997). Based on market data for the life insurance
industry from Aswath Damodaran (there were not enough data points for the reinsurance industry), the
rounded rate as of December 31st, 2019 was calculated to be 7.5% (Damodaran, 2020; see appendix D.2
for calculation). 7% was set to the low-risk rate to represent the minimum rate the acquirer will accept.
The baseline rate was set to 8% and the high rate, if the acquirer gets ambitious, was set to 9%. These
rates may be lower than what would be seen in a typical deal which is partially due lower risk stemming
from a reduced term and the simple nature of the liabilities.
Future interest rates were determined based on a forward curve that projects the future treasury
rates based on current treasury rates. These future rates played a role in determining the reinvestment
yields that the buy–side will earn from this transaction. See appendix A.3 for more details on forward
curve calculations.
c. Sell-Side Model
Before diving into the components of the sell-side model, it is important to understand the
model’s purpose. The sell-side model is designed to value future cash flows ceded by the US
government to the acquirer. Essentially, this is valuing the benefit of not paying these retirement
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benefits. Further, the sell-side model measures this impact to the trust fund based on adjusting SSA
projections for cash flows generated by the coinsurance transaction. This subsection analyzes three main
components of the sell-side model. The three components are economic assumptions, benefit projections
and the trust fund.
The main economic assumption underlying the sell-side model is future interest rates. In their
2020 report, the Trustees projected that the ultimate trust fund interest rate will be 4.7% (SSBT, 2020).
Further, the Trustees project that in 2029, the trust fund will reach this rate (SSBT, 2020). This would be
a very rapid increase from their recent low levels. If interest rates are less than expected, the trust fund
will deplete quicker. However, the interest assumed by the Trustees were also assumed for the sell-side
model to be consistent.
The second component encompasses how retirement benefits were modeled. The goal here is to
project future benefits and value them at present. To achieve this outcome, each contract in the deal was
grouped into a cell. Each cell represents a unique gender-age combination. Further, inforce assumptions
about the number of contracts ceded within each cell were made using a distribution (see appendix B.1).
Each cell was assigned an average benefit based on Social Security data. This average benefit approach
was chosen as individual policy data is not publicly available (for good reason), so a seriatim model was
not possible. In addition, average benefits were projected to increase over time, within each cell, to
account for mortality inequality. Mortality inequality is the trend where people with higher
socioeconomic statuses tend to have lower mortality rates (Waldron, 2013). See appendix B.2 for the
mortality inequality assumptions. Monthly benefits are then projected based on mortality assumptions,
average benefit assumptions and the policy count (for that cell). These monthly benefits are then present
valued. Further, monthly benefits were aggregated into annual benefits, to be compatible to the trust
fund projections. For a more detailed mathematical description of this process, see appendix B.3.
The last component of the sell-side model is modeling the trust fund. The SSA makes this
process easier by publishing trust fund projections in their annual report (SSBT, 2020). Therefore, rather
than re-modeling the trust fund, the SSA projections were adjusted to account for PRT cash flows. A
“Control” model was created based on taxable payroll, cost rates, and income rates assumptions from
the SSA. A second trust fund model is created that adjusts the “control” model based on the PRT. There
were two main adjustments, the initial cash outflow paid to the acquirer and the annual cash inflows
(ceded benefits). For a more formula-based explanation, see appendix E.1.
d. Buy-Side Model
The buy-side takes in the benefit projections and assets transferred from the sell-side model.
From these projections, it projects the impact this deal will have on the acquirer’s income statement and
its contribution to free surplus (“CTFS”). First, the model measures the IRR and the net present value of
this deal with no ceding commission. The next step is to solve for the ceding commission that achieves
the acquirer’s profitability target (there were three profitability targets: 7%, 8% and 9%, see above).
These ceding commissions are sent to the sell-side model to determine adjusted sell-side profitability.
As for accounting, the general formula for calculating pre-tax income each projection year is:
Pre-tax Income = (Ceding Commission + Net Investment Income) – (Annuity Benefits + Increase in
Reserves + Expenses)
After arriving at pre-tax income, taxes are calculated to get post-tax income. CTFS is calculated
by adjusting post-tax income for capital releases/increases. Overall, there were few lines because the
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liabilities are fixed and simple to account for. The following paragraphs discuss important individual
components of CTFS. The four components are interest income, reserves, capital, and taxes.
Interest income comes from two sources: existing assets and reinvestment. The assets that the SSA
initially transfers to the acquirer will generate cash flows. These cash flows are used to counter liability
cash flows. The excess inflows from assets over the liability cash flows is reinvested at market interest
rates (see appendix A.4).
Reserves are the next topic for discussion. In life insurance mortality rate and interest rate
assumptions tend to be prescribed by regulation. In this context, the reserve method may be unclear, as
the ceding party, does not have prescribed reserves. However, the policies were treated as a payout
group annuity as the policies are part of a pension plan and there are no contributions being collected.
This classification would not affect benefit amounts as the benefits are fixed at the start of the contract.
Based on this classification, reserves used the 1994 Group Annuity Reserving mortality table (NAIC
Model #821) and interest rates followed VM-22 (2020 Valuation Manual). This means that the reserve
at each time would be equivalent to the present value of future annuity benefits since these policies are
payout annuities.
Per the fundamental equation of accounting, capital (also referred to as equity or shareholder’s
equity) is equivalent to assets less liabilities. However, in insurance, the NAIC requires a certain level of
capital as regulated by Risk-Based Capital (“RBC”). A company’s RBC requirement is derived from the
risks it takes. Capital affects profitability in the following ways. The interest earned on capital is part of
income. However, there is an initial non-taxable capital increase at the start of the projection period and
then capital is released over time. Cost of capital, an important metric, measures the present value of the
impacts just stated. See appendix C.2 & C.3 for a more in-depth discussion about regulatory capital.
The final component of the buy-side model is taxes. Taxes were calculated on a marginal basis.
Therefore, “negative taxes” are possible as they would offset the acquirer’s other income sources. For
instance, there are taxable losses after the first year due to tax reserves being less than statutory reserves.
However, the acquirer would not receive money from the government but rather, they would deduct the
losses from its overall entity level taxable income. As for calculating marginal taxes, the corporate tax
rate was assumed to be 21% of taxable income (IRC § 11(b)). The taxable income from the deal was
calculated by making two adjustments to statutory pre-tax income. The two adjustments were tax
reserves (IRC § 807) and deferred acquisition costs (“DAC”) (IRC § 848). In addition to the previous
listed factors, the acquirer’s tax basis of the existing assets exchanged is also important. For coinsurance,
the acquirer’s tax basis was the market value of the assets transferred (Baxely & Katz, 2017). See
appendix C.4 for more analysis on tax considerations.
IV. Baseline Model Results
As stated before, the baseline results encompass the best estimate assumptions for the future
variables affecting the Social Security. This modeling exercise seeks to determine whether the ceding
commissions demanded by the buy-side model is acceptable from the sell-side’s point of view. This
section was illustrated through 3 figures that walk through each of the three steps. Figure 4.1, figure 4.2
and figure 4.3 show 3 different sets of values at the three different valuation rates (as discussed in
section III). Figure 4.1 is from the Seller’s perspective and these values were used to create the initial
asset portfolio transferred to the acquirer. Figure 4.2 is from the acquirer’s perspective after considering
the projections generated by the sell-side model as well as the initial assets transferred. Figure 4.2
displays the range of additional ceding commissions calculated at the buy-side’s three different
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valuation rates. Figure 4.3 illustrates the impact the deal has on the trust fund after adjusting the baseline
sell model for the three additional ceding commission. Appendices E and F include trust fund
projections and income statement projections which are the source of these values.
a. Initial Valuation
Figure 4.1 Social Security - Baseline Sell-Side Initial Results
In Millions of USD
Valuation Rate
Line 3.0% 4.0% 5.0%
Valuation
Ceding Commission to Acquirer - - -
Present Value of Net Cash Flows 1,426 1,365 1,309
IRR 2.96% 4.07% 5.19%
Trust Fund
2029 Year End Reserve Balance 1,820,405 1,820,485 1,820,559
Increase from SSA Projections 23 103 177
Cost Savings
Ceded Benefits 1,635 1,635 1,635
Additional Tax Revenue - - -
Lost Income (1,445) (1,383) (1,325)
Savings 191 253 311
Figure 4.1 assumes that only existing assets are being transferred to the acquirer. Thus, the most
important item is the “Present Value of Net Cash Flows” as this line represents the initial assets that the
government transfers to the buyer. Since this is coinsurance, remember that these assets will be marked-
to-market on the acquirer’s books (Baxely & Katz, 2017). This is preferable for the acquirer as interest
rates have decreased making the assets more valuable. Another area of importance is the amount that the
2029-year end trust fund balance is projected to increase from the control scenario. In the baseline
scenario, the projected improvement is $103 million. All values shown are in millions of US Dollars.
Overall, the present value of cash flows ceded is projected to be $1.365 billion under the 4.0% baseline
scenario. This valuation ranges from $1.426 billion to $1.309 billion for the low-high risk scenarios,
respectively. In addition, the 2029-year end trust fund Balance is projected to be increase by $23-177
million (low-high risk scenarios). This equates to $191-311 million in un-discounted cash savings over
the length of the contract. While these values are insignificant compared to the size of the trust fund,
keep in mind this is only one transaction. Further, the goal of this paper is to determine if PRT’s are an
effective solution.
b. Ceding Commission Calculation
The buy-side model calculates the ceding commission at each of the three target buy-side
valuation rates. Figure 4.2 displays the profitability breakdown and ceding commission calculation as
well as other miscellaneous values at the bottom of the table. As you may remember from the previous
section, the existing asset portfolio transferred to the acquirer is recorded at market value. It is labeled,
“[1] Market Value of Assets Transferred” (“MV of Assets”). MV of Assets is higher than the values
quoted above in figure 4.1 because interest rates have decreased. The MV of Assets is lower than the
starting reserves which is not consistent with coinsurance transactions (Tiller & Tiller, 2015). However,
12 | P a g e
since the government does not have regulated reserves, it only can transfer assets and the reinsurer in
turns puts up statutory reserves and pays the government reinsurance cash flows throughout the contract
period. The ceding commissions range from $(33) to $(44) million. They are negative which indicates
that the US government must pay the acquirer to reinsure this business. Cost of capital ranged from (9)
to (12) million. These ceding commissions (and taxes paid) are then plugged back into the sell-side
model to determine the profitability from the point of view of the US government.
Figure 4.2 Social Security - Buy-side Baseline Valuation by Components
In Millions of USD
Valuation Rate
Line 7.0% 8.0% 9.0%
Book Value of Assets Transferred 1,365 1,365 1,365

Mark-to-Market Benefit 48 48 48
[1] Market Value of Assets Transferred 1,413 1,413 1,413
[2] Starting Reserves 1,476 1,476 1,476
Value of Inforce (Pre-Tax) 51 49 46

