15.7. Valuing a Property-Casualty Insurer (Hard) The following summarizes the balance sheet and income statement for a property-casualty insurer. Numbers are in millions of dollars. Balance Sheet 2009 2008 Operating assets associated with underwriting $2,450 $2,300 Unpaid daims and unearned premiums Net operating assets in underwriting activities 5,300 5,600 (2,850) (3,300) Investments in debt and equity securities, at marke Common equity 6,050 5,940 3,200 2,640 Net income of $848 million for 2009 come from the following to which taxes have been allocated. Loss on underwriting activities, after tax $ 43 Investment income and realized gains on investments, after tax 891 In addition to net income in the income statement, unrealized losses on available-for-sale investments of $124 million were reported as part of other comprehensive income in the equity statement.

a. Calculate the residual income from underwriting activities for 2009. Use beginning-of- year balance sheet numbers in the calculation and a required return of 9 percent.

b. Value the equity under a forecast that the residual income from underwriting will grow at 2 percent per year in the future.