MSA.RATIOS

Question 1

MCT Ratio (Minimum Capital Test)

Answer 1

Formula: CapAv / minCapReq

Acceptable range: > 150%

Meaning: measure of capital adequacy

Question 2

ROE (return on equity)

Answer 2

Formula: (NI.preTax - TotTax)/Equity

Acceptable range: > 5.4%

Meaning: sustainability of earnings

Question 3

ROR (return on revenue)

Answer 3

Formula: (U/W Inc. - CapGains + InvInc + IncFrmSubs)/GWP

Acceptable range: > 6.2%

Meaning: income relative to revenue-generating capacity

Question 4

ROA (return on assets, after tax)

Answer 4

Formula: (NI.pretax - TotTax)/(2-yr avg of assets)

Acceptable range: > 2.6%

Meaning: efficiency measure for income-generation

Question 5

Insurance return on Net EP

Answer 5

Formula: (U/W Inc. - CapGains + InvInc(from U/W Inc.))/NEP

Acceptable range: > 4.0%

Meaning: core earning capacity

Question 6

Liabilities/Liquid Assets

Answer 6

Formula: Liabilities/Liquid Assets

Acceptable range: < 105%

Meaning: liquidity measure

Question 7

Net Loss Reserves/Equity

Answer 7

Formula: Net Loss Reserves/Equity

Acceptable range: < 200%

Meaning: high ratio means financial distress

Question 8

1-yr development/Equity

Answer 8

Formula: 1-yr development/Equity

Acceptable range: > -10%

Meaning: adverse development could mean under-reserving

Question 9

Net Leverage

Answer 9

Formula: (Net Liabilities + NWP)/Equity

Acceptable range: < 500%

Meaning: stability measure (high ratio means excessive writing)

Question 10

Adjusted Investment Yield

Answer 10

Formula: [2 x (Net InvInc. + OCI)]/(Invested Assets [start of yr] + Invested Assets [end of yr] - Net InvInc. - OCI)

Acceptable range: n/a

Meaning: measures income and capital gains relative to assets

Question 11

Components Invested Assets (4)

Answer 11

Cash
Bonds & Debentures
Common Shares
Real Estate

Question 12

Formule NEP

Answer 12

NEP = NWP - chg(UEP)

Question 13

% Change in NWP

Answer 13

Formula: NWP(yr = x)/NWP(yr = x-1)

Acceptable range: n/a

Meaning: growth measure - high value may indicate capital strain

Question 14

% Change in GWP

Answer 14

Formula: GWP(yr = x)/GWP(yr = x-1)

Acceptable range: n/a

Meaning: growth measure - high value may indicate capital strain

Question 15

Change in Equity

Answer 15

Formula: EQ(yr = x)/EQ(yr = x-1)

Acceptable range: n/a

Meaning: lower value indicates lower ability to support growth

Question 16

AOCI/Equity

Answer 16

Formula: AOCI/Equity

Acceptable range: n/a

Meaning: AOCI relates to unrealized gains/losses

Question 17

Reinsurance Recoveries/Equity

Answer 17

Formula: Reinsurance Recoveries/Equity

Acceptable range: n/a

Meaning: high value indicates dependence on Reinsurance Recoveries

Question 18

Net U/W Leverage

Answer 18

Formula: NWP/Equity

Acceptable range: < 300%

Meaning: higher ratio indicates capital strain

Question 19

2-yr Combined Operating Ratio

Answer 19

Formula: [APV(incurred claims) + Operating expenses]/EP

Acceptable range: < 100%

Meaning: higher ratio indicates U/W loss

Question 20

Overall diversification

Answer 20

Formula: (LOB diversity score) x (geographic diversity score)

Acceptable range: > 65

Meaning: score for each factor is from 1-10. A higher score is better because it indicates greater diversity which is a hedge against risk