Tax (13) (14) (15)
[3] Value of Future Profits 39 35 31
[4] Cost of Capital (9) (11) (12)
[5] Valuation: [1] - [2] + [3] + [4] (33) (39) (44)
Details
MV of Assets Transferred 1,413
Starting Reserves 1,476
Starting Capital 13
Policy Count 10,000
c. Final Adjusted Baseline Results

Figure 4.3 shows the results from the sell-side point of view, after accounting for the three ceding
commissions. The sell-side values are all calculated at 4.0% or the baseline valuation rate. Naturally, all
profitability metrics should get worse because the SSA now needs to provide premium to the buyer.
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Figure 4.3 Social Security - Baseline Sell-Side Results including Deal Premium
Sell-Side Values calculated at 4.0%
In Millions of USD
Baseline Buy-Side Premiums Impact of Buy-Side Premium
Line 7.0% 8.0% 9.0% 7.0% 8.0% 9.0%
Valuation
Ceding Commission to Acquirer (33) (39) (44) (33) (39) (44)
Present Value of Net Cash Flows 1,365 1,365 1,365 - - -
IRR 3.66% 3.58% 3.51% -0.41% -0.49% -0.56%
Trust Fund
2029 Year End Reserve Balance 1,820,441 1,820,434 1,820,427 (44) (51) (58)
Increase from SSA Projections 59 52 45
Cost Savings
Ceded Benefits 1,635 1,635 1,635 - - -
Additional Tax Revenue 12 13 14 12 13 14
Lost Income (1,417) (1,422) (1,428) (34) (40) (45)
Savings 230 226 222 (22) (27) (31)
When analyzing the results, the 8% baseline premium should be assumed unless stated otherwise.
Overall, the trust fund at year end 2029 is still projected to increase from the control by $52 million
(compared to $103 million without ceding commission). The IRR decreased moderately by 0.49%
which brings down the IRR earned to 3.58% which is still above the 3% low valuation rate scenario.
Further, all three premium scenarios had IRR’s above 3%. This is may be an adequate yield to justify
going forward with this transaction. However, there are two sides to this argument. One could argue that
low current rates (as of valuation date) plus its short term 10-year contract length make the PRT
approach attractive. Another could respond with the fact that all three IRR’s are lower than 4%, and the
SSA’s 4.7% ultimate rate for that matter. Now it becomes time to determine why these results were
reached. There are 3 main reasons, and they are taxes, interest rates earned, reserves.
Taxes represent a ray of light for the Proposal. Taxes collected on the acquirer’s future profits
benefited the adjusted sell-side IRR (the SSA is a part of the US government after all). Normally the
government would not be directly involved in a deal. However, in this case the sell-side winds up
collecting the taxes the acquirer pays on its profits.
In contrast, one constraining aspect is interest rates earned by the acquirer. These rates are relatively
low compared to the existing asset portfolio. While it still holds that corporate bond rates are above rates
earned by Treasuries, interest rates have decreased. Therefore, assets in the trust fund’s portfolio, bought
many years ago, can be high-yielding relative to investment grade assets that can be purchased today.
This makes the existing assets a larger than hoped for component of the deal. The advantage the private
sector has over the U.S. government is dampened which means that the premium must increase to
compensate. The lesson learned is this PRT may be more attractive to the acquirer when interest rates
are increasing. This in turn will increase the impact of the comparative advantage of interest rates,
increasing the size of the interest income pie.
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Another problem with interest rates being low is that there is barely a margin over the reserving
interest rate. Reserving rates were calculated according to the VM-22 and were either 2.75% or 3% (as
of year-end 2019). Under VM-22, reserving rates are contingent on treasuries rates, market spreads and
defaults. So, when treasury rates go down as they have been, it lowers the reserving rate. In turn
increased reserves put a strain on profitability. Now, the acquirer would still earn interest on reserves
but, that interest earned will be lower than the yields that the acquirer desires (unfortunately, the acquirer
cannot earn 8% from investment grade fixed income securities). In addition, Social Security mortality is
worse than mortality in the insured population as Social Security includes people of all socioeconomic
statuses. This means that the reserving mortality may be even more conservative than normal. This issue
could be dampened by picking policies with higher benefits, so this mortality difference is less severe.
However, the data for that analysis is not available.
V. Sensitivities
a. Covid-19
Now is the time to turn our attention to Covid-19’s impact on this coinsurance transaction. To
adapt to a lack of data (the SSA has not published updated annual report with Covid-19 assumptions),
interest rate and mortality assumptions were created. To provide some context, the pandemic and its
economic implications caused the Federal Reserve to drastically cut interest rates. Thus, the assets that
the SSA purchases had lower rates than before. Future interest rates were estimated based on the trust
fund’s asset allocations as of June 30th, 2020 along with the projected forward curve as of June 30th,
2020. The rates after five years were graded to the SSA ultimate rate of 4.7%. In addition, it was
assumed that mortality would be 12% higher in 2020 based on death data from the CDC (CDC, 2020). It
was assumed that mortality would only be half or 6% higher in 2021 as vaccines are hopefully
distributed. It was only feasible to make these mortality assumptions on policies transferred in the deal,
not the aggregate trust fund because of limited data. Therefore, income rate and the cost rate (as
mentioned in section III) were not adjusted. This means only net cash flows from the PRT were
analyzed not the trust fund balance.
b. Description of Accompanying Sensitivities
In addition to Covid-19, other sensitivities were run as well. Figure 5.2 lists them below.
Sensitivities #1 and #2, “High Interest Rates” and “Low Interest Rates” respectively, seek to measure
the impact that low interest rates and high interest rates would have on the deal. It does this by
adding/subtracting 100 bps, graded over 5 years to the forward curve. Sensitivity #3 changes the annuity
term from 10 years to for life. This will increase the aggregate savings but will represent a reserve strain
because reserves are calculated for life rather than only 10 years. In sensitivity #3 the number of policies
being transferred was reduced to 6,000 to achieve a comparable starting reserve. Sensitivity #4 improves
mortality rates by 5% (i.e., multiply all mortality rates by 95%) to measure the impact of increased
longevity. The “28% Corporate Tax” sensitivity (#5) was included as that is what has been proposed by
the president elect Biden’s campaign (Biden For President, 2020). Sensitivity #6 sets interest rates to
those observed as of year-end 2018. And sensitivities #7 and #8 are the two Covid sensitivities as
discussed above.
15 | P a g e
Figure 5.1 Sensitivity Descriptions
Sensitivity
Name Description
#
Baseline Best Estimate Assumptions
Forward Curve + 100 bps. On sell-side, use
1 High Interest Rates
SSA high interest rate scenario
Forward Curve - 100 bps. On sell-side, use
2 Low Interest Rates
SSA low interest rate scenario
Contract leverages life annuities instead of
3 Life Annuities
10-year term annuities
5% Decrease in Decrease mortality rates by 5% for both
4
Mortality genders, all ages, and all durations.
Corporate tax rate changed from 21% to
5 28% Corporate Tax
28%
6 Year End 2018 Rates 12/31/2018 interest rate environment
7 Covid-19 Base Covid-19 mortality and interest rates

