Question

(a) Discuss the general uses, benefits and drawback of financial ratio analysis.

(b) Consider the following insurance company accounts of Twachimvya General Insurance Plc in K’000s:

TABLE A: INCOME STATEMENT

INCOME STATEMENT AS AT 31/12/2018	K'000
Gross Written Premium	31870.00
Outward Reinsurance Premium	-8750.00
Net Written Premium	23120.00
Change in the gross provision to unearned premium	-1910.00
Less: Change in the provision for unearned	290.00
Change in the gross provision to unearned premium	-1620.00
Net earned premium	21500.00
Net Investment return	9030.00
TOTAL INCOME	30530.00
EXPENSES
Gross Claims Incurred	-29520.00
Reinsurers Share	13100.00
Claims incurred net of reinsurance	-16420.00
Acquisition Costs	-1900.00
Other Operating Expenses	-1600.00
TOTAL EXPENSES	-19920.00
Profit Before Tax	10610.00
Tax Expense	-3800.00
Profit for the period	6810.00

TABLE B: BALANCE SHEET

BALANCE SHEET AS AT 31/12/2018	K'000s	K'000s
ASSETS	100000.00
Intangible assets	667600.00
Investments	220000.00
Reinsurer's share of insurance contract liabilities	20600.00
Deferred acquisition costs	80000.00
Debtors Other Assets	95000.00
Cash and cash equivalents	60000.00
TOTAL ASSETS		1243200.00
Shareholders equity and reserves	126900.00
LIABILITIUES
Provision for unearned premium	110200.00
Provision for losses and loss adjustment expenses	845800.00
Reinsurance Liabilities	40000.00
Creditors and other current liabilities	120300.00
TOTAL EQUITY, RESERVES AND LIABILITIES		1243200.00

REQUIRED:

(i) Compute the following insurance ratios and interpret your results

(a) Solvency ratio

(b) claims ratio

(c) expenses ratio

(c) Commissions ratio

(d) combined ratio

(e) Return on equity

Answer 1

A. Uses and benefits of financial ratio analysis

1. Financial ratio analysis is the analysis of ratios in the financial instruments

2. It makes the users to understand the financial statements in better manner

3. Ratio analysis is calculated from the given financial statements of the entity

4. It helps to compare the growth of the entity with other in the Industry

5. It helps to know about the current status in the balance sheet

6. It helps to find out efficiency in the operations, financial management, etc.,

Limitations

1. While calculating ratios it will not take time value of money in to account

2. It considers only quantitative aspects

3. The ratios analysis only balances at the end of balance sheet but not during the year

B.

a) solvency ratio = Net operating profit after tax/ total liability

=6810/270500=2.52, its is more than required

b) claims ratio = Claims settled / claims received = 16420/23120=71%

c) expenses ratio = net expenses / investment = 19920/220000=9.05%

d) commissions ratio - as details regarding commissions are not available

e) Combined ratio=loss + expenses /earned premium=19920/21500=0.9265

f) Return on equity = Net Income / equity = 6810/126900=5.37%