A:

Underwriting and investing are two different methods an insurance company uses to generate income. The underwriting income is the profit generated by an insurance company from its underwriting business, while investment income is profit from investing in the financial markets.

The underwriting income is the profit generated by an insurance company by charging a fee, or premium, for the risk it takes on when accepting a liability and insuring the party over a specified period of time. Underwriting income is calculated as the difference between an insurance company's earned premiums and its expenses, claims and any dividends paid out when settling policies.

For example, assume an insurance company sells life insurance policies. Suppose the company collected $100 million in premiums last year. However, it paid out $10 million in insurance claims, $5 million in expenses and $20 million in dividends. Therefore, its underwriting income is $65 million, or $100 million - $10 million - $5 million - $20 million.

Contrary to underwriting income, investment income is the income an insurance company generates from its capital gains, dividends and other investment activities related to the purchase and sale of securities. While underwriting income is the profit generated from an insurance company's operations, investment income is the profit generated from its investments in financial markets.

For example, assume an insurance company had a profit of $50 million last year and wants to invest a portion of its profits into futures contracts. The insurance company buys 10 S&P Index futures contracts, trading at $2,110.25 per unit. Therefore, the notional value is $5,275,625, or $2,110.25*250*10. If the insurance company closes out its position above $2,110.25 per unit, the return is considered investment income.

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