Reading and Analyzing Insurance Ratios.

Financial institutions such as banks, financial service companies, insurance companies, securities firms and credit unions have very different ways of reporting financial information.

This guide gives you the most pertinent information to analyze an insurance company's financial statements.


Underwriting Ratios


Loss Ratio

USBR calculates the loss ratio by dividing loss adjustments expenses by premiums earned.

The loss ratio shows what percentage of payouts are being settled with recipients.

The lower the loss ratio the better.

Higher loss ratios may indicate that an insurance company may need better risk management policies to guard against future possible insurance payouts.

Loss Ratio = ( Loss Adjustments / Premiums Earned )





Expense Ratio

USBR calculates the expense ratio of an insurance company by dividing underwriting expenses by net premiums earned.

Underwriting expenses are the costs of obtaining new policies from insurance carriers.

The lower the expense ratio the better because it means more profits to the insurance company.

Expense Ratio = ( Underwriting Expenses / Net Premiums Written )





Combined Ratio

This figure just measures claims losses and operating expenses against premiums earned.

The lower the figure the better.

The combined ratio is the total of estimated claims expenses for a period plus overhead expressed as a percentage of earned premiums.

A ratio below 100 percent represents a measure of profitability and the efficiency of an insurance firms underwriting efficiency.

Ratios above 100 percent denote a failure to earn sufficient premiums to cover expected claims.

High ratios can usually occur either because of underpricing and/or because of unexpected high claims.

Combined Ratio = ( Loss Ratio + Expense Ratio )



Ratio of Net Written Premiums to Policyholder Surplus

This ratio measures the level of capital surplus necessary to write premiums.

An insurance company must have an asset heavy balance sheet to pay out claims.

Industry statuary surplus is the amount by which assets exceed liabilities.

For instance: a ratio 0.95 -to 1 means that insurers are writing less than $1.00 worth of premium for every $1.00 of surplus. A ratio of 1.02-to-1 means insures are writing about $1.02 for every $1.00 in premiums.







Profitability Ratios


Return on Revenues

This figure determines the profitability of an insurance company .

It is the profits after all expenses and taxes are paid by the insurance company.

Return on Revenues = ( Net Operating Income / Total Revenues )



Return on Assets

USBR calculates the return on assets by dividing net operating income by Mean average assets.

This figure shows the profitability on existing investment securities and premiums.

The higher the return on assets the better the company is enhancing its returns on existing liquid assets.

Return on Assets ( Net Operating Income / Mean Average Assets )





Return on Equity

This figure shows the net profits that are returned to shareholders.

The higher the return on equity, the more profitable the company has become and the possibility of enhanced dividends to shareholders.

Return on Equity = ( Net Operating Income (less preferred stock Dividends / Average Common Equity )





Investment Yield

This is the return received on an insurance company's assets.

The investment yield is obtained by dividing the average investment assets into the net investment income before income taxes.

Investment Yield = ( Average investment Assets / Net Investment Income )


http://activemedia-guide.com/busedu_insure.htm



https://www.group.qbe.com/investor-centre/reports-presentations

Understanding financial statements of an insurance company

Financial Times
This article aims to help investors to understand insurance companies better and thus make the right investment decisions. Business Model An insurance company basically agrees to take the risk of an individual in exchange for a price.  Insurance companies make profits  by charging the right price for the risk they undertake (Underwriting) and  also by investing the large pool of funds they collect in terms of premiums. Income Statement The key metrics in the income statement of an insurance company are: * Gross Written Premium or Sales (GWP) –  The amount of risk premiums an insurance company has underwritten in the period of the financial statement.  *Reinsurance and Net written Premium -  Insurance companies will pass some of their premiums to other insurance companies to reduce risks.  This outflow of premiums is known as ceding reinsurance.  Net Written premium = GWP –Reinsurance Ceded.  * Net Earned premium-  All written premiums may not be earned over the period of the financial statement.  This is because customers would pay premiums in advance.  The part of the premiums which are earned over the financial statements duration are known as net earned premiums. * Investment Income and Other income –  An insurance company will receive significant amounts of cash from policy holders.  It will invest the cash.  Investment income therefore becomes a significant line of income for an insurance company.   Other income would be those which are earned from other insurance related activities.  Often this would comprise various fees which an insurance company may charge policy holders for services provided. *Revenue -  This would be the total income earned for a financial statement period.  It would therefore be the sum of  Earned Premiums,  Investment income and  Other income.  * Benefits –  This is the claims incurred for the period.  Incurred includes both paid claims and reserve movements to Balance Sheet.  In line with accounting prudence an insurance company will have to hold more or less reserves in line with changes in claims patterns and economic conditions. * Underwriting and Acquisition costs -  This would be Commissions paid in relation to insurance sales. * Operating and Administrative expenses -  These would be costs of operations of the insurance company.  Key Income Statement Metrics The following metrics can be used when comparing between insurance companies: Claims ratio –  Claims (Benefits)/Net Earned Premiums.   Other things being equal; lower the ratio better the performance. Expense ratio –  Total Underwriting and Operating Expenses/ Revenue.  Combined Ratio -  Measurement of how an insurance company’s revenue when excluding investment income covers its expenses.   Total expenses/( Revenue – Investment Income).   Ideally the ratio should be less than 100% and this indicates that both are making profits because of investment income and not from insurance business. Message to the Investor The insurance business is technical and complex when compared to other industries.  By understanding the business model and the method of accounting investors can make better decisions towards shareholder value. (By Ravi Mahendra.  The writer is an accountant working in the UK). http://www.sundaytimes.lk/071028/FinancialTimes/ft3025.html