Covid-19 Life
8 Life annuities under Covid-19 sensitivity
Annuities
c. Sensitivity Results
Figure 5.2.1 Social Security - Sensitivity Analysis Compared to Baseline
In Millions of USD
Sell-Side: All Present Values Discounted at 4.0%
Buy-Side: All Present Values Discounted at 8.0%
Initial Sell-Side Buy-Side
Increase from Ceding Increase from
Sensitivity # Description Initial Valuation
Baseline Commission Baseline
Baseline 1,365 39
1 High Interest Rates 1,365 - 29 (10)
2 Low Interest Rates 1,365 - 48 10
3 Life Annuities 1,299 (66) 174 135
4 5% Decrease in Mortality 1,372 7 37 (2)
5 28% Corporate Tax 1,365 - 45 7
6 Year End 2018 Rates 1,365 - 13 (25)
7 COVID-19 Base 1,370 5 57 18
8 COVID-19 Life Annuities 1,305 (60) 212 173
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Figure 5.2.2 Social Security - Sensitivity Analysis Compared to Baseline
In Millions of USD
Sell-Side: All Present Values Discounted at 4.0%
Buy-Side: All Present Values Discounted at 8.0%
Adjusted Sell-Side
Aggregate Increase from Increase
Sensitivity # Description IRR
Cost Savings Baseline from Baseline
Baseline 226 3.58%
1 High Interest Rates 240 14 3.81% 0.23%
2 Low Interest Rates 213 (13) 3.36% -0.22%
3 Life Annuities 440 214 2.68% -0.90%
4 5% Decrease in Mortality 230 4 3.62% 0.04%
5 28% Corporate Tax 219 (7) 3.46% -0.12%
6 Year End 2018 Rates 239 13 3.81% 0.23%
7 COVID-19 Base 191 (35) 2.96% -0.62%
8 COVID-19 Life Annuities 387 161 2.28% -1.30%
Above in figures 5.2.1 and figure 5.2.2 are the sensitivity results. All values were calculated at
the baseline valuation rates for the sell-side and buy-side, 4% and 8% respectively. Keep in mind that
the IRR earned by the acquirer is always 8% as that is the yield that the final ceding commission was
priced at. The main metric used to measure the feasibility of the deal was the adjusted sell-side IRR. The
most impactful sensitivities were life annuities, 2018 interest rates and the two Covid-19 sensitivities.
High and low interest rates were also impactful. High interest rates resulted in a higher IRR (+0.23%)
for the seller because the premium charged is lower with higher rates. The inverse is true when interest
rates are lower (-0.22%). The mortality sensitivity had little impact (+0.04%), which was likely driven
by the short term of the contract. Taxes had a moderate impact (-0.12%). Essentially, taxes are a give-
take where higher taxes means more taxes collected by the government, which in turn, leads to more
premium demanded by the acquirer.
Now we will direct our attention to the more interesting sensitivities. The life sensitivity resulted
in a low IRR of 2.68% (-0.90%). The low IRR was driven by a high premium demanded. The reasoning
can be attributed to reserves (see appendix C.1). While life annuities seem to be the common approach
in practice (Kessler, 2019, Blake, et al, 2019), life annuities may not be the most appropriate approach in
this context because of low interest rates. The 2018 year-end interest rate environment sensitivity was
kind to this transaction (+0.23%). This is because in 2018 interest rates were rising and looked poised to
continue based on the forward curve. Further, the interest rates earned on the existing portfolio was
relatively low compared to the rates that could be earned on the market. Therefore, the comparative
advantage of interest rates would be in full effect because of the higher rates achievable in the bond
market. As for results, the ceding commission charged was only 13 million and the adjusted sell-side
IRR was 3.80%. Lastly, the Covid-19 sensitivities were also impactful but not in a good way. In the
baseline Covid-19 sensitivity, the IRR was 2.96% (-0.62%). In a more extreme fashion than the baseline
scenario, the comparative advantage for the private sector is dampened even more because of lower
reinvestment yields. Further, reserving rates as of June 30th, 2020 decreased. As for the Covid-Life
Annuities sensitivity, reserves were now raised even higher when combining life terms with low interest
rates. The adjusted IRR for this sensitivity was 2.28% (-1.30%), significantly lower than the baseline
Covid-19 sensitivity.
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VI. Conclusions
The PRT approach yielded moderately successful results as the baseline scenario yielded the U.S.
government 3.58%. Remember, the contract was only for 10 years which makes these yields much more
attractive when considering low rates. As expected, cost of capital and statutory reserves hurt the
feasibility of this transaction but did not ruin it. Unfortunately, the baseline scenario is not necessarily
enough to justify going forward with this proposal as the Covid-19 sensitivities do not help this
proposal’s case. The Covid-19 baseline scenario yielded a lower IRR of 2.96%. One could argue 2.96%
over 10 years may be worth the risk considering the low-rate environment. However, there is more risk
involved when transferring liabilities to the private sector and the government must choose a reputable
counterparty. In addition, it may be worthwhile for the US government to audit asset purchases to ensure
that the acquirer invests in investment grade bonds as the proposal intended. As a final reminder, since
this transaction is through coinsurance, the U.S. government would have to step in and pay benefit
payments in the event of a default, providing a safety net to beneficiaries.
It is important to note that PRT’s are not sufficient to completely solve the Social Security problem.
This hypothetical deal while small from Social Security’s point of view, is large for the PRT market.
Therefore, it does not take politicians off the hook from either raising taxes, reducing benefits or a
combination of the two. However, tininess should not disqualify PRT’s (or other ideas) from
consideration. While this modeled deal only saved an estimated $226 million in costs over 10 years, it is
still a good investment for the government and earned 3.58%. However, considering poor Covid
sensitivity results, it may be a beneficial to wait a few years for interest rate markets to normalize. The
existing asset portfolio yield will also decrease as old assets mature which means the comparative
advantage of interest rates will be more prominent. Overall, this proposal presents an opportunity to pick
the low hanging fruit; benefit the trust fund without raising taxes or reducing benefits.
The remaining portion of the conclusion will be devoted to discussing what can be learned from this
paper. The prevalent lessons are as follows:
1. Interest rates not valuation rates create value.
2. Taxes had minimal impact on this deal.
3. Long-term insurance contracts can decrease the feasibility of deals because of statutory reserves.
4. The existing asset portfolio can dilute the comparative advantage of interest rates.
5. There exist other opportunities to leverage a comparative advantage of interest rates.
While interest rates and valuation rates were constantly mentioned in tandem, it is important to note
that interest rates come first not valuation rates. As a refresher, interest rates are what an entity earns on
its assets and valuation rates are what an entity discounts its cash flows at. This comparative advantage
only works if value is created. If interest rates earned by the private sector do not exceed what the
government would have earned, the difference in valuation rates does not save the deal. This is because
the aggregate cash flows generated would not be higher than if no PRT was executed (i.e., expanding the
interest income pie). A deal is feasible if more total value is generated than would have been otherwise.
The next lesson is about the impact of taxation, or lack thereof. Ultimately taxes did not hurt the
deal’s feasibility because taxes were simply a give-and-take. Higher taxes lead to lower profits for the
acquirer but more ceding commission demanded. This additional premium hurt the government.
However, it did not matter since the government receives more taxes from the acquirer. Thus, this
relationship increases the attractiveness of other deals from the government’s perspective. If the
government transfers something with profit potential to the private sector, they will receive taxes back.
18 | P a g e
Most institutions do not share this luxury. As a caveat, the government should avoid deals that generate
taxable losses for the private sector.
The third lesson deals with reserves. There was no surprise that reserves constrain the feasibility of
this deal. However, short-term contracts lead to better outcomes when rates are low as seen by the life
sensitivity. The problem with long-term contracts is if rates increase, the acquirer will be stuck holding
reserves at low interest rates.
The fourth lesson deals with the existing asset portfolio. When the yields on the existing asset
portfolio are relatively high, it reduces the feasibility of the deal. The sell-side would be better off just
holding these relatively high yielding assets. The evidence to this lesson can be seen by the Covid-19
(2.96% IRR) and the 2018-year end sensitivity (3.80% IRR). In the Covid sensitivity the market rates
were low. In this sensitivity, yields earned by the acquirer will not significantly exceed the yields of the
existing portfolio. Despite lower current yields, the trust fund’s overall portfolio yield does not change
substantially because older assets bring up the average. Thus, the comparative advantage of interest rates
is diluted. When yields are increasing, as they were in the 2018-year end sensitivity, the acquirer can
reinvest in relatively high yielding assets. Thus, the comparative advantage of interest rates will be in
full effect making the deal more feasible.
The final lesson is that there are other approaches for Social Security to take advantage of
comparative advantage of interest rates. For instance, it could issue longevity bonds. Longevity bonds
would be like a loan where payments are contingent on longevity and the interest rate charged by the US
government. It allows the US to transfer capital to another entity that could earn higher returns. Further,
it benefits from less regulation than insurance. As for who to lend to, they could choose someone or
something whose work benefits the United States, while also generating a comparative advantage effect.
Some examples could be combating climate change, investing in infrastructure, and improving health
(physical and mental). Investing in all three areas could save costs in the future. To use a simple
example, it is cheaper for the government to fix a pothole today than later. The reason why is seen by the
alternative. The alternative is to fix the pothole in the future in addition to paying the lawsuit when
someone inevitably suffers damages from driving over it. As for measuring the comparative advantage
impact and pricing it in the form of a deal, that is out of scope of this author’s expertise. The key here is
to ensure transparency and prevent corruption when deciding who receives the loans. Leveraging
technology to track funds as well oversight committees could be a good start. The take-home point here
is that investing in opportunities that create more value than the interest Social Security could otherwise
earn, will benefit Social Security and by extension American retirees.
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VIII. Appendix
A. Economic Assumptions
1. Simple Liability Valuation Illustration
This example is based on pages 191-192 in John Quiggen’s book “Zombie Economics.”
Comparative Advantage of Interest Rates (In
Millions of $)
Assumptions
Private Earned Rate 3.0%
Public Earned Rate 2.0%
Annual Cash Flow -60
Term (Years) 10
Public Sector Calculations
PV (Annuity Due) 8.98
Liability 539
Private Sector
PV (Annuity Due) 8.53
Liability 512
Differences (Private compared to Public)
Liability Difference (27)
Liability Difference (%) -5%
The assumptions here are simple but seek to show the differences in liability and asset
valuations. All present values were discounted at the earned rate associated to that entity. Since
liabilities are being valued, low valuations are desirable. The private sector’s valuation would be lower
compared to the public sector. The private sector has a higher earned rate which gives it the ability cover
these liabilities better than the public sector. Thus, the public sector could transfer these liabilities to the
private sector for a price lower than the $539 million calculated in the figure (but higher than $512
million) and save money. In Quiggen’s example, he is using assets. Thus, the cash flows are positive
rather than negative.
2. Corporate Spreads
Source: Federal Reserve Bank of St. Louis, as of 6/30/2020 (FRED(a), FRED(b)).
24 | P a g e
3. Forward Curve
The ultimate forward rate (“UFR”) is calculated by the EIOPA, a European regulatory agency.
The UFR represents the long-term interest rate that the market will converge to (Akinyemi, et al., 2019).
The EIOPA estimated that the UFR was 3.9% in the US for 2020 (EIPOA, 2019). The EIOPA lowered
the UFR to 3.6% for 2021 because of the pandemic (EIPOA, 2020).
To project future rates, a zero-coupon bond with a 60-year tenor was set to yield the EIOPA’s
UFR rate. 60 years represented the ultimate tenor. In addition, this approach ensures that projected
future treasury rates converge to the UFR. The calculation was done as follows. First, zero-coupon
discount rates, were solved for each term starting at the first term and then for each term afterwards
using bond rates from the treasury curve. Bond rates with no market data were estimated with cubic
splines (or extrapolated using the UFR). Next forward rates were calculated from the zero-coupon rates
determined in step one. These rates were capped at the UFR. The last step is to use these zero-coupon
rates to calculate the implied coupon rates in the forward curve (for future periods). This was done by
discounting each cash flow (coupon and principal) at the discount rates calculated in step two. These
three equations are expressed below.
i) rn × ∑nk=1 vikk +vinn = 1
a. rn = coupon rate for a bond with a duration of n (Comes from treasury curve).
b. vikk = (1+ ik )-k
c. ik = k year annual interest rate observable today
d. Equation solves for vinn
e. r60 was calculated so that i60 = UFR
ii) vikk,t+1 = min(vik+1k+1, t
÷ vi11, t , 𝑈𝐹𝑅)
a. t = valuation year
b. ik,t = projected k year annual interest rate observable in valuation year t
iii) rn, t × ∑nk=1 vikk,t +vinn,t = 1
a. rn, t = coupon rate for a bond with a tenor of n at valuation year t
4. Reinvestment
To calculate reinvestment yields, the treasury curve, asset portfolio allocation, reinvestment
spreads and defaults were needed. The treasury curve came from the forward curve. Spreads and
defaults charges came from NAIC VM-22 data (VM-20 Tables). This data was chosen since it is
publicly available. In addition, The NAIC provided both long term and current spreads. The model
assumed that long-term spreads would be reached in 5 years. Reinvestment asset portfolio allocation
was set to a 50% A and 50% BBB split. The allocation was chosen for capital purposes. The allocation
determines the percentage of available cash that goes into each credit rating and tenor asset combination.
For each asset, the treasury rate is determined, the spread is added, and defaults subtracted to get the
yield. Defaults were modeled as default costs, not default rates as this is compatible with VM 22 data
(NAIC Valuation Manual, 2020). For simplicity purposes, the Interest Maintenance Reserve (“IMR”)
was ignored. Normally, the gain/loss is initially put up as an IMR and is amortized over time to defer the
recognition of gains per SSAP #7 (AP&P Manual, 2020). See figure below for a summary of
reinvestment assumptions
25 | P a g e
Reinvestment Assumptions
Data Sources
Forward Curve As of 12/31/2019
Spreads VM-20
Defaults VM-20
Reinvestment Allocations
Credit Rating 1 2 3 5 7 10
TSY
AAA
AA
A 10% 20% 20%
BBB 20% 20% 10%
BB
B
B. Actuarial Modeling
1. Inforce assumptions
Recall that liabilities consist of individual cells. Each cell represents a group of retired
beneficiaries as each cell is a distinct gender age combination. It was assumed that the gender
distribution would be 50% female, 50% male. The age distribution was concentrated towards the
recently retired, see below. A younger inforce is desired as recently retired people have higher average
benefits than people who have long been retired (SSBT, 2020). Higher average benefits would reduce
the number of beneficiaries in the deal. This reduces the administrative burden of tracking beneficiaries.
Further, younger people have lower mortality which makes them less risky in terms of the variance of
their future lifetimes.
Age Distribution (%)
64 8.0%
65 10.0%
66 10.0%
67 12.0%
68 10.0%
69 10.0%
70 10.0%
71 8.0%
72 7.0%
73 5.0%
74 3.0%
75 2.0%
76 1.5%
77 1.5%
78 1.0%
79 1.0%
26 | P a g e
2. Mortality Inequality
Cells Annual Rate (%)
66-69 Female 0.60%
70-79 Female 0.75%
80+ Female 0.55%
66-69 Male 0.20%
70-79 Male 0.20%
80+ Male 0.00%
Above are the mortality inequality assumptions used in this analysis. The Trustees account for
mortality inequality by using the PIA, (a component of the benefit formula) to account “differences in
mortality by level of lifetime earnings” (SSBT, 2020, p. 150). For this model, the average benefits are
increased by the rates in the table each year. The rates in the table rates are based on five years of SSA
data. The assumptions were determined using the following formula.
ben(x, s, t+1) -1
MQ(x, s, t) = ×(1+COLA(t))
(
ben x, s, t)
MQ(x, s, t) = estimated mortality inequality adjustment for cell age x, gender s, in year t
“cell age x” = Age of cell at the start of the projection period.
ben(x, s, t) = average benefits for cell age x, gender s, in year t
COLA(t) = projected cost of living adjustment in year t
Overall, the formula seeks to remove COLA's from this year's average benefits. Results of data were
aggregated in the form of the table above.
3. Benefit projections
Average monthly benefits are calculated for each cell and then aggregated as follows.
1
Ben(x, s, m) = Ben(x, s, m-1) ×(1+MQ(x, s, t))12 ×(1+COLA(t)×I(m))
Ben(x, s, m) = average benefits cell for age x, gender s, in month m.
m = full months since valuation date, m is an integer, m ∈ [1, 12*n]. n = Length of contract in
years.
Ben(x, s, 0) = starting average benefits for cell age x, gender s. From SSA data.
1, 1 if (m mod 12) = 1
I(m) = {
0, Otherwise
C(x, s, m) = L(x, s) × Ben(x, s, m) × m−1ps,t
x × (1 − e)
12
27 | P a g e
C(x, s, m) = expected benefits ceded by SSA net of expenses for cell age x, gender s, in month m
e = collection expenses, % of benefits
L(x, s) = number of starting lives included in transaction for cell age x, gender s
s,t
kpx = probability of survival from time t to end of year t + k, for cell age x, gender s.
s
m px = m−1psx × (1- m qs,t s
x+t) ; 0px = 1
12 12 12
s, t
kq x+t = probability of death to occur in the next k years for cell age x+t, gender s, as of time t
s,t m
kq x+t ~ Uniform Distribution of Deaths, let t = ⌊ ⌋
12
s s s,t
⇒ m px = tpx × (1 − (m mod 12) × kq x+t )
12
s,t s s
=> 1q m = 1 − m px ÷ m−1px
x+ 12
12 12 12
The last step is to value these cash flows at monthly valuation rates.
12*n
m-1
V(x, s, i)= ∑ C(x, s, m)*vi 12
m=1
V(x, s, i) = valuation of ceded benefits or cell age x, gender s, discounted at rate i

