Question

The Colorado Comfort Insurance Company has the following financial statements.

                                              2018               2019

Net Premiums Written                           78,560             67,819

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Income Statement (mils.)

Premiums Earned                                   76,272             65,801

Loss Expenses                                         58,235             55,030

Operating Expenses                                20,653             17,498

Total Policy Expenses                             78,888             72,528

Net Underwriting Gain/Loss                 -2,616              -6,727

Net Investment Income                          8,670              8,206

Operating Income                                   6,054              1,479

Taxes                                                        1,818                   263

Net Income                                              4,236               1,216

Ave Yield on Investments                     7.26%             6.18%

Balance Sheet (mils.)                               2018               2019

Assets

Cash                                                            241             940

S.T. Investments                                      16,948             43,025            

Bonds                                                       102,140           88,883

Interest Due                                               1,371            1,395

Other Assets                                                349                  772

Total Assets                                             121,049           135,015

Liabilities

Accrued Losses                                       28,371             33,003

Loss Adj. Expenses                                 10,444             10,914

Taxes, Licenses, Fees                              968                    1,550

Unearned Premiums                               28,647             26,715

Other Liabilities                                      12,991             27,547

Total Liabilities                                       81,421             99,729

Equity Accounts                                      39,628             35,286

Total Liabs. & Equity                            121,049           135,015  

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, ROA, ROE, and equity multiplier (EM).

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

NUM 2018   __________     NUM 2019 ______________

        2018                  2019

                  Expense ratio                          

                   Loss ratio

                   Combined ratio

                   Average Investment Yield

                  Overall Profitability

                   Asset Utilization

            Operating Profit Margin

                      ROA

                      ROE

           Equity Multiplier (EM)

[Hints: Expense ratio = (operating expenses/net premiums written)

Loss ratio = (loss expenses/premium earned),

Combined ratio = (loss ratio + expense ratio),

Overall Profitability Ratio = {[100% - Combined Ratio%] + (Investment Yield% }

Asset Utilization (AU)= Total Revenues including investment income / Total Assets

Operating Profit Margin (OPM) = Operating Income / Total Revenues

Return on Assets (ROA) = Net Income / Total Assets

Return on Equity (ROE) = Net Income / Total Equity

Equity Multiplier (EM) = Total Assets / Total Equity]

Answer 1

Net Underwriting Margin (NUM):

Net Underwriting Margin (NUM) = (Premiums Earned – Total Policy Expenses) / Total Assets

For 2018

Premiums Earned = 76272

Total Policy Expenses = 78,888

Total Assets = 121,049

NUM = -0.0216

For 2019

Premiums Earned = 65801

Total Policy Expenses = 72,528

Total Assets = 135,015

NUM = -0.0498

Expense ratio:

Expense ratio = (operating expenses/net premiums written)

For 2018

Operating expenses = 20,653

Net premiums written = 78,560

Expense ratio =20,653/ 78,560 = 0.2629

For 2019

Operating expenses =  17,498

Net premiums written = 67,819

Expense ratio =17,498/67,819 = 0.2580

Loss ratio:

Loss ratio = (loss expenses/premium earned)

For 2018

Loss expenses = 58,235

Premium earned = 76,272

Loss ratio = 0.7635

For 2019

Loss expenses = 55,030

Premium earned = 65,801

Loss ratio = 0.8363

Combined ratio:

Combined ratio = (loss ratio + expense ratio),

For 2018

Combined ratio = 0.7635 + 0.2629 = 1.0264

For 2019

Combined ratio = 0.8363 + 0.2580 = 1.0943

Overall Profitability Ratio:

Overall Profitability Ratio = {[100% - Combined Ratio%] + (Investment Yield% }

For 2018

Combined ratio =1.0264 = 102.64%

Investment yield = 7.26%

Overall Profitability Ratio = (100% – 102.64%) + 7.26% = 4.62%

For 2019

Combined ratio =1.0943 = 109.43%

Investment yield = 6.18%

Overall Profitability Ratio = (100% – 109.43%) + 6.18% = -3.25%