https://www.lonpac.com/web/my/quarterly-financial-statements
https://www.group.qbe.com/investor-centre/reports-presentations

Property/Casualty Insurance Accounting

Property/Casualty Insurance Accounting

Income Statement of Property/Casualty Insurance Company

Premium revenue is also known as earned premium.  This premium revenue is used to fund:

1. Claim payments (loss expense).
2. Sales commissions for insurance agents (commission expenses)
3. Operating expenses (OPEX)

Claim expenses, for example, typically consume 75% of an insurer’s net revenues.

(1)    + (2) + (3) / Premium revenue = Combined ratio

Combined ratio is an insurance company’s key underwriting profit measure.

A combined ratio under 100 indicates an underwriting profit. 

For example:  A combined ratio of 95 means that the insurer paid out 95% of its premium revenue for losses.  The 5% remaining is the underwriting profit.

A combined ratio exceeding 100 indicates an underwriting loss. 

For example:  An insurer with a combined ratio of 105 paid out 105% of its premium revenue to cover losses,  meaning that it had an underwriting loss equal to 5% of revenues.

Companies with combined ratios exceeding 105 for more than a short time have a difficult time recouping their losses via investment earnings, and this type of poor underwriting track record suggests that an insurer’s competitive position is unusually weak.  Insurers unable to earn even the occasional underwriting profit will produce the industry’s poorest returns and may be tempted to accept large investment risks to boost profitability.

Investment income of Insurance companies

Insurers also make money from investment income.  They are often reported as a ratio of premium.

Adding the investment ratio to the combined ratio yields the operating profit ratio.  In many instances, investment income is a key profit determinant because it offsets underwriting losses.

Combined ratio  + Investment ratio  = Operating Profit ratio

Balance Sheet of Property/Casualty Insurance Company 

In addition to float, most insurers invest a large portion of their own retained earnings as well.  The investment account reveals the size of an insurer’s investments relative to its asset base and details the asset allocation employed.

Investment account = Float deployed + Retained Earnings deployed.

Look at the asset allocation of this investment account.  Look for insurers with no more than 30% invested in equities (unless the company is run by Warren Buffett).

Unearned Premiums of Property/Casualty Insurance Company

Unearned premiums represent premiums received but not yet considered revenue.

This oddity reflects an accounting convention.  When an insurer receives a premium, it is deemed to earn it gradually across the year.  After all, if a customer cancels a policy, the insurer must refund that portion of the coverage not consumed.  After six months, an annual auto policy would be 50% earned, and half the premium would be considered revenue.  Before this occurs, the premiums are held in the unearned premium account, and the insurer is free to invest them.

The best property/casualty insurer is one that is able to consistently earn underwriting profits on a large, growing customer base.  In effect, this insurer would be getting paid to profit from investing other people’s money and could retain this float indefinitely (as long as it grows).  Unfortunately, for investors, these situations rarely occur.