These valuations were then aggregated at the three valuation rates representing the amount of assets
transferred. This baseline aggregated valuation fed into the buy-side model.
2 w=85
A(i) = ∑ ∑ V(x, s, i)
s=1 x=64
A(i) = value of assets initially transferred under discount rate i.

The assets were selected in such a way so that their average yields were roughly equivalent to the
implied yields from the SSA’s trust fund projections.
C. Regulatory Assumptions
1. Reserve Illustration
Assumptions:
Age 65 Interest Rate Sensitivities
Gender Male Low Rate 2.0%
Annual Benefit 20,000 Medium Rate 3.0%
Mortality 1994 GAR High Rate 4.0%
Improvement Scale G2
28 | P a g e
The graph above shows relationship between reserves and term length for three different
reserving rate scenarios. The reserve used is starting reserves or the reserves put up at the start of a
contract. Reserves follow logarithmic growth, increasing rapidly initially for short term annuities and
leveling off once the annuity length approaches lifetime. Further, these three lines diverge at the longer
term contracts. The likely explanation is that the difference between the three discount rates is negligible
in the short term but more significant in the long term.
2. RBC Calculations
RBC Components
Component Name Description
Capital company must hold for the risky assets the
C-1 Asset Risk
company holds.
C-2 Insurance Risk Capital company must hold for the liabilities it insures
Capital company must hold for the risk interest rate
C-3 Insurance Risk
changes
Capital company must hold for risk of operating a
C-4 Operational Risk
business
Reduces RBC to avoid double counting correlation
Covariance
between the C's
In practice, CAL RBC (post covariance) is calculated as: C-4 + Square Root of [(C-1o + C-3)2 +
2
(C-2) ]. Note that there are more components to this formula (NAIC RBC, 2017) such as C-1cs, or risk
charge for equity securities. However, these components were not relevant to this analysis and excluded.
In addition, a simplifying assumption was made in lieu of using the square root function.
Simplified method; CAL RBC = 75% * (C-1 + C-2 + C-3) + C-4.
29 | P a g e
75% was determined based subjective judgement assuming this block of liabilities would provide
a diversification benefit to the acquiring company. It would be unreasonable to use the official RBC
covariance calculation since this block of business would likely not become its own entity but rather
would fall under the umbrella of an existing entity. Thus, this method represents the marginal impact to
required capital. We will now devote time to how each component was calculated.
First is C-1, asset risk which is the additional capital a company must hold for each asset it owns.
This charge is based on risk-charges provided by the NAIC. C-1 was determined to be 0.90% based on
the allocation profile mentioned in appendix A.4. C-2 is insurance risk. This is based on the amount of
insurance a company has inforce. Currently there is no C-2 component for annuities (NAIC RBC, 2017).
However, that may soon change as it appears longevity risk will be implemented in 2021 (RBC
Newsletter, 2020). Thus, C-2 was set to 0.70% of reserves as this was the marginal proposed capital
charge for companies with over $1 billion in annuity reserves (Navratil, 2019). C-3 represents interest
rate risk. As part of C-3 there is a factor-based approach based on their C-3 risk class (low, medium, or
high risk). The risk class is based on interest rate guarantees provided by the policy. Since there are no
guarantee withdrawals or anything of the like, the low-risk C-3 factor of 0.50% was assumed for this
transaction. This factor was further cut in half to 0.25% under the assumption that the acquiring entity
has favorable C-3 phase 1 cash flow testing results (NAIC RBC, 2017). C-4 captures operations risk. Per
regulation it is 2% of premiums paid (NAIC RBC, 2017). In this situation, there are no schedule T
premiums so there is no C-4 (NAIC RBC, 2017). After applying the covariance factor, target capital was
set to 400% of CAL RBC, which is the actual amount of capital that company intends to hold.
Summarized Capital Assumptions:
Capital Assumption Value
C-1 (Applied to Assets) 0.90%
C-2 (Applied to Reserves) 0.70%
C-3 (Applied to Reserves) 0.25%
C-4 (Applied to Premiums) 2.00%
C-2 Implementation Date 2021
Covariance 75%
Target 400%
3. RBC Risk Charges

RBC C-1o Bond Risk Charges
NAIC Rating Pre-tax Charge (%) Post-tax Charge (%)
NAIC 1 0.39% 0.33%
NAIC 2 1.26% 1.06%
NAIC 3 4.46% 3.76%
NAIC 4 9.70% 8.17%
NAIC 5 22.31% 18.80%
NAIC 6 30.00% 23.70%
Source: 2017 NAIC Life Risk-Based Capital Report: Forecasting and Instructions for Companies.
30 | P a g e
NAIC Ratings to S&P Ratings
NAIC Rating S&P Rating
NAIC 1 AAA to A-
NAIC 2 BBB+ to BBB-
NAIC 3 BB+ to BB-
NAIC 4 B+ to B-
NAIC 5 CCC+ to CCC-
NAIC 6 CC or Worse
Source: CRP Credit Rating Equivalent to SVO Designations, 2017 (Published by NAIC)
Note that treasury securities receive a 0% risk charge as they are deemed risk free (NAIC RBC, 2017).
Thus, C-1 was low in the initial years thanks to the special issue trust fund treasuries transferred.
4. Tax
Social Security - Buy-side Baseline Taxation Derivation
In Millions of USD
Valuation Rate
Line 7.0% 8.0% 9.0%
Value of Inforce (Pre-Tax) 51 49 46

Tax on Pre-Tax Profits 6 6 6
Cost of Capital (9) (11) (12)
[1] Value pre-reinsurance transaction 48 44 40
Market Value of Assets Transferred 1,413 1,413 1,413

Starting Reserves 1,476 1,476 1,476
[2] Initial Income (Loss) from Transfer (62) (62) (62)
[3] Tax Liability on Initial Transfer: -21% x [2] 13 13 13
Statutory Reserve 1,476 1,476 1,476

Tax Reserve 1,370 1,370 1,370
[4] Stat to Tax Difference 21% x (Tax - Stat) (22) (22) (22)
Market Value of Assets Transferred 1,413 1,413 1,413

