MSA.Ratios

Question 1

What is the formula, acceptable range and meaning of ROE?

Answer 1

ROE = (NI.preTax - TotTax)/Eq

> 5.4%

Sustainability of earnings

Question 2

What is the formula, acceptable range and meaning of ROA?

Answer 2

ROA = (NI.preTax - TotTax) / 2y Avg of assets

> 2.6%

Efficiency measure for income generation.

Question 3

What is the acceptable range and meaning of the Net Loss Reserves / Equity Ratio?

Answer 3

< 200%

High ratio could mean financial distress

Question 4

What is the formula, acceptable range and meaning of the Net Leverage Ratio?

Answer 4

(Net liabilities + NWP) / Equity

< 500%

Stability measure (high ratio means excess writing)

Question 5

What is the formula and meaning of the % chg in NWP ratio?

Answer 5

NWP(x) / NWP(x-1)
Growth measure (high value may indicate capital strain)

Question 6

What is the formula and meaning of the change in equity ratio?

Answer 6

Eq(x) / Eq(x-1)

Lower value indicated lower ability to support growth.

Question 7

What is the formula, acceptable range and meaning of the Net U/W Leverage Ratio?

Answer 7

NWP / Eq

< 300%

Higher ratio indicated capital strain

Question 8

What is the formula, acceptable range and meaning of the Overall Diversification ratio?

Answer 8

LOB diversity score x geographic diversity score

> 65

Score is from 1-10.
A higher score is better since it indicates greater diversity which is a hedge against risk.

Question 9

What is the formula, acceptable range and meaning of ROR ratio?

Answer 9

(U/W Income - Capital Gains + Investment Income + Income from subsidies) / GWP

> 6.2%

Income relative to revenue-generating capacity

Question 10

How do you calculate the Net Combined Ratio?

Answer 10

(Net incurred losses + Operating Expenses) / NEP

Question 11

What is the formula, acceptable range and meaning of the Insurance Return on Net EP ratio?

Answer 11

(U/W Income - Capital Gains + InvInc) / NEP

> 4.0%

Core earning capacity

Question 12

What is the formula, acceptable range and meaning of the Liabilities / Liquid Assets ratio?

Answer 12

Liabilities / Liquid Assets

< 105%

Liquidity measure

Question 13

What is the formula, acceptable range and meaning of the 1yrDev/Eq ratio?

Answer 13

1 year development / Equity

> -10%

Adverse development could mean under-reserving

Question 14

How do you calculate the adjusted investment yield? What is the meaning?

Answer 14

2*(NetInvInc + OCI)/(Invested Assets(beg) + Invested Assets(end) - NetInvInc - OCI)

Measures income and capital gains relative to assets

Question 15

What is the acceptable range & meaning of the combined operating ratio?

Answer 15

< 100%

Higher ratio indicates U/W loss

Question 16

How do you calculate the investment yield?

Answer 16

2*(Net InvInc) / (Inv Assets(beg) + Inv Assets(end) - Net InvInc)

Question 17

How do you calculate the invested assets? (4 pieces)

Answer 17

Sum of:
1. Cash
2. Bonds & Debentures
3. Common Shares
4. Real Estate

Question 18

How do you calculate NEP?

Answer 18

NWP - chg(UEP)

Question 19

How do you calculate the unpaid claims & adjustment expenses recoverable at the end of the year?

Answer 19

UCAE Rec = Gross UCAE + Net UEP - Net liab
Net UEP = Gross UEP - UEP Rec
Gross UEP = Tot Liab - Gross UCAE
Tot Liab = Assets - Eq
Net Liab = Eq * ( overall net lev ratio - net UW lev ratio)

Question 20

Give 4 examples of company characteristics not captures in MSA ratios?

Answer 20

1. Subjective analysis of market position
2. Quality of management
3. Quality of reinsurance
4. Prospects for growth & innovation

Question 21

What does diversification score measure?

Answer 21

How closely the insurer tracks the overall Canadian market (in terms of geographic & LOB spread)

Question 22

How do you calculate the Non-liquid Assets?

Answer 22

Non-liquid Assets = Assets - Liquid Assets
Assets = Liabilities + Eq