1

RIHM 3505DR. WEISS

Financial Ratio Analysis for Property-Liability Insurers

2

Introduction

How d0 you know if an insurer is successful?

Use financial ratio analysis statutory data

Types of financial ratios Capacity (or Leverage)

LiquidityProfitability

3

Capacity Ratios

Determined from capital, called ____________.Growth places a strain on insurer’s surplus:1.

2.

Investments also affect capacity. What happens to realized and unrealized capital gains (losses)?

Exposure to potential losses represented by ________.

4

Capacity Ratios (Cont’d)

Two capacity ratios:1. Net Premiums Written/Surplus

Range for this ratio:primarily reflects what kind of risk?Some problems with this ratio as measure

of capacity:1.2.

5

Capacity Ratios (Cont’d)

2. Reserves to Surplus RatioMeasures _________.Use loss reserves, UPR, and loss adjustment

expense reserves to calculate ratio.How is this affected by reserving errors?How is this ratio affected by liability lines?Other variations of this ratio:

loss reserves to surplusnet liabilities to surplusgross leverage ratio = net leverage

ratio + ceded reinsurance ratio

6

Liquidity Ratios

Definition of liquidity:

1. Liquidity ratio = liquid investments/(UPR + Loss and LAE Reserves)

liquid investments =

2. Quick Liquidity ratio = quick assets/net liabilities2. Quick assets = 3. Net liabilities =

3. Overall liquidity ratio = total assets/total liabilities

7

Profitability Ratios

Underwriting and investment income make up profit.1. Combined ratio = loss ratio + expense ratio

2. Overall operating ratio = combined ratio – net investment income ratio

3. Investment yield ratio =investment returns/invested assets

4. Return on Policyholders Surplus = net income /Surplus

8

Other Ratios

1. Change in Writings ratio

2. Surplus aid to policyholders surplus ratio

3. Gross change in policyholders’ surplus ratio

4. One year Reserve Development to policyholders’ surplus ratio