Ceding Commission Transferred 33 39 44
[5] DAC Tax on Total Assets Transferred (2) (3) (3)
[6] Tax on Ceding Commission (7) (8) (9)
[7] Reinsurance Tax Valuation [3] + [4] + [5] + [6] (18) (20) (21)
[8] Valuation: [1] + [2] + [7] (33) (39) (44)
31 | P a g e
Above is a table summarizing how taxation was determined for this reinsurance transaction. It
was assumed that there would be immediate tax implications upon completion of the deal. There would
be an immediate recognition of income from the assets received. However, there would also be a
deduction for the reserves put up. But not statutory reserves, but rather tax reserves. Line 3 in the table
seeks to adjust the immediate tax liability so that acquirer is deducting tax reserves instead of statutory
reserves. In addition to these initial taxable events there would be deferred acquisition tax impact on the
ceding commission and the market value of assets transferred (IRC § 848(a), Tiller & Tiller, 2015). The
ceding commission would also be taxed as taxable income if it is negative, which it is (negative means
the acquirer receives money for reinsuring the business; ceding commission would be deducted if
positive). Thus, the reinsurance tax valuation is equivalent to -21% of the sum of the following: initial
assets less initial reserves (line 3), initial tax reserve adjustment (line 4), deferred acquisition tax on total
assets received (line 5) and ceding commission (line 6).
As for the tax liability that was not mention above, there were two adjustments made to taxable
income each year. The first adjustment is taxable change in reserves. Per IRC § 807(d)(1)(A), tax
reserves are 92.81% of the statutory reserve for non-variable life contracts (annuities are considered life
contracts). Further, increase in reserves is deductible (decrease is income). This is a main reason why the
tax on pre-tax profits is positive. It only encapsulates the decrease in reserves. When reserves are
decreasing, which they do for year 2 onwards, the tax reserve decrease is smaller than the actual reserve
decrease which means taxable income and therefore tax liability is reduced. As for the second step, the
model must account for deferred acquisition costs (“DAC”). DAC capitalizes the value of acquiring
insurance contracts and amortizes it over 15 years (IRC § 848(a)). Since this a coinsurance agreement
there would be reinsurance premiums that qualify for DAC (Tiller & Tiller, 2015). Per IRC § 848(c)(2),
2.09% of the premium was capitalized and then amortized over 15 years. As for what constitutes
premiums, the reinsurance net cash flows or the reinsurance considerations would qualify for DAC
capitalization (Tiller & Tiller, 2015, § 848(d)). As stated above, the market value of assets transferred
plus the ceding commission would also fall under the scope of DAC.
D. General Modeling Assumptions
1. Summarized Assumptions
Assumption Name Value
Valuation Date 12/31/2019
trust fund SSA Scenario Intermediate
Annuity Length 10
Exclude COLA? Yes
Sell-Side Female (%) 50%
Policies Sold 10,000
Transaction Expense (% of Price) 0.20%
Per Benefit Expenses (%) 0.10%
Reserve Method CARVM
Tax Reserve (% of Stat. Reserve) 92.81%
Mark-to-Market? Yes
Corporate Tax Rate 21.00%
Buy-Side
DAC Amort. Yrs. 15
DAC Rate 2.09%
Transaction Expense (% of Price) 0.20%
Per Benefit Expenses (%) 0.20%
32 | P a g e
In this coinsurance transaction it was assumed that only liability cash flows (i.e., annuity
payments) would be subject to reinsurance contract because of the potential administrative difficulty of
proper expense allocation. Further, the SSA is efficient with expenses. In 2019, expenses for the
retirement portion of the trust fund, were 3.7 million which was 0.41% of 903 million in retirement
benefits provided (SSBT, 2020). The expenses modeled were the cost of collecting reinsurance claims
for the sell-side and the cost of paying claims for the buy-side. In addition, there were onetime expenses
for the cost of completing the deal for both sides.
2. Capital Asset Pricing Model
The Capital Asset Pricing Model (“CAPM”) estimates the required return of an investment based
on risk. For this research, the CAPM was used to determine the valuation rate for the acquirer based on
reinsurance market data published by Aswath Damodaran, a professor at NYU.
R = α +rf +β × (Rm -rf )
R = required return, rf = risk-free rate, Rm = expected market return
α = unobservable changes to R not observable in market, assumed α = 0
β = Beta of investment, how R changes when the market changes
Below is a table of the CAPM assumptions for the insurance industry. As for the data behind
these numbers here is a summary. The risk-free rate was the 10-year treasury and expected market return
is linked to the S&P. Beta measured the insurance industry’s sensitivity to aggregate market changes and
is calculated with regression.
CAPM Assumptions
Valuation Date 12/31/2019
Risk Free 1.92%
Risk Premium 5.20%
Beta 1.08
Required Return 7.52%
Source: Damodaran, A. (2020). Betas by Sector (US).
Thus, R = 1.92% + 1.08 × (7.12% -1.92%) = 7.52% ≈ 7.50%
E. Trust Fund
1. Trust Fund Replication
Believe it or not replicating the trust fund projections was simple. First, non-interest income and
costs were calculated using rates provided by the SSA. Second, investment income rate was backed out
from the SSA’s intermediate projections. The trust fund balance equation is as below.
TF(t) = TF(t − 1) + int(t) + N(t) − B(t)
TF(t) = trust fund balance at end of year t
N(t) = non-interest income (payroll taxes) in year t; N(t) = nr(t) × P(t)
B(t) = total costs for year t; B(t) = cr(t) × P(t)
cr(t) = cost rate in year t, nr(t) = non-interest income rate in year t
33 | P a g e
P(t) = taxable payroll in year t
N(t) − B(t)
int(t) = interest earned on assets; int(t) = r(t) × (TF(t − 1)) + )
2
int(t)
=> r(t) =
(N(t) − B(t))
(TF(t − 1) + )
2
r(t) was important for determining the adjusted interest income after factoring in the PRT. The results of
the replication are below. 10 years are shown as that is the length of the PRT contract.
Trust Fund Control
In Millions of USD, as of 12/31/2019
Calculated
Beginning Interest Non-interest SSA Ending
Year Cost Ending
Balance Income Income Balance*
Balance
2020 2,897,400 77,596 1,038,440 (1,111,930) 2,901,506 2,901,213
2021 2,901,506 74,793 1,075,086 (1,170,927) 2,880,459 2,880,217
2022 2,880,459 71,796 1,123,229 (1,237,898) 2,837,586 2,837,471
2023 2,837,586 69,696 1,173,787 (1,308,945) 2,772,124 2,771,948
2024 2,772,124 69,006 1,228,427 (1,385,530) 2,684,027 2,684,555
2025 2,684,027 68,416 1,282,320 (1,467,763) 2,567,000 2,567,801
2026 2,567,000 68,421 1,348,998 (1,553,610) 2,430,809 2,431,418
2027 2,430,809 67,914 1,409,680 (1,645,520) 2,262,884 2,263,267
2028 2,262,884 65,619 1,474,114 (1,741,221) 2,061,397 2,062,293
2029 2,061,397 61,339 1,538,517 (1,840,871) 1,820,382 1,821,963
*Errors appear to be driven by rounding.
2. Trust Fund Model
The trust fund model is then adjusted by the annualized cash flows generated from the PRT. The
equation becomes:
TF(t) = TF(t − 1) – P(i) × H(t) + int(t) + N(t) – B(t) + C(t) – E(t)
P(i) = initial assets transferred + ceding commission under interest scenario j.
j = Interest rate scenarios for the buy − side used to calculate ceding commissions.
j = 7%, 8% or 9%.
1, if t = 1
H(t) = {
0, Otherwise
C(t) = aggregated ceded benefits received in year t
N(t) − B(t) + C(t)
int(t) = r(t) × (TF(t − 1) − P(i) × H(t) + )
2
E(t) = PRT expenses incurred during year t. E(t) = P(i) × H(t) × z + C(t) × e
z = first year transaction expense (0.20% of A(i))
34 | P a g e
Below are the baseline results after adjusting for PRT.
Trust Fund Model post PRT
Beginning Acquisition Interest Non-interest
Year Cost
Balance Cost Income Income
2020 2,897,400 (1,407) 77,560 1,038,440 (1,111,930)
2021 2,900,243 - 74,762 1,075,086 (1,170,927)
2022 2,879,340 - 71,769 1,123,229 (1,237,898)
2023 2,836,614 - 69,674 1,173,787 (1,308,945)
2024 2,771,301 - 68,987 1,228,427 (1,385,530)
2025 2,683,351 - 68,400 1,282,320 (1,467,763)
2026 2,566,471 - 68,408 1,348,998 (1,553,610)
2027 2,430,426 - 67,905 1,409,680 (1,645,520)
2028 2,262,646 - 65,614 1,474,114 (1,741,221)
2029 2,061,304 - 61,339 1,538,517 (1,840,871)
Trust Fund Model post PRT

Control Ending Increase from
Year Ceded Benefits Ending Balance
Balance Control
2020 179 2,900,243 2,901,506 (1,263)
2021 176 2,879,340 2,880,459 (1,118)
2022 173 2,836,614 2,837,586 (971)
2023 170 2,771,301 2,772,124 (824)
2024 166 2,683,351 2,684,027 (676)
2025 163 2,566,471 2,567,000 (529)
2026 159 2,430,426 2,430,809 (383)
2027 155 2,262,646 2,262,884 (237)
2028 150 2,061,304 2,061,397 (92)
2029 145 1,820,434 1,820,382 52
3. Net Cash Flow

