Capacity Ratio #1:

Net Premiums Written to Surplus

Net Premiums Written

Surplus

Ideal Range: <2 (NAIC considers >=3 troublesome)

Primarily Reflects: Underwriting Risk

Problems: Does NOT consider actual coverage insured

Does NOT differentiate business w/ deductibles or co-ins.

Capacity Ratio #2

Reserves to Surplus

Loss Reserves + LAE + UPR

Surplus

Measures: Leverage

i.e. - Ratio=1.39 --> $1.39 debt for each $1 surplus

High ratio --> High sensitivity to reserving errors

No benchmark

Long-tail liability losses sit in reserves for a long time

...inflate reserves vs surplus

Capacity Ratio #3

Loss Reserves to Surplus

Loss Reserves

Surplus

Benchmark (Property): 0.5 < LR/S < 1.0

Benchmark (Liability): 2 < LR/S < 3

Capacity Ratio #4

Net Liabilities to Surplus

a.k.a. "Debt to Equity (GAAP)"

Total Liabilities

Surplus

Includes ALL unpaid obligations (including borrowed money, dvidends declared but unpaid, etc.)

Capacity Ratio #5

Gross Leverage Ratio

Net Liabilities +   NPW    +  Ceded Reins. Prem.

Surplus             Surplus             Surplus      

Exposure to         Subject to          Risk of Collecting

ALL unpaid Liab.  Pricing Err. Vol.   Reins. Payments

Net Leverage Ratio  +  Ceded Reinsurance Ratio

Liquidity Ratio #1

Liquidity Ratio

              Liquid Investments             

(UPR + Loss & LAE Reserves)

Liquid Investments: stocks, bonds, cash, short-term investments (mutual funds), interest due on bonds

Poor liquidity exposes the insurer to investment losses if assets must be sold below market value 

Liquidity Ratio #2

Quick Liquidity Ratio

   Quick Assets    

Net Liabilities

Quick Assets: Cash, short-term inv. (mutual funds), bonds mat. w/in 1 year, Gov't bond mat. w/in 5 years, 80% value of common stocks

Net Liabilities: ALL unpaid obligations

Liquidity Ratio #3

Overall Liquidity Ratio

  Total Assets   

Total Liabilities

Affected by:

• quality & marketability of premium balances
• investments in affiliates,  
• other assets that are not invested

Profitability Ratio #1

Combined Ratio

Loss Ratio  +  Expense Ratio

(Losses + LAE "Inc.")  +   Expenses      

Prem. Earned                  Prem. Written

Measures: Underwriting Income

Combined Ratio < 1    =   Underwriting Profit

Profitability Ratio #2

Overall Operating Ratio

Combined Ratio       -       Net Investment Income Ratio

Combined Ratio   -    Net Investment Income

                            Premiums Earned

Measures: pre-tax operating profits

Excludes: capital gains (losses), income taxes, other exp.

Includes: interest income, dividends, others

Profitability Ratio #3

Investment Yield Ratio

a.k.a. "Return on Investment"

Investment Returns

Invested Assets

Measures: investment returns relative to invested assets

"How well the firm has done w/ investing"

Includes: realized capital gains (losses)

Profitability Ratio #4

Return on Policyholder Surplus

a.k.a. "Return on Equity"

Net Income

Surplus

Measures: after-tax income relative to insurer's net resources (surplus)

Other Ratios #1

Change in Writings Ratio

(NPWt - NPWt-1)

NPWt-1

Measures: % change in NPW for insurer from one period to the next

 - some growth is a good sign
 - excessive growth may mean insurer has relaxed u/w standards or has  - inadequate pricing

 - volatility/wide variation in NPW growth may indicate unstable insurer

 - Sudden drop may mean insurer has withdrawn from line of biz or facing serious competition

Other Ratios #2

Surplus Aid to Policyholders Ratio

Surplus aid: commissions on reinsurance ceded to non-affiliated reinsurers.

Benchmark: should be BELOW 15%

High ratio: Insurer is u/w more business than it can support with its surplus

 - Concern about reinsurer quality

 - Threat to solvency if reinsurance arrangements cancelled or unable to pay its portion of claims

Other Ratios #2

Gross Change in Policyholders' Surplus Ratio

Other Ratios #4

One-Year Reserve Development to

Policyholders' Surplus Ratio