Insurance Companies of Malaysia
Click here: https://docs.google.com/open?id=0B-RRzs61sKqRWmp5ZEFEREw4VWM

Characteristics of Financial Service firms (banks, insurance companies and investment banks) and their Value Drivers

Characteristics of financial service firms

            There are many dimensions on which financial service firms differ from other firms in the market. In this section, we will focus on four key differences and look at why these differences can create estimation issues in valuation. The first is that many categories (albeit not all) of financial service firms operate under strict regulatory constraints on how they run their businesses and how much capital they need to set aside to keep operating. The second is that accounting rules for recording earnings and asset value at financial service firms are at variance with accounting rules for the rest of the market. The third is that debt for a financial service firm is more akin to raw material than to a source of capital; the notion of cost of capital and enterprise value may be meaningless as a consequence. The final factor is that the defining reinvestment (net capital expenditures and working capital) for a bank or insurance company may be not just difficult, but impossible, and cash flows cannot be computed.

The Regulatory Overlay

Financial service firms are heavily regulated all over the world, though the extent of the regulation varies from country to country. In general, these regulations take three forms. First, banks and insurance companies are required to maintain regulatory capital ratios, computed based upon the book value of equity and their operations, to ensure that they do not expand beyond their means and put their claimholders or depositors at risk. Second, financial service firms are often constrained in terms of where they can invest their funds. For instance, until a decade ago, the Glass-Steagall Act in the United States restricted commercial banks from investment banking activities as well as from taking active equity positions in non-financial service firms. Third, the entry of new firms into the business is often controlled by the regulatory authorities, as are mergers between existing firms.

            Why does this matter? From a valuation perspective, assumptions about growth are linked to assumptions about reinvestment. With financial service firms, these assumptions have to be scrutinized to ensure that they pass regulatory constraints. There might also be implications for how we measure risk at financial service firms. If regulatory restrictions are changing or are expected to change, it adds a layer of uncertainty (risk) to the future, which can have an effect on value. Put more simply, to value banks, insurance companies and investment banks, we have to be aware of the regulatory structure that governs them.

Differences in Accounting Rules

            The accounting rules used to measure earnings and record book value are different for financial service firms than the rest of the market, for two reasons. The first is that the assets of financial service firms tend to be financial instruments (bonds, securitized obligations) that often have an active market place. Not surprisingly, marking assets to market value has been an established practice in financial service firms, well before other firms even started talking about fair value accounting. The second is that the nature of operations for a financial service firm is such that long periods of profitability are interspersed with short periods of large losses; accounting standard have been developed to counter this tendency and create smoother earnings.

a.     Mark to Market: If the new trend in accounting is towards recording assets at fair value (rather than original costs), financial service firms operate as a laboratory for this experiment. After all, accounting rules for banks, insurance companies and investment banks have required that assets be recorded at fair value for more than a decade, based upon the argument that most of a bank/s assets are traded, have market prices and therefore do not require too many subjective judgments. In general, the assets of banks and insurance companies tend to be securities, many of which are publicly traded.  Since the market price is observable for many of these investments, accounting rules have tilted towards using market value (actual of estimated) for these assets.  To the extent that some or a significant portion of the assets of a financial service firms are marked to market, and the assets of most non-financial service firms are not, we fact two problems. The first is in comparing ratios based upon book value (both market to book ratios like price to book and accounting ratios like return on equity) across financial and non-financial service firms. The second is in interpreting these ratios, once computed. While the return on equity for a non-financial service firm can be considered a measure of return earned on equity invested originally in assets, the same cannot be said about return on equity at financial service firms, where the book equity measures not what was originally invested in assets but an updated market value.

b.     Loss Provisions and smoothing out earnings: Consider a bank that makes money the old fashioned way – by taking in funds from depositors and lending these funds out to individuals and corporations at higher rates. While the rate charged to lenders will be higher than that promised to depositors, the risk that the bank faces is that lenders may default, and the rate at which they default will vary widely over time – low during good economic times and high during economic downturns. Rather than write off the bad loans, as they occur, banks usually create provisions for losses that average out losses over time and charge this amount against earnings every year.  Though this practice is logical, there is a catch, insofar as the bank is given the responsibility of making the loan loss assessment. A conservative bank will set aside more for loan losses, given a loan portfolio, than a more aggressive bank, and this will lead to the latter reporting higher profits during good times.