Modeling the impact to the trust fund does not paint the whole picture as there are also corporate
taxes payable to the US government which are external to the trust fund’s revenue. Thus, net cash flow
realized by the government from the coinsurance transaction each year is as follows.
CF(t) = −P(i) × H(t) + C(t) − E(t) + tax(t) + intCF(t)
tax(t) = tax revenue increase (decrease) in year t as a result of the deal
intCF(t) = interest gained (lost) in year t from reinsurance cash flows
C(t)
intCF(t) = (−P(i) × H(t) + ) × r
2
The IRR’s cited were calculated using the net cash flow vector and solving for the equation below.
35 | P a g e
n
k
∑ CF(t) × vIRR =0
k=1
f. Projections:
The next pages consist of projections for the baseline scenario and the life annuities scenario.
36 | P a g e
A. Low Discount Rate Projections
In Millions of $
Scenario Baseline
Description Best Estimate Assumptions
12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 12/31/2024 12/31/2025 12/31/2026 12/31/2027 12/31/2028 12/31/2029 12/31/2030 12/31/2031 12/31/2032 12/31/2033 12/31/2034 12/31/2035 12/31/2036 12/31/2037 12/31/2038 12/31/2039 12/31/2040 12/31/2041 12/31/2042 12/31/2043 12/31/2044
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Income
Ceding Commissions 33.3 - - - - - - - - - - - - - - - - - - - - - - - - -
Premiums - - - - - - - - - - - - - - - - - - - - - - - - - -
Investment Income 44.1 37.1 32.7 29.0 26.3 24.7 20.2 16.3 11.4 7.0 - - - - - - - - - - - - - - -
Total Income 33.3 44.1 37.1 32.7 29.0 26.3 24.7 20.2 16.3 11.4 7.0 - - - - - - - - - - - - - - -
Disbursements
Annuity Benefits (178.9) (176.1) (173.1) (169.9) (166.5) (162.8) (158.8) (154.5) (149.9) (144.9) - - - - - - - - - - - - - - -
Surrender Benefits - - - - - - - - - - - - - - - - - - - - - - - - -
Increase In Reserves (62.5) 144.5 145.4 146.5 147.6 148.6 149.1 149.3 149.1 148.5 147.3 - - - - - - - - - - - - - - -
Maintenance Expenses (3.0) (0.4) (0.4) (0.3) (0.3) (0.3) (0.3) (0.3) (0.3) (0.3) (0.3) - - - - - - - - - - - - - - -
Total Disbursements (65.4) (34.7) (31.0) (27.0) (22.6) (18.3) (14.0) (9.8) (5.7) (1.7) 2.1 - - - - - - - - - - - - - - -
Pre-Tax Income (32.2) 9.4 6.1 5.7 6.3 8.1 10.7 10.5 10.6 9.7 9.1 - - - - - - - - - - - - - - -
Tax (21.7) 1.4 2.0 2.1 1.9 1.5 0.9 0.9 0.7 0.9 0.9 (0.1) (0.1) (0.1) (0.1) (0.3) (0.5) (0.4) (0.3) (0.3) (0.2) (0.2) (0.2) (0.1) (0.1) (0.0)
Post-Tax Income (53.8) 10.8 8.1 7.7 8.2 9.5 11.6 11.3 11.4 10.6 10.0 (0.1) (0.1) (0.1) (0.1) (0.3) (0.5) (0.4) (0.3) (0.3) (0.2) (0.2) (0.2) (0.1) (0.1) (0.0)
Change in Capital (13.2) 0.3 (30.2) (1.2) 0.2 1.7 8.5 8.5 8.5 8.5 8.4 - - - - - - - - - - - - - - -
Contribution to Free Surplus (67.0) 11.1 (22.0) 6.6 8.4 11.2 20.1 19.8 19.9 19.0 18.4 (0.1) (0.1) (0.1) (0.1) (0.3) (0.5) (0.4) (0.3) (0.3) (0.2) (0.2) (0.2) (0.1) (0.1) (0.0)
Balance Sheet
Assets 1,489.1 1,344.3 1,229.1 1,083.8 936.0 785.8 628.1 470.3 312.6 155.7 - - - - - - - - - - - - - - - -
Statutory Reserves 1,475.9 1,331.5 1,186.0 1,039.6 891.9 743.4 594.2 444.9 295.8 147.3 - - - - - - - - - - - - - - - -
Additional Reserve - - - - - - - - - - - - - - - - - - - - - - - - - -
Reserves 1,475.9 1,331.5 1,186.0 1,039.6 891.9 743.4 594.2 444.9 295.8 147.3 - - - - - - - - - - - - - - - -
C-1 0.7 1.0 3.1 4.9 6.2 7.1 5.7 4.2 2.8 1.4 - - - - - - - - - - - - - - - -
C-2 - - 8.3 7.3 6.2 5.2 4.2 3.1 2.1 1.0 - - - - - - - - - - - - - - - -
C-3 3.7 3.3 3.0 2.6 2.2 1.9 1.5 1.1 0.7 0.4 - - - - - - - - - - - - - - - -
C-4 - - - - - - - - - - - - - - - - - - - - - - - - - -
Covariance (1.1) (1.1) (3.6) (3.7) (3.7) (3.5) (2.8) (2.1) (1.4) (0.7) - - - - - - - - - - - - - - - -
CAL RBC 3.3 3.2 10.8 11.1 11.0 10.6 8.5 6.3 4.2 2.1 - - - - - - - - - - - - - - - -
Capital 13.2 12.8 43.0 44.2 44.1 42.4 33.9 25.4 16.9 8.4 - - - - - - - - - - - - - - - -
B. Medium Discount Rate Projections
In Millions of $
Scenario Baseline
12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 12/31/2024 12/31/2025 12/31/2026 12/31/2027 12/31/2028 12/31/2029 12/31/2030 12/31/2031 12/31/2032 12/31/2033 12/31/2034 12/31/2035 12/31/2036 12/31/2037 12/31/2038 12/31/2039 12/31/2040 12/31/2041 12/31/2042 12/31/2043 12/31/2044
- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Income
Premiums - - - - - - - - - - - - - - - - - - - - - - - - - -
Total Income 38.8 44.1 37.1 32.7 29.0 26.3 24.7 20.2 16.3 11.4 7.0 - - - - - - - - - - - - - - -
Disbursements
Pre-Tax Income (26.7) 9.4 6.1 5.7 6.3 8.1 10.7 10.5 10.6 9.7 9.1 - - - - - - - - - - - - - - -
Tax (22.9) 1.4 2.0 2.1 1.9 1.5 0.9 0.9 0.8 0.9 0.9 (0.1) (0.1) (0.1) (0.1) (0.3) (0.5) (0.4) (0.3) (0.3) (0.2) (0.2) (0.2) (0.1) (0.1) (0.0)
Post-Tax Income (49.5) 10.8 8.1 7.7 8.2 9.5 11.6 11.3 11.4 10.6 10.0 (0.1) (0.1) (0.1) (0.1) (0.3) (0.5) (0.4) (0.3) (0.3) (0.2) (0.2) (0.2) (0.1) (0.1) (0.0)
Balance Sheet
Assets 1,489.1 1,344.3 1,229.1 1,083.8 936.0 785.8 628.1 470.3 312.6 155.7 - - - - - - - - - - - - - - - -
Reserves 1,475.9 1,331.5 1,186.0 1,039.6 891.9 743.4 594.2 444.9 295.8 147.3 - - - - - - - - - - - - - - - -
C-1 0.7 1.0 3.1 4.9 6.2 7.1 5.7 4.2 2.8 1.4 - - - - - - - - - - - - - - - -
C-2 - - 8.3 7.3 6.2 5.2 4.2 3.1 2.1 1.0 - - - - - - - - - - - - - - - -
C-3 3.7 3.3 3.0 2.6 2.2 1.9 1.5 1.1 0.7 0.4 - - - - - - - - - - - - - - - -
C-4 - - - - - - - - - - - - - - - - - - - - - - - - - -
Covariance (1.1) (1.1) (3.6) (3.7) (3.7) (3.5) (2.8) (2.1) (1.4) (0.7) - - - - - - - - - - - - - - - -
CAL RBC 3.3 3.2 10.8 11.1 11.0 10.6 8.5 6.3 4.2 2.1 - - - - - - - - - - - - - - - -
Capital 13.2 12.8 43.0 44.2 44.1 42.4 33.9 25.4 16.9 8.4 - - - - - - - - - - - - - - - -
C. High Discount Rate Projections
In Millions of $
Scenario Baseline
12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 12/31/2024 12/31/2025 12/31/2026 12/31/2027 12/31/2028 12/31/2029 12/31/2030 12/31/2031 12/31/2032 12/31/2033 12/31/2034 12/31/2035 12/31/2036 12/31/2037 12/31/2038 12/31/2039 12/31/2040 12/31/2041 12/31/2042 12/31/2043 12/31/2044
- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Income
Premiums - - - - - - - - - - - - - - - - - - - - - - - - - -
Total Income 43.9 44.1 37.1 32.7 29.0 26.3 24.7 20.2 16.3 11.4 7.0 - - - - - - - - - - - - - - -
Disbursements
Pre-Tax Income (21.5) 9.4 6.1 5.7 6.3 8.1 10.7 10.5 10.6 9.7 9.1 - - - - - - - - - - - - - - -
Tax (23.9) 1.4 2.0 2.1 1.9 1.5 0.9 0.9 0.8 0.9 0.9 (0.1) (0.1) (0.1) (0.1) (0.3) (0.5) (0.4) (0.3) (0.3) (0.2) (0.2) (0.2) (0.1) (0.1) (0.0)
Post-Tax Income (45.5) 10.8 8.2 7.7 8.2 9.5 11.6 11.3 11.4 10.6 10.0 (0.1) (0.1) (0.1) (0.1) (0.3) (0.5) (0.4) (0.3) (0.3) (0.2) (0.2) (0.2) (0.1) (0.1) (0.0)
Balance Sheet
Assets 1,489.1 1,344.3 1,229.1 1,083.8 936.0 785.8 628.1 470.3 312.6 155.7 - - - - - - - - - - - - - - - -
Reserves 1,475.9 1,331.5 1,186.0 1,039.6 891.9 743.4 594.2 444.9 295.8 147.3 - - - - - - - - - - - - - - - -
C-1 0.7 1.0 3.1 4.9 6.2 7.1 5.7 4.2 2.8 1.4 - - - - - - - - - - - - - - - -
C-2 - - 8.3 7.3 6.2 5.2 4.2 3.1 2.1 1.0 - - - - - - - - - - - - - - - -
C-3 3.7 3.3 3.0 2.6 2.2 1.9 1.5 1.1 0.7 0.4 - - - - - - - - - - - - - - - -
C-4 - - - - - - - - - - - - - - - - - - - - - - - - - -
Covariance (1.1) (1.1) (3.6) (3.7) (3.7) (3.5) (2.8) (2.1) (1.4) (0.7) - - - - - - - - - - - - - - - -
CAL RBC 3.3 3.2 10.8 11.1 11.0 10.6 8.5 6.3 4.2 2.1 - - - - - - - - - - - - - - - -
Capital 13.2 12.8 43.0 44.2 44.1 42.4 33.9 25.4 16.9 8.4 - - - - - - - - - - - - - - - -
In Millions of $
Scenario Life Annuities

