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Ferrari
Ferrari- Total Return on Shareholders Equity
12
Finance
Professional
01/16/2012

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Cards

Term
Ferrari Notation: T, I, U, P, A, R, S
Definition
T = Total After Tax Returns, I = Investment Gain or Loss (after tax), U = Underwriting Profit (after tax), P = Premium income, A = Total assets, R = reserves and other liabilities (excluding equity in UNPR), S = Stockholder's equity (capital, surplus, equity in UNPR)
Term
2 basic relationships
Definition
T= I + U and A = R + S
Term
Ferrari Fundamental Equation
Definition
T/S = I/A * ( 1 + R/S) + U/P * P/S
Term
Insurance Leverage
Definition
(R/S)(essentially loans from policyholder)
Term
Insurance Exposure
Definition
P/S
Term
Equation as form of Capital
Definition
T/S = I/A + R/S * (I/A + U/R)
Term
Balcarek P/S ratio interaction with I/A
Definition
Increases in P/S lead to lower I/A,
1) Premium increases tie up assets in agents balances, etc
2) In order to keep overall risk constant, increases in Premium should be matched by reductions in investment risk
Term
Balcarek P/S ratio interaction U/P
Definition
Will move together because the more profitable the business, the more risk you can assume w/o changing likelyhood of insolvency
Term
Belcarek U/P and I/A
Definition
Will move in the same direction because more underwriting profit allow for more risk taking on investments
Term
3 parties in each components
Definition
1)Investors interested in ROE
2) Society interested in ROA
3) Regular/Actuaries interested in ROS
Term
Optimum Capital Structure
2) Factors that affect value
Definition
is the mix of Owners Equity and Libilities which maxs value of firm
1)Expected earnings stream
2) Rate at which stream is discounted by the market
Term
Method to determine optimum capital structure
Definition
1) Relationship between I/A & U/R and resulting impact on earnings stream
2) Increase in probability of unfavorable results due to higher volatility
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