Debt and Equity

            In the financial balance sheet that we used to describe firms, there are only two ways to raise funds to finance a business – debt and equity. While this is true for both all firms, financial service firms differ from non-financial service firms on three dimensions:

a. Debt is raw material, not capital: When we talk about capital for non-financial service firms, we tend to talk about both debt and equity. A firm raises funds from both equity investor and bondholders (and banks) and uses these funds to make its investments. When we value the firm, we value the value of the assets owned by the firm, rather than just the value of its equity. With a financial service firm, debt has a different connotation. Rather than view debt as a source of capital, most financial service firms seem to view it as a raw material. In other words, debt is to a bank what steel is to a manufacturing company, something to be molded into other products which can then be sold at a higher price and yield a profit. Consequently, capital at financial service firms seems to be narrowly defined as including only equity capital. This definition of capital is reinforced by the regulatory authorities, who evaluate the equity capital ratios of banks and insurance firms.

b. Defining Debt: The definition of what comprises debt also is murkier with a financial service firm than it is with a non-financial service firm. For instance, should deposits made by customers into their checking accounts at a bank be treated as debt by that bank? Especially on interest-bearing checking accounts, there is little distinction between a deposit and debt issued by the bank. If we do categorize this as debt, the operating income for a bank should be measured prior to interest paid to depositors, which would be problematic since interest expenses are usually the biggest single expense item for a bank.

c. Degree of financial leverage: Even if we can define debt as a source of capital and can measure it precisely, there is a final dimension on which financial service firms differ from other firms. They tend to use more debt in funding their businesses and thus have higher financial leverage than most other firms. While there are good reasons that can be offered for why they have been able to do this historically - more predictable earnings and the regulatory framework are two that are commonly cited – there are consequences for valuation. Since equity is a sliver of the overall value of a financial service firm, small changes in the value of the firm.s assets can translate into big swings in equity value.

Estimating cash flows is difficult

            We noted earlier that financial service firms are constrained by regulation in both where they invest their funds and how much they invest. If, as we have so far in this book, define reinvestment as necessary for future growth, there are problems associated with measuring reinvestment with financial service firms. Note that, we consider two items in reinvestment – net capital expenditures and working capital. Unfortunately, measuring either of these items at a financial service firm can be problematic.

Consider net capital expenditures first. Unlike manufacturing firms that invest in plant, equipment and other fixed assets, financial service firms invest primarily in intangible assets such as brand name and human capital. Consequently, their investments for future growth often are categorized as operating expenses in accounting statements. Not surprisingly, the statement of cash flows to a bank show little or no capital expenditures and correspondingly low depreciation. With working capital, we run into a different problem. If we define working capital as the difference between current assets and current liabilities, a large proportion of a bank's balance sheet would fall into one or the other of these categories. Changes in this number can be both large and volatile and may have no relationship to reinvestment for future growth.

            As a result of this difficulty in measuring reinvestment, we run into two practical problems in valuing these firms. The first is that we cannot estimate cash flows without estimating reinvestment. In other words, if we cannot identify how much a company is reinvesting for future growth, we cannot identify cash flows either. The second is that estimating expected future growth becomes more difficult, if the reinvestment rate cannot be measured.

Financial Service Companies: Value Drivers

Equity Risk

In keeping with the way we have estimated the cost of equity for firms so far in this book, the cost of equity for a financial service firm has to reflect the portion of the risk in the equity that cannot be diversified away by the marginal investor in the stock. This risk is estimated using a beta (in the capital asset pricing model) or betas (in a multi-factor or arbitrage pricing model).  There are three estimation notes that we need to keep in mind, when making estimates of the cost of equity for a financial service firm:

1.     Use bottom-up betas: In our earlier discussions of betas, we argued against the use of regression betas because of the noise in the estimates (standard errors) and the possibility that the firm has changed over the period of the regression. We will continue to hold to that proposition, when valuing financial service firms. In fact, the large numbers of publicly traded firm in this domain should make estimating bottom up betas much easier.

2.     Do not adjust for financial leverage: When estimating betas for non-financial service firms, we emphasized the importance of unlevering betas (whether they be historical or sector averages) and then relevering them, using a firm's current debt to equity ratio. With financial service firms, we would skip this step for two reasons. First, financial service firms tend to be much more homogeneous in terms of capital structure – they tend to have similar financial leverage primarily due to regulations. Second, and this is a point made earlier, debt is difficult to measure for financial service firms. In practical terms, this will mean that we will use the average levered beta for comparable firms as the bottom-up beta for the firm being analyzed.

