RIHM 3505 DR. WEISS Financial Ratio Analysis for Property-Liability Insurers 1

Introduction How d0 you know if an insurer is successful? Use financial ratio analysis statutory data Types of financial ratios Capacity (or Leverage) Liquidity Profitability 2

Capacity Ratios Determined from capital, called ____________. Growth places a strain on insurer’s surplus: Investments also affect capacity. What happens to realized and unrealized capital gains (losses)? Exposure to potential losses represented by ________. 3

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:

Capacity Ratios (Cont’d) 2. Reserves to Surplus Ratio Measures _________. 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 surplus net liabilities to surplus gross leverage ratio = net leverage ratio + ceded reinsurance ratio 5

Liquidity Ratios Definition of liquidity: 1. Liquidity ratio = liquid investments/(UPR + Loss and LAE Reserves) liquid investments = 2. Quick Liquidity ratio = quick assets/net liabilities 2. Quick assets = 3. Net liabilities = 3. Overall liquidity ratio = total assets/total liabilities 6

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 7

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 8