MSA

1. need combination of favourable returns and equity ratios
   • if ROE favourable but leverage ratios high, can indicate issue with low equity (and not necessarily good return) -> can indicate low MCT ratio (deterioration in financial condition; insufficient capital available to support risks)
2. UW vs. Investment results
   • favourable investment performance can offset UW losses, and still lead to a favorable overall results
3. change in Equity (from NI or OCI)
   • decrease indicates weak financial performance and increase in leverage / risks not being covered and decrease in MCT

• capital ratios: MCT
• returns and min:
  • ROE (5.4%)
  • ROR (6.2%)
  • ROA after tax (2.6%)
  • Insurance return on NPE (4%)
• equity ratios:
  • Net loss reserves to equity or adjusted equity (max 200%)
  • One-year development to equity (min -10%)
  • Overalll net leverage (max 500%)
  • Reinsurance recoverables to equity
  • Net u/w leverage ratio (max 300%)
  • AOCI to equity
• other ratios:
  • Liabilities as a % of liquid assets (max 105%)
  • Investment yield
  • YOY Changes in NWP / GWP / Equity
  • Two-year Combined Ratio
  • Overall diversification (well diversified >= 65)

= UW Income + Investment Income + other income - income tax

• UW income = EP - expenses - incurred & LAE
• EP = NWP - change in unearned premium
• expenses = gen + acq
• net investment income include G/L

Assets - Liabilities - Reserves Required

• = Assets (bonds, debentures, shares, recoverables, receivables)
• - Liabilities (unpaid L&LAE, UEP, reserves required)
• = Previous year Equity + NI + OCI - dividends

= Equity - Capital required for cat & unreigstered reinsurance

• MCT = Total Capital Available / Min Capital Required
• BAAT = Total Net Assets Available / Margin Required
• min 150% (may be higher for individual insurers)

Net income / Equity

• min 5.4%
• return to s.h.'s per unit of equity / ability to generate profit from s.h.'s equity
• sustainability of earnings is critical rather than occassionally high returns followed by low returns or losses
• High can imply high NI or small equity base used to generate profits

(U/W Income + investment income (excl G/L) + income from subsidiaries) / GWP

• min 6.2%
• before tax
• investment income (excl G/L) = investment income - investment expenses
• GWP only direct; does not include assumed
• income generated (or profit) relative to its revenue generating capacity. Ability to turn UW revenue into income.

Net income / avg Assest (Beg, End)

• min 2.6%
• Total asset, not just invested assets
• efficiency in generating income (or profit) from its asset base.
• High can imply high NI or small asset base used to generate income

(UW income + investment income (excl G/L)) / net premium earned

• min 4%
• core earnings capacity based on income from UW related activities
• High implies strong UW and investment income
• Similar to ROR but exclude income from subsidiaries and uses NPE as basis instead of GWP

(Unpaid Claims - Unpaid Claims Recoverables) / Equity or Adjusted Equity

• max 200%
• Loss reserves from BS
• exposure to financial distress if unpaid claims provision proves inadequate (given its inherent uncertainty)
• when really high, small deviation in o/s reserves can be devastating on solvency

(Initial Liab - Paid losses - Ending Liab + investment income) / Equity

• min -10%
• one-year development margin / deficiency on unpaid claims relative to equity
• use discounted loss reserves and add investment income in the development
• High indicates under-reserving and overstatement of equity

Net Loss Reserves to Equity / (Overall Net Leverage – Net U/W Leverage Ratio)

(NWP + Net Liabilities)/Equity

• max 500%
• Net Liabilities = Total Liabilities - Unpaid Claims and LAE Recoverable - Unearned Premiums Recoverable
• Total Liabilities = A - L
• high implies erosion to financial stability from excess writings relative to capital or deterioration in liabilities

Recoverables on unpaid claims & UEP / Equity or Adj Equity

• reliance on reinsurer financial health and sensitivity if reinsurance provision proves to be inadequate or default
• high implies heavy reliance on financial health of its reinsurers
• Gross, not offset by payables to reinsurers
• Incl recoverables from S&S

NWP/Adj Equity

• max 300%
• UW exposure to capital base. WP as proxy for exposure
• high may indicate capital strain and vulnerability / overextending UW exposure relative to capital base.

Unrealized G/L (from mark-to-market) on AFS securities / equity

• max 105%
• liquidity. Uses BS values to measure liquid assets
• higher implies greater liabilities relative to assets available to back them -> at risk of not having enough assets that can be easily sold to cover ST obligations

2 * (net investment income + OCI)/(beg + end invested assets - net investment income - OCI)

• Incl realized gains
• Low may lead to failures

Decline in equity YOY % change reduces cushion to support premiums and losses; increase may show instability

• Smoother measure than a one-year
• >100% UW loss; <100% UW profit

• Measure of how close to overall Canadian market in geo and LOB mix
• LOB diversification score (1-10) * geo diversification score (1-10)
• Higher, the more diversified. Well-diversified threshold >= 65