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Module 7 &8: Management Issues for Non-Depository Institutions The Save You Insurance Company has the following...

Module 7 &8: Management Issues for Non-Depository Institutions

The Save You Insurance Company has the following financial statements.                                                                           2020                      2019

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.)                                                       2020               2019

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  

Dupont Analysis:

                   Asset Turnover                                

                  Net Profit Margin                              

                     ROA                                                 

                     ROE                                                 

                     OROA                                              

           Equity Multiplier (EM)        

Give an overview for why the insurance companies overall profitability changed in 2020 including trends in the expense ratio, loss ratio, and combined rate, and average investment yield. Also do a Dupont analysis explaining why the ROE and ROA for the insurance company changed in 2020 (based on the Operating Profit Margin, Asset Utilization, and the Equity Multiplier.

Solutions

Expert Solution

Workings:

Details
2020 2019
Net Premiums Written 48,612 47,398
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%
Total Assets 381,972 406,529
Total Liabilities 349,069 369,700
Total Equity 32,903 36,829
Total Liability & Equity 381,972 406,529
NUM = [Premiums Earned – T, Policy Expenses] / T. Assets
-1.53% -0.92%
Loss Ratio = [Loss Exp / Premiums Earned] 72.13% 71.12%
Expense Ratio = [Oper Exp / Net Premiums Written] 36.45% 37.33%
Combined Ratio = [Loss Ratio + Expense Ratio] 108.58% 108.44%
Overall Profitability = [100% - Combined Ratio%] + Investment Yield -3.64% -2.55%
Asset Turnover (revenues(Premium earned)/total assets)      0.1116       0.1189
Net Profit Margin (net income/revenues(Premium Earned) 0.048025 0.087498
Return on Assets (Net Income/Total Assets) 0.54% 1.04%
Return on Equity (Net Income/equity accounts) 6.22% 11.48%
Operating ROA (Operating Income/Total Assets) 2.58% 4.00%
Equity Multiplier (Total Assets / Equity)    11.6090    11.0383

Formulas:

Details
2020 2019
Net Premiums Written 48612 47398
Premiums Earned 42624 48321
Loss Expenses 30746 34364
Operating Expenses 17720 17693
Total Policy Expenses 48466 52057
Net Underwriting Gain/Loss -5842 -3736
Net Investment Income 15700 19995
Operating Income before taxes 9858 16259
Dividends to Policyholders 6517 10361
Income Tax 1294 1670
Net Income 2047 4228
Ave Investment Yield 0.0494 0.0589
Total Assets 381972 406529
Total Liabilities 349069 369700
Total Equity 32903 36829
Total Liability & Equity 381972 406529
NUM = [Premiums Earned – T, Policy Expenses] / T. Assets
=(B3-B6)/B14 =(C3-C6)/C14
Loss Ratio = [Loss Exp / Premiums Earned] =B4/B3 =C4/C3
Expense Ratio = [Oper Exp / Net Premiums Written] =B5/B2 =C5/C2
Combined Ratio = [Loss Ratio + Expense Ratio] =B22+B23 =C22+C23
Overall Profitability = [100% - Combined Ratio%] + Investment Yield =(100%-B24)+B13 =(100%-C24)+C13
Asset Turnover (revenues(Premium earned)/total assets) =B3/B14 =C3/C14
Net Profit Margin (net income/revenues(Premium Earned) =B12/B3 =C12/C3
Return on Assets (Net Income/Total Assets) =B12/B14 =C12/C14
Return on Equity (Net Income/equity accounts) =B12/B16 =C12/C16
Operating ROA (Operating Income/Total Assets) =B9/B14 =C9/C14
Equity Multiplier (Total Assets / Equity) =B14/B16 =C14/C16

Operating income has decreased and assets have decreased due to which the operating ROA has decreased and Return on assets has also come down.

Return on equity has almost reduced to half due to slight reduction in equities and net income. Due to slight changes in both equities and assets, equity multiplier remains almost same for both years same as asset turnover ratio whereas net profit margins have also reduced.


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