Description Annuity length for life instead of 10 Years
12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 12/31/2024 12/31/2025 12/31/2026 12/31/2027 12/31/2028 12/31/2029 12/31/2030 12/31/2031 12/31/2032 12/31/2033 12/31/2034 12/31/2035 12/31/2036 12/31/2037 12/31/2038 12/31/2039 12/31/2040 12/31/2041 12/31/2042 12/31/2043 12/31/2044
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Income
Premiums - - - - - - - - - - - - - - - - - - - - - - - - - -
Investment Income 41.4 37.5 35.7 34.2 33.4 33.0 32.5 32.5 31.5 30.4 30.9 28.8 27.4 25.8 23.9 21.9 19.7 18.3 15.6 13.6 11.9 10.0 8.4 7.0 6.1
Total Income 160.0 41.4 37.5 35.7 34.2 33.4 33.0 32.5 32.5 31.5 30.4 30.9 28.8 27.4 25.8 23.9 21.9 19.7 18.3 15.6 13.6 11.9 10.0 8.4 7.0 6.1
Disbursements
Annuity Benefits (107.3) (105.7) (103.9) (102.0) (99.9) (97.7) (95.3) (92.7) (89.9) (87.0) (83.8) (80.4) (76.7) (72.9) (68.9) (64.7) (60.3) (55.8) (51.2) (46.5) (41.8) (37.3) (32.8) (28.5) (24.5)
Increase In Reserves (189.2) 68.7 68.6 68.6 68.9 69.2 69.3 69.2 68.9 68.3 67.5 66.4 65.0 63.3 61.4 59.3 56.8 54.1 51.1 47.8 44.4 40.6 36.7 32.7 28.8 25.0
Maintenance Expenses (3.1) (0.2) (0.2) (0.2) (0.2) (0.2) (0.2) (0.2) (0.2) (0.2) (0.2) (0.2) (0.2) (0.2) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.0)
Total Disbursements (192.3) (38.9) (37.3) (35.5) (33.2) (30.9) (28.6) (26.3) (24.0) (21.8) (19.7) (17.6) (15.5) (13.6) (11.6) (9.8) (8.0) (6.3) (4.8) (3.4) (2.2) (1.3) (0.6) (0.1) 0.2 0.5
Pre-Tax Income (32.3) 2.5 0.2 0.2 1.0 2.5 4.3 6.2 8.4 9.7 10.7 13.4 13.2 13.8 14.1 14.2 13.9 13.4 13.5 12.2 11.4 10.6 9.4 8.3 7.2 6.6
Tax (22.6) 1.4 1.8 1.8 1.6 1.3 0.8 0.4 (0.1) (0.4) (0.7) (1.3) (1.3) (1.5) (1.7) (1.9) (2.2) (2.1) (2.2) (2.0) (1.9) (1.7) (1.6) (1.4) (1.2) (1.2)
Post-Tax Income (54.9) 3.9 2.1 2.0 2.6 3.8 5.2 6.6 8.3 9.2 10.0 12.1 11.9 12.3 12.5 12.2 11.8 11.3 11.3 10.2 9.5 8.9 7.9 6.9 6.0 5.5
Change in Capital (17.0) (0.6) (33.6) (2.3) (1.5) (0.6) 0.2 1.2 1.7 2.2 2.6 3.8 3.7 3.6 3.5 3.4 3.2 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.6 1.4
Contribution to Free Surplus (71.9) 3.3 (31.6) (0.3) 1.1 3.1 5.3 7.7 10.0 11.4 12.6 15.8 15.6 15.9 16.0 15.6 15.0 14.4 14.2 13.0 12.1 11.2 10.0 8.8 7.7 6.9
Balance Sheet
Assets 1,542.4 1,474.3 1,439.4 1,373.1 1,305.7 1,237.1 1,167.7 1,097.3 1,026.8 956.3 886.30 816.1 747.5 680.5 615.6 553.0 492.9 435.7 381.7 331.1 284.2 241.3 202.5 167.9 137.4 111.0
Statutory Reserves 1,525.4 1,456.8 1,388.2 1,319.6 1,250.7 1,181.5 1,112.2 1,043.1 974.2 905.9 838.5 772.1 707.1 643.8 582.4 523.1 466.3 412.2 361.1 313.2 268.9 228.3 191.5 158.8 130.0 105.0
Reserves 1,525.4 1,456.8 1,388.2 1,319.6 1,250.7 1,181.5 1,112.2 1,043.1 974.2 905.9 838.5 772.1 707.1 643.8 582.4 523.1 466.3 412.2 361.1 313.2 268.9 228.3 191.5 158.8 130.0 105.0
C-1 1.8 2.2 3.9 5.3 6.4 7.3 7.9 8.2 8.3 8.2 8.0 7.3 6.7 6.1 5.5 5.0 4.4 3.9 3.4 3.0 2.6 2.2 1.8 1.5 1.2 1.0
C-2 - - 9.7 9.2 8.8 8.3 7.8 7.3 6.8 6.3 5.9 5.4 4.9 4.5 4.1 3.7 3.3 2.9 2.5 2.2 1.9 1.6 1.3 1.1 0.9 0.7
C-3 3.8 3.6 3.5 3.3 3.1 3.0 2.8 2.6 2.4 2.3 2.1 1.9 1.8 1.6 1.5 1.3 1.2 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.3
C-4 - - - - - - - - - - - - - - - - - - - - - - - - - -
Covariance (1.4) (1.5) (4.3) (4.5) (4.6) (4.6) (4.6) (4.5) (4.4) (4.2) (4.0) (3.7) (3.4) (3.1) (2.8) (2.5) (2.2) (2.0) (1.7) (1.5) (1.3) (1.1) (0.9) (0.8) (0.6) (0.5)
CAL RBC 4.2 4.4 12.8 13.4 13.7 13.9 13.9 13.6 13.1 12.6 12.0 11.0 10.1 9.2 8.3 7.5 6.6 5.9 5.1 4.5 3.8 3.3 2.7 2.3 1.9 1.5
Capital 17.0 17.6 51.2 53.5 55.0 55.6 55.4 54.3 52.5 50.4 47.8 44.0 40.3 36.7 33.2 29.8 26.6 23.5 20.6 17.9 15.3 13.0 10.9 9.1 7.4 6.0
In Millions of $

12/31/2045 12/31/2046 12/31/2047 12/31/2048 12/31/2049 12/31/2050 12/31/2051 12/31/2052 12/31/2053 12/31/2054 12/31/2055 12/31/2056 12/31/2057 12/31/2058 12/31/2059 12/31/2060 12/31/2061 12/31/2062 12/31/2063 12/31/2064 12/31/2065 12/31/2066 12/31/2067 12/31/2068 12/31/2069
26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50
Income
Ceding Commissions - - - - - - - - - - - - - - - - - - - - - - - - -
Premiums - - - - - - - - - - - - - - - - - - - - - - - - -
Investment Income 5.0 3.6 3.0 2.3 1.7 1.3 1.0 0.7 0.5 0.4 0.3 0.2 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (0.0) (0.0) (0.0)
Total Income 5.0 3.6 3.0 2.3 1.7 1.3 1.0 0.7 0.5 0.4 0.3 0.2 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (0.0) (0.0) (0.0)
Disbursements
Increase In Reserves 21.4 18.0 14.9 12.1 9.7 7.6 5.9 4.4 3.3 2.4 1.7 1.2 0.8 0.6 0.4 0.2 0.2 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0
Maintenance Expenses (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0)
Total Disbursements 0.6 0.7 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 0.0 (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) 0.0 0.0 0.0 0.0 0.0 0.0 (0.0)
Pre-Tax Income 5.6 4.3 3.7 2.9 2.2 1.7 1.3 0.9 0.6 0.4 0.3 0.2 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (0.0) (0.0) (0.0)
Tax (1.0) (0.8) (0.7) (0.6) (0.5) (0.4) (0.3) (0.2) (0.2) (0.1) (0.1) (0.1) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) 0.0 0.0 0.0
Post-Tax Income 4.6 3.5 2.9 2.3 1.7 1.3 1.0 0.7 0.4 0.3 0.2 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (0.0) (0.0) (0.0)
Change in Capital 1.2 1.0 0.9 0.7 0.6 0.4 0.3 0.3 0.2 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Contribution to Free Surplus 5.8 4.6 3.8 3.0 2.3 1.8 1.3 1.0 0.6 0.4 0.3 0.2 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (0.0) (0.0)
Balance Sheet
Assets 88.4 69.4 53.6 40.7 30.5 22.4 16.2 11.5 8.1 5.6 3.8 2.5 1.7 1.1 0.7 0.4 0.3 0.2 0.1 0.0 0.0 0.0 0.0 0.0 -
Statutory Reserves 83.6 65.6 50.7 38.5 28.8 21.2 15.3 10.9 7.7 5.3 3.6 2.4 1.6 1.0 0.7 0.4 0.2 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0
Additional Reserve - - - - - - - - - - - - - - - - - - - - - - - - -
Reserves 83.6 65.6 50.7 38.5 28.8 21.2 15.3 10.9 7.7 5.3 3.6 2.4 1.6 1.0 0.7 0.4 0.2 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0
C-1 0.8 0.6 0.5 0.4 0.3 0.2 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -
C-2 0.6 0.5 0.4 0.3 0.2 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
C-3 0.2 0.2 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
C-4 - - - - - - - - - - - - - - - - - - - - - - - - -
Covariance (0.4) (0.3) (0.2) (0.2) (0.1) (0.1) (0.1) (0.1) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0)
CAL RBC 1.2 0.9 0.7 0.5 0.4 0.3 0.2 0.2 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Capital 4.8 3.7 2.9 2.2 1.6 1.2 0.9 0.6 0.4 0.3 0.2 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
In Millions of $

12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 12/31/2024 12/31/2025 12/31/2026 12/31/2027 12/31/2028 12/31/2029 12/31/2030 12/31/2031 12/31/2032 12/31/2033 12/31/2034 12/31/2035 12/31/2036 12/31/2037 12/31/2038 12/31/2039 12/31/2040 12/31/2041 12/31/2042 12/31/2043 12/31/2044
- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Income
Premiums - - - - - - - - - - - - - - - - - - - - - - - - - -
Total Income 174.1 41.4 37.5 35.7 34.2 33.4 33.0 32.5 32.5 31.5 30.4 30.9 28.8 27.4 25.8 23.9 21.9 19.7 18.3 15.6 13.6 11.9 10.0 8.4 7.0 6.1
Disbursements
Pre-Tax Income (18.2) 2.5 0.2 0.2 1.0 2.5 4.3 6.2 8.4 9.7 10.7 13.4 13.2 13.8 14.1 14.2 13.9 13.4 13.5 12.2 11.4 10.6 9.4 8.3 7.2 6.6
Tax (25.6) 1.4 1.9 1.8 1.6 1.3 0.8 0.4 (0.1) (0.4) (0.7) (1.3) (1.3) (1.5) (1.6) (1.9) (2.2) (2.1) (2.2) (2.0) (1.9) (1.7) (1.6) (1.4) (1.2) (1.2)
Post-Tax Income (43.8) 3.9 2.1 2.0 2.6 3.8 5.2 6.6 8.3 9.3 10.0 12.1 11.9 12.3 12.5 12.2 11.8 11.3 11.3 10.2 9.5 8.9 7.9 6.9 6.0 5.5
Balance Sheet
Assets 1,542.4 1,474.3 1,439.4 1,373.1 1,305.7 1,237.1 1,167.7 1,097.3 1,026.8 956.3 886.30 816.1 747.5 680.5 615.6 553.0 492.9 435.7 381.7 331.1 284.2 241.3 202.5 167.9 137.4 111.0
Reserves 1,525.4 1,456.8 1,388.2 1,319.6 1,250.7 1,181.5 1,112.2 1,043.1 974.2 905.9 838.5 772.1 707.1 643.8 582.4 523.1 466.3 412.2 361.1 313.2 268.9 228.3 191.5 158.8 130.0 105.0
C-1 1.8 2.2 3.9 5.3 6.4 7.3 7.9 8.2 8.3 8.2 8.0 7.3 6.7 6.1 5.5 5.0 4.4 3.9 3.4 3.0 2.6 2.2 1.8 1.5 1.2 1.0
C-2 - - 9.7 9.2 8.8 8.3 7.8 7.3 6.8 6.3 5.9 5.4 4.9 4.5 4.1 3.7 3.3 2.9 2.5 2.2 1.9 1.6 1.3 1.1 0.9 0.7
C-3 3.8 3.6 3.5 3.3 3.1 3.0 2.8 2.6 2.4 2.3 2.1 1.9 1.8 1.6 1.5 1.3 1.2 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.3
C-4 - - - - - - - - - - - - - - - - - - - - - - - - - -
Covariance (1.4) (1.5) (4.3) (4.5) (4.6) (4.6) (4.6) (4.5) (4.4) (4.2) (4.0) (3.7) (3.4) (3.1) (2.8) (2.5) (2.2) (2.0) (1.7) (1.5) (1.3) (1.1) (0.9) (0.8) (0.6) (0.5)
CAL RBC 4.2 4.4 12.8 13.4 13.7 13.9 13.9 13.6 13.1 12.6 12.0 11.0 10.1 9.2 8.3 7.5 6.6 5.9 5.1 4.5 3.8 3.3 2.7 2.3 1.9 1.5
Capital 17.0 17.6 51.2 53.5 55.0 55.6 55.4 54.3 52.5 50.4 47.8 44.0 40.3 36.7 33.2 29.8 26.6 23.5 20.6 17.9 15.3 13.0 10.9 9.1 7.4 6.0
In Millions of $