3.     Adjust for regulatory and business risk: If we use sector betas and do not adjust for financial leverage, we are in effect using the same beta for every company in the sector. As we noted earlier, there can be significant regulatory differences across markets, and even within a market, across different classes of financial service firms. To reflect this, we would define the sector narrowly; thus, we would look the average beta across large money center banks, when valuing a large money center bank, and across small regional banks, when valuing one of these. We would also argue that financial service firms that expand into riskier businesses – securitization, trading and investment banking – should have different (and higher betas) for these segments, and that the beta for the company should be a weighted average.

4.     Consider the relationship between risk and growth: Through the book, we have emphasized the importance of modifying a company's risk profile to reflect changes that we are assuming to its growth rate. As growth companies mature, betas should move towards one. We see no need to abandon that principle, when valuing banks. We would expect high growth banks to have higher betas (and costs of equity) than mature banks.  In valuing such banks, we would therefore start with higher costs of equity but as we reduce growth, we would also reduce betas and costs of equity.

Quality of growth

To ensure that assumptions about dividends, earnings and growth are internally consistent, we have to bring in a measure of how well the retained equity is reinvested; the return on equity is the variable that ties together payout ratios and expected growth. Using a fundamental growth measure for earnings:

Expected growth in earnings = Return on equity * (1 – Dividend Payout ratio)

For instance, a bank that payout out 60% of its earnings as dividends and earns a return on equity of 12% will have an expected growth rate in earnings of 4.8%.  When we introduced the fundamental equation in chapter 2, we also noted that firms can deliver growth rates that deviate from this expectation, if the return on equity is changing.

Expected Growth_EPS 

Thus, if the bank is able to improve the return on equity on existing assets from 10% to 12%, the efficiency growth rate in that year will be 20%. However, efficiency growth is temporary and all firms ultimately will revert back to the fundamental growth relationship.

            The linkage between return on equity, growth and dividends is therefore critical in determining value in a financial service firm. At the risk of hyperbole, the key number in valuing a bank is not dividends, earnings or growth rate, but what we believe it will earn as return on equity in the long term. That number, in conjunction with payout ratios, will help in determining growth. Alternatively, the return on equity, together with expected growth rates, can be used to estimate dividends. This linkage is particularly useful, when we get to stable growth, where growth rates can be very different from the initial growth rates. To preserve consistency in the valuation, the payout ratio that we use in stable growth, to estimate the terminal value, should be:

Payout ratio in stable growth 

The risk of the firm should also adjust to reflect the stable growth assumption. In particular, if betas are used to estimate the cost of equity, they should converge towards one in stable growth.

Regulatory Buffers

The cashflow to equity is the cashflow left over for equity investors after debt payments have been made and reinvestment needs met. With financial service firms, the reinvestment generally does not take the form of plant, equipment or other fixed assets. Instead, the investment is in regulatory capital; this is the capital as defined by the regulatory authorities, which, in turn, determines the limits on future growth.

FCFE_{Financial Service Firm} = Net Income – Reinvestment in Regulatory Capital

To estimating the reinvestment in regulatory capital, we have to define two parameters. The first is the book equity capital ratio that will determine the investment; this will be heavily influenced by regulatory requirements but will also reflect the choices made by a bank.  Conservative banks may choose to maintain a higher capital ratio than required by regulatory authorities whereas aggressive banks may push towards the regulatory constraints. For instance, a bank that has a 5% equity capital ratio can make $100 in loans for every $5 in equity capital. When this bank reports net income of $15 million and pays out only $5 million, it is increasing its equity capital by $10 million. This, in turn, will allow it to make $200 million in additional loans and presumably increase its growth rate in future periods. The second is theprofitability of the activity, defined in terms of net income. Staying with the bank example, we have to specify how much net income the bank will generate with the additional loans; a 0.5% profitability ratio will translate into additional net income of $1 million on the additional loans.

Little Book on Valuation

Aswath Damodaran

LPI Annual Report 2009 (Summary)

  LPI Annual Report 2009

Underwriting Surplus before Management Expenses By Class

RM’000                           Underwriting Surplus before management expenses
                                                                        2009                  2008
Fire                                                               93,030                68,603
Motor                                                           19,312                30,366
Marine, Aviation & Transit                       6,100                  5,290
Miscellaneous                                                54,997               38,083
Total                                                           173,439              142,342


SUMMARY OF GROUP FINANCIAL PERFORMANCE
At A Glance


                                                              2009 RM’000          2008 RM’000
Profit Before Taxation                                  161,335               141,564
Profit After Taxation                                     126,088               104,247
Total Assets                                              1,488,697               856,201
Shareholders’ Equity                                    900,673               363,741
Basic Earnings Per Share (sen)                           91.6                     75.7
Return on Equity (“ROE”)                                14.0%                14.0%*
Operating Margin                                              21.7%                 22.1%
Net Claims Incurred                                          46.7%                 51.2%

*Restated ROE after taking into account of FRS 139 adoption.



