Portfolio Earned Rate Asset Base and the Cause of Warning Message #3715 (June, 2009)
This article describes the different asset base definitions in portfolio earned rate calculation, and what causes warning message #3715.
In AXIS, portfolio earned rates can be calculated at the Fund, Office and Block levels. The basic form of the earned rate is given by:
Earned rate = Income / Exposure to Interest
Users can use the "Earned rate validation" functionality to test for certain conditions when calculating and/or capturing earned rates. If those conditions occur, AXIS will:
- Adjust the calculated earned rate based on the settings selected by the user; and/or
- Display warning message # 3715
For more information on earned rate validations, please see Earned rate validation. As discussed in the help section, some cases can result in earned rates failing the validation. One possible reason is that the leverage effect which could result when borrowing is used for negative cashflow allocation. In such a case, the total asset (Exposure to Interest) may be close to zero as the invested asset base is significantly reduced or offset by the borrowing account. As such, the calculated earned rates could be a very large number because of the very small denominator.
Two asset base definitions are available in AXIS for earned rate calculation. Using Type 2 asset base below may solve the leverage effect discussed above.
Type 1 - Total assets
Type 2 - Total invested asset
Type 1 – Total assets
Total asset base includes all the assets (invested and non-invested assets) and it is the original asset base that AXIS uses to calculate earned rates.
Gross earned rate = Gross investment income / Total assets
Gross Investment Income = Gross Income on Invested Assets
+ Income from Reinvestment Account
+ Investment Income on CF and Cash Account
Total Assets = Total Book Value of Invested Assets
+ Cashflow Account
+ Cashflow Account Accrued Int
+ Reinvestment Account
+ Reinvestment Account Accrued Int
Type 2 – Total invested assets
Total invested asset base includes the Total Book Value of Invested Assets only. By selecting this asset base definition, the borrowed amount will be ignored in the "exposure to interest" calculation and therefore avoids the leverage effect as mentioned above.
Gross earned rate = Gross income on invested assets / Total book value of invested assets
Please note that:
Gross Income on Invested Assets = Earned income
+ Amortization of Premium/Discount
+ Income from Realized Gains/Losses
+ Income from Unrealized Gains/Losses
+ Gains/Losses on Defaults
+ IMR amortization
Total book value of invested assets = Amortized Cost Basis (excl accrued)
+ Accrued Income
+ Unamortized Realized Gain
+ Amortized Unrealized Gain
- Interest Maintenance Reserve
- Non Admitted IMR