12/31/2045 12/31/2046 12/31/2047 12/31/2048 12/31/2049 12/31/2050 12/31/2051 12/31/2052 12/31/2053 12/31/2054 12/31/2055 12/31/2056 12/31/2057 12/31/2058 12/31/2059 12/31/2060 12/31/2061 12/31/2062 12/31/2063 12/31/2064 12/31/2065 12/31/2066 12/31/2067 12/31/2068 12/31/2069
26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50
Income
Premiums - - - - - - - - - - - - - - - - - - - - - - - - -
Total Income 5.0 3.6 3.0 2.3 1.7 1.3 1.0 0.7 0.5 0.4 0.3 0.2 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (0.0) (0.0) (0.0)
Disbursements
Pre-Tax Income 5.6 4.3 3.7 2.9 2.2 1.7 1.3 0.9 0.6 0.4 0.3 0.2 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (0.0) (0.0) (0.0)
Tax (1.0) (0.8) (0.7) (0.6) (0.5) (0.4) (0.3) (0.2) (0.2) (0.1) (0.1) (0.1) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) 0.0 0.0 0.0
Post-Tax Income 4.6 3.5 2.9 2.3 1.7 1.3 1.0 0.7 0.4 0.3 0.2 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (0.0) (0.0) (0.0)
Balance Sheet
Assets 88.4 69.4 53.6 40.7 30.5 22.4 16.2 11.5 8.1 5.6 3.8 2.5 1.7 1.1 0.7 0.4 0.3 0.2 0.1 0.0 0.0 0.0 0.0 0.0 -
Reserves 83.6 65.6 50.7 38.5 28.8 21.2 15.3 10.9 7.7 5.3 3.6 2.4 1.6 1.0 0.7 0.4 0.2 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0
C-1 0.8 0.6 0.5 0.4 0.3 0.2 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -
C-2 0.6 0.5 0.4 0.3 0.2 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
C-3 0.2 0.2 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
C-4 - - - - - - - - - - - - - - - - - - - - - - - - -
Covariance (0.4) (0.3) (0.2) (0.2) (0.1) (0.1) (0.1) (0.1) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0)
CAL RBC 1.2 0.9 0.7 0.5 0.4 0.3 0.2 0.2 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Capital 4.8 3.7 2.9 2.2 1.6 1.2 0.9 0.6 0.4 0.3 0.2 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
In Millions of $

12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 12/31/2024 12/31/2025 12/31/2026 12/31/2027 12/31/2028 12/31/2029 12/31/2030 12/31/2031 12/31/2032 12/31/2033 12/31/2034 12/31/2035 12/31/2036 12/31/2037 12/31/2038 12/31/2039 12/31/2040 12/31/2041 12/31/2042 12/31/2043 12/31/2044
- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Income
Premiums - - - - - - - - - - - - - - - - - - - - - - - - - -
Total Income 186.1 41.4 37.5 35.7 34.2 33.4 33.0 32.5 32.5 31.5 30.4 30.9 28.8 27.4 25.8 23.9 21.9 19.7 18.3 15.6 13.6 11.9 10.0 8.4 7.0 6.1
Disbursements
Pre-Tax Income (6.2) 2.5 0.2 0.2 1.0 2.5 4.3 6.2 8.4 9.7 10.7 13.4 13.2 13.8 14.1 14.2 13.9 13.4 13.5 12.2 11.4 10.6 9.4 8.3 7.2 6.6
Tax (28.2) 1.4 1.9 1.8 1.6 1.3 0.8 0.4 (0.1) (0.4) (0.7) (1.3) (1.3) (1.5) (1.6) (1.9) (2.2) (2.1) (2.2) (2.0) (1.9) (1.7) (1.6) (1.4) (1.2) (1.2)
Post-Tax Income (34.4) 3.9 2.1 2.0 2.6 3.8 5.2 6.6 8.3 9.3 10.0 12.1 11.9 12.3 12.5 12.2 11.8 11.3 11.3 10.2 9.5 8.9 7.9 6.9 6.0 5.5
Balance Sheet
Assets 1,542.4 1,474.3 1,439.4 1,373.1 1,305.7 1,237.1 1,167.7 1,097.3 1,026.8 956.3 886.30 816.1 747.5 680.5 615.6 553.0 492.9 435.7 381.7 331.1 284.2 241.3 202.5 167.9 137.4 111.0
Reserves 1,525.4 1,456.8 1,388.2 1,319.6 1,250.7 1,181.5 1,112.2 1,043.1 974.2 905.9 838.5 772.1 707.1 643.8 582.4 523.1 466.3 412.2 361.1 313.2 268.9 228.3 191.5 158.8 130.0 105.0
C-1 1.8 2.2 3.9 5.3 6.4 7.3 7.9 8.2 8.3 8.2 8.0 7.3 6.7 6.1 5.5 5.0 4.4 3.9 3.4 3.0 2.6 2.2 1.8 1.5 1.2 1.0
C-2 - - 9.7 9.2 8.8 8.3 7.8 7.3 6.8 6.3 5.9 5.4 4.9 4.5 4.1 3.7 3.3 2.9 2.5 2.2 1.9 1.6 1.3 1.1 0.9 0.7
C-3 3.8 3.6 3.5 3.3 3.1 3.0 2.8 2.6 2.4 2.3 2.1 1.9 1.8 1.6 1.5 1.3 1.2 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.3
C-4 - - - - - - - - - - - - - - - - - - - - - - - - - -
Covariance (1.4) (1.5) (4.3) (4.5) (4.6) (4.6) (4.6) (4.5) (4.4) (4.2) (4.0) (3.7) (3.4) (3.1) (2.8) (2.5) (2.2) (2.0) (1.7) (1.5) (1.3) (1.1) (0.9) (0.8) (0.6) (0.5)
CAL RBC 4.2 4.4 12.8 13.4 13.7 13.9 13.9 13.6 13.1 12.6 12.0 11.0 10.1 9.2 8.3 7.5 6.6 5.9 5.1 4.5 3.8 3.3 2.7 2.3 1.9 1.5
Capital 17.0 17.6 51.2 53.5 55.0 55.6 55.4 54.3 52.5 50.4 47.8 44.0 40.3 36.7 33.2 29.8 26.6 23.5 20.6 17.9 15.3 13.0 10.9 9.1 7.4 6.0
In Millions of $

12/31/2045 12/31/2046 12/31/2047 12/31/2048 12/31/2049 12/31/2050 12/31/2051 12/31/2052 12/31/2053 12/31/2054 12/31/2055 12/31/2056 12/31/2057 12/31/2058 12/31/2059 12/31/2060 12/31/2061 12/31/2062 12/31/2063 12/31/2064 12/31/2065 12/31/2066 12/31/2067 12/31/2068 12/31/2069
26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50
Income
Premiums - - - - - - - - - - - - - - - - - - - - - - - - -
Total Income 5.0 3.6 3.0 2.3 1.7 1.3 1.0 0.7 0.5 0.4 0.3 0.2 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (0.0) (0.0) (0.0)
Disbursements
Pre-Tax Income 5.6 4.3 3.7 2.9 2.2 1.7 1.3 0.9 0.6 0.4 0.3 0.2 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (0.0) (0.0) (0.0)
Tax (1.0) (0.8) (0.7) (0.6) (0.5) (0.4) (0.3) (0.2) (0.2) (0.1) (0.1) (0.1) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) 0.0 0.0 0.0
Post-Tax Income 4.6 3.5 2.9 2.3 1.7 1.3 1.0 0.7 0.4 0.3 0.2 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (0.0) (0.0) (0.0)
Balance Sheet
Assets 88.4 69.4 53.6 40.7 30.5 22.4 16.2 11.5 8.1 5.6 3.8 2.5 1.7 1.1 0.7 0.4 0.3 0.2 0.1 0.0 0.0 0.0 0.0 0.0 -
Reserves 83.6 65.6 50.7 38.5 28.8 21.2 15.3 10.9 7.7 5.3 3.6 2.4 1.6 1.0 0.7 0.4 0.2 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0
C-1 0.8 0.6 0.5 0.4 0.3 0.2 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -
C-2 0.6 0.5 0.4 0.3 0.2 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
C-3 0.2 0.2 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
C-4 - - - - - - - - - - - - - - - - - - - - - - - - -
Covariance (0.4) (0.3) (0.2) (0.2) (0.1) (0.1) (0.1) (0.1) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0)
CAL RBC 1.2 0.9 0.7 0.5 0.4 0.3 0.2 0.2 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Capital 4.8 3.7 2.9 2.2 1.6 1.2 0.9 0.6 0.4 0.3 0.2 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Coinsuring America&#39;s Future

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Coinsuring America&#39;s Future

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Coinsuring America’s Future: A Proposal to Strengthen the Financial Stability of Social Security

By: Matt Farmer

Capstone Advisor: Bryan Snyder, Economics, Bentley University

Figure 1.1 Social Security trust fund Assets

Book Value of Assets Transferred 1,365 1,365 1,365

[2] Starting Reserves 1,476 1,476 1,476

Value of Inforce (Pre-Tax) 51 49 46

[4] Cost of Capital (9) (11) (12)

[5] Valuation: [1] - [2] + [3] + [4] (33) (39) (44)

c. Final Adjusted Baseline Results

7 Covid-19 Base Covid-19 mortality and interest rates

Tax Imposed, 26 U.S.C § 11 (IRC § 11) (2017). Retrieved from

Trust Funds, 42 U.S.C. § 401 (1994). Retrieved from https://www.law.cornell.edu/uscode/text/42/401

Source: Federal Reserve Bank of St. Louis, as of 6/30/2020 (FRED(a), FRED(b)).

V(x, s, i) = valuation of ceded benefits or cell age x, gender s, discounted at rate i

A(i) = value of assets initially transferred under discount rate i.

3. RBC Risk Charges

Value of Inforce (Pre-Tax) 51 49 46

Market Value of Assets Transferred 1,413 1,413 1,413

[3] Tax Liability on Initial Transfer: -21% x [2] 13 13 13

Statutory Reserve 1,476 1,476 1,476

Market Value of Assets Transferred 1,413 1,413 1,413

[6] Tax on Ceding Commission (7) (8) (9)

[8] Valuation: [1] + [2] + [7] (33) (39) (44)

Trust Fund Model post PRT

3. Net Cash Flow

Scenario Life Annuities

Scenario Life Annuities

Scenario Life Annuities

Scenario Life Annuities

Scenario Life Annuities

Scenario Life Annuities

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Coinsuring America's Future

Coinsuring America's Future

Trust Funds, 42 U.S.C. § 401 (1994). Retrieved from https://www.law.cornell.edu/uscode/text/42/401