Profit Before Taxation By Segment
                                                                    2009 RM’000      2008 RM’000
General Insurance Operations                           126,311              108,679
Investment Holding                                             34,097                32,322
Financing of Leases                                                    (1)                   (34)
                                                                        160,407              140,967
Share of profit after tax of
equity accounted associated
company                                                                  928                    597
Profit Before Taxation                                       161,335              141,564



RM’000                 Fire          Motor       M.A & T#     Miscellaneous      Total
Gross premium     229,381    194,406       23,446          228,013        675,246
%                          34.0         28.8              3.5                 33.7             100.0
Underwriting
surplus before
management
expenses               93,030      19,312       6,100           54,997         173,439

Underwriting
surplus after
management
expenses               69,319       (9,724)      4,085           33,964           97,644


# Marine, Aviation and Transit




Class                  Total no. of policies    No. of policies per underwriting staff
                             2009        2008              2009         2008
Fire                    284,170     274,520          18,945      17,158
Motor                463,615     416,608          42,147       37,873
Marine, Aviation
& Transit             26,791       26,114            3,349        3,264
Miscellaneous    263,618     197,109            5,492        4,693
Total              1,038,194      914,351          12,661      11,875




Gross Premium By
Agents                                 27.3%
Financial Institutions             25.8%
Direct                                  14.7%
Broker                                 12.4%
Reinsurance Arrangement       5.6%




The statistics of claims registered and settled in 2008 and 2009 are as follows



Classes                         No. of claims registered             No. of claims settled
                                          2009      2008                         2009          2008
Fire                                    2,202      2,119                      1,188            915
Marine                                  849         719                         427            340
Personal Accident              5,667      6,730                       5,106        6,127
Miscellaneous                    2,404      1,768                       1,448           808
Health                                3,319      2,701                       2,589        1,841
Workmen Compensation    2,412      2,928                         997         1,183
Motor                              17,716    18,547                       8,892        7,264
Liability                              1,380      1,029                          467           219
Bond                                    333         123                          213             23
Aviation                                   1             0                              1               0
Engineering                           840        717                           321           161
Total                               37,123    37,381                      21,649      18,881



LPI has been consistent in its dividend payment since listed
in 1993. The gross dividend per share paid by LPI since
1993 is depicted below:

Year    Gross Dividend per share (sen)
2008     85.0
2007   110.0 N1
2006   105.0 N1
2005    70.0 N1
2004    60.0 N2
2003    25.0
2002    15.0*
2001    15.0*
2000    15.0*
1999    12.5*
1998    27.5
1997    40.0
1996    40.0
1995    30.0
1994    25.0
1993    18.0

* Tax Exempt

N1 - Including a special dividend of 25 sen less taxation

N2 - Including a special dividend of 30 sen less taxation

BALANCE SHEETS

AT 31 December 2009

                                                                      Group                    

                                                           2009              2008 

                                                           RM’000        RM’000 

Restated Restated

Assets

Plant and equipment                              6,290            6,435 

Investment properties                            9,487          10,947

Investment in subsidiaries                            -                     -     

Investment in associate                        12,230          11,482 

Investments                                                 -          725,903 

Available-for-sale financial assets       671,348                  - 

Held-to-maturity investments              172,515                 - 

Loans and receivables, excluding

 insurance receivables                         536,985         27,622

Insurance receivables                           69,904          60,735

Tax recoverable                                           -                    - 

Cash and cash equivalents                      9,938         13,077 

total assets                                      1,488,697        856,201 

equity

Share capital                                       138,723       138,723 

Treasury shares, at cost                        (8,628)         (8,611) 

Reserves                                            770,578        233,629

shareholders’ equity                            900,673        363,741

liabilities

Insurance liabilities

-  Claims liabilities                                229,021       242,654 

-  Premium liabilities                             222,545       188,258 

Deferred tax liabilities                                  557                   -     

Borrowings                                            72,880                  -     

Insurance payables                                 37,505         34,422 

Other payables                                      15,416          12,988 

Taxation                                                 10,100         14,138 

total liabilities                                        588,024        492,460 

total shareholders’ equity 

and liabilities