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Flashcards in MSA Ratios Deck (18):

(formula & range)

Total Capital / Minimum Required Capital

Minimum 150%


(formula & range)

Net Income/Equity

Minimum 5.4%

Return to shareholder per unit of invested capital. Should be sustainable rather than up and down. High ROE can be from low equity, which could mean high leverage.


Return on Revenue (ROR)
(formula & range)

= (UW income + Inv Income exc gains + Income from Subsidiaries) / Gross WP

Minimum 6.2%

Measures the income generated by the company relative to its revenue capacity


Return on Assets after tax (ROA)
(formula & range)

= Net Income After Tax/ (Beginning Year Assets + Ending Year Assets)/2

Minimum = 2.6%

Measures the efficiency of the company in terms of the company's ability to generate income from its assets.


Insurance Return on Net Premium Earned (IRNPE)
(formula & range)

(UW Income + Inv Income exc gains)/Net Premiums Earned

Minimum 4%

Measures core earning capacity


Liabilities as a Percentage of Liquid Assets (LLA)
(formula & range)

Liabilities/Liquid Assets

Maximum = 105%

Measures the insurers liquidity. The higher the ratio means you have less assets to back your liabilities. Balance sheet values are used to determine liquidity.


Net Loss Reserves to Equity
(formula & range)

NLRE = Net Loss Reserves/ Equity

Maximum = 200%

If this ratio is too high then small % deviations in o/s reserves can have devastating effects on solvency. A high ratio could mean the insurer is exposed to financial distress due to the uncertainty in assessing unpaid claim liabilities.


One-Year Development to Equity
(formula & range)

1 year development deficiency/equity

Minimum = -10%

Investment income is built in. Development is impacted by mandatory discounting. Measures an insurers one year development margin or deficiency on unpaid claims to equity.
Adverse development implies previous estimated liabilities were underestimated, hence previous equity was overstated.


Overall Net Leverage
(formula & range)

(NWP + NL) / Equity

Maximum = 500%

Excessive premium writing relative to capital or a deterioration in liabilities will erode a company's financial stability.


Adjusted Investment Yield (include realized capital gains)

=(2*(Net Investment Income + OCI))/(Beginning Year + End Year Invested Assets - Net Investment Income - OCI)

Measure income and capital gains relative to deployed assets


Change in NPW

Year over Year % Change in net premiums written


Change in Gross Premiums Written

Year over Year % change in GWP


Change in Equity

Year over year % change in equity. Declines in equity decrease the company's cushion available to support premium writings and absorb losses. Dramatic increases in equity may be indicative of instability.


AOCI to Equity

= Accumulated other Comprehensive Income/Equity

AOCI is a capital element relating to unrealized (mark to market) capital gains or losses on available for sale securities. Measures AOCI's proportion to overall capital.


Reinsurance Recoverable to Equity

=(RR from Unearned Premium + RR from Unpaid Claims)/Equity

Gross measure since not offset by payables. Also accounts for S&S recoverables. High ratio means the insurer depends on the recoverability of those funds and thus financial health of the reinsurer.


Net Underwriting Leverage Ratio
(formula & range)

NUWLR = Net Premiums Written / Equity

Maximum = 300%

Measures the company's underwriting exposure relative to its capital base. Utility of ratio is reduces by the fact that WP is less than adequate proxy for exposure.


Two Year Combined Ratio
(formula & range)

= Loss Ratio + Expense Ratio + (LAE/Earned Premium)
over 2 years
= 1- (UW Income/NPE)

>100% mean loss
s UW performance then a single year measure


Overall Diversification Score (1-100)
(description & range)

Measures how closely the insurer tracks the overall CAN mrkt both geographic and LOB spread.
Higher score means company tracks closely to overall industry. Excludes ICBC.
Insurers that belong to group need to look into group's diversification score on group summary page.
Don't judge too quickly - a low score could mean the company is concentrated by LOB or geographically. Niche markets can be highly profitable.

Excess of 65 means track closely with the industry