Question

Management Issues for Non-Depository Institutions

The EverSure Insurance Company has the following financial statements.

                                                                              2018                             2017

Net Premiums Written                                         48,612                          47,398

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Income Statement ($ mils.)

Premiums Earned                                             42,624                           48,321

Loss Expenses                                                 30,746                            34,364

Operating Expenses                                          17,720                           17,693

Total Policy Expenses                                       48,466                           52,057

Net Underwriting Gain/Loss                             (5,842)                           (3,736)

Net Investment Income                                       15,700                        19,995

Operating Income before taxes                         9,858                           16,259

Dividends to Policyholders                                6,517                            10,361

Income Tax                                                       1,294                              1,670

Net Income                                                      $2,047                           $ 4,228

Ave Investment Yield                                       4.94%                             5.89%

(mils.)                                                               2018                               2017

Total Assets                                                  $381,972                        $406,529

Liabilities

Total Liabilities                                            $349,069                           $369,700

Total Equity                                                   32,903                               36,829

Total Liabs. & Equity                                   $381,972                            $406,529

a. Calculate and evaluate the Net Underwriting Margin (NUM); Loss Ratio Expense Ratio; Combined Ratio; and Overall Profitability Ratio for each year using the information in the income statement above. Also calculate the firm’s OPM, OROA, ROA, ROE, and equity multiplier (EM).

Recall NUM = (Premiums Earned – Total Policy Expenses) / Total Assets

NUM 2018__________ NUM 2017 ______________

Recall: expense ratio = (operating expenses/net premiums written) and loss ratio = (loss expenses/premium earned), and combined ratio = (loss ratio + expense ratio), and overall profitability ratio = {[100% - Combined Ratio%] + (Investment Yield% }for the firm each year) Also calculate asset turnover (revenues/total assets), net profit margin [net income/revenues], operating ROA (operating income/total assets), return on assets (net income/total assets) and return on equity (net income/equity accounts), and equity multiplier (total assets / equity).

                                                                                      2018                                                           2017

Expense ratio

Loss ratio

Combined ratio

Average Investment Yield

Overall Profitability

Dupont Analysis:

Asset Turnover

Net Profit Margin

OROA

ROA

ROE

Equity Multiplier (EM)

b. Analyze the trends in all of the ratios, and the other financial information provided. What do each of these specifically reveal for trends over time including trends as well on the firm’s balance sheet? What areas of strength & weakness are revealed? What advice for improvement would you give?

Answer 1

Ratio	Explanation	2018	Explanation	2017	Formula used for Ratio calculation
Expense Ratio	17720/48612	36.45%	17693/47398	37.33%	expense ratio = (operating expenses/net premiums written
loss Ratio	30746/48612	72.13%	34364/48321	71.12%	loss ratio = (loss expenses/premium earned
Combined Ratio	36.45+72.13	108.58%	37.33+71.12	108.44%	combined ratio = (loss ratio + expense ratio
Overall Profitability Ratio	100-108.58+4.94	-3.64%	100-108.44+5.89	-2.55%	overall profitability ratio = {[100% - Combined Ratio%] + (Investment Yield% }for the firm each year
Asset Turnover Ratio	48466/381972	12.69%	52057/406529	12.81%	asset turnover (revenues/total assets
Net margin Ratio	2047/42624	4.80%	4228/48321	8.75%	net profit margin [net income/revenues
Operating ROA	17720/381972	4.64%	17693/406529	4.35%	operating ROA (operating income/total assets
ROA	2047/381972	0.54%	4228/406529	1.04%	return on assets (net income/total assets
ROE	2047/32903	6.22%	4228/36829	11.48%	return on equity (net income/equity accounts
Equity Multiplier (EM)	381972/32903	11.609	406529/36829	11.0383	equity multiplier (total assets / equity
Net Underwriting Margin	-5842/42624	-13.71%	-3736/48321	-7.73%	Net Underwriting Margin=underwriting margin/Premium earned

From the above calculated statement it is observed that expense ratio has been reduced by around 1% and loss ratio is same from 2017 to 2018,that means expenses reduced but loss is constant to the extent of expense reduced is retained by company as earnings.

Overall profitability ratio is increased in negative from 2017 to 2018

Net margin has been reduced by 50% from 2017 to 2018

Operating ROA and equity multiplier are constant from 2017 to 2018

ROE is reduced by 50% from 2017 to 2018

The DU-PONT is an expression which breaks return on equity down in 3 parts

Net profit margin,Asset turnover and equity multiplier

for 2017

8.75*12.81*11.03 = 12.37

for 2018

4.8*12.69*11.609 = 7.07

Return on equity as per dupont is reduced from 2017 to 2018