How is Change in Adjusted PHS defined?

• A. PHS of the current year minus changes in surplus notes, minus capital paid-in or transferred, minus surplus paid-in or transferred, minus PHS of the prior year
• B. PHS of the current year minus PHS of the prior year
• C. PHS of the prior year minus PHS of the current year
• D. Change in PHS divided by Prior PHS

Answer: (A)

Change in Adjusted PHS measures how much policyholders’ surplus has changed from one year to the next after removing financing-related changes, so you’re looking at the part of the change driven by earnings retained rather than by capital movements.

Start with the year-to-year change in PHS, which is current year PHS minus prior year PHS. Then remove the effects of financing or capital changes that aren’t tied to earnings, specifically changes in surplus notes, changes in capital paid-in or transferred, and changes in surplus paid-in or transferred. Doing this gives the adjusted change: PHS current year minus changes in surplus notes minus capital paid-in or transferred minus surplus paid-in or transferred minus PHS prior year. Equivalently, (PHS_current − PHS_prior) − [changes in surplus notes + changes in capital paid-in or transferred + changes in surplus paid-in or transferred].

For intuition, think of it as isolating the operational performance by excluding the impact of issuing/retiring debt and injecting or transferring capital. For example, if PHS current is 1,000 and PHS prior is 900, while there are changes of 30 in surplus notes, 20 in capital paid-in, and 10 in surplus paid-in, the Change in Adjusted PHS would be 1,000 − 30 − 20 − 10 − 900 = 40, which also equals (1,000 − 900) − (30 + 20 + 10) = 100 − 60 = 40.