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FRM Part II · FRM Exam Part II · The Global Drivers of Private Credit

A life insurer holds USD 2,000 million of assets funding long-dated liabilities. It reallocates 10% into private credit yielding 8.0%, funded by selling public bonds yielding 5.5%. Its liability-matching portfolio otherwise earns 5.5%. Regulatory capital for the private credit is 12% of exposure versus 4% for the public bonds, and the insurer's cost of capital is 10%. What is the net annual benefit after the capital charge on the incremental capital?

The net benefit is USD 3.4 million. The 2.5 point yield pickup on USD 200 million gives USD 5.0 million, less a 10% charge on USD 16 million of extra capital (8% of 200 million), which is USD 1.6 million.

  1. AUSD 1.6 millionCorrect
  2. BUSD 5.0 million
  3. CUSD 3.4 million
  4. DUSD 3.6 million

Explanation

Reallocated amount = 200 million. Extra income = 2.5% x 200 = 5.0 million. Incremental capital = (12% - 4%) x 200 = 16 million; cost at 10% = 1.6 million. Net = 5.0 - 1.6 = 3.4 million. So the correct figure is 3.4 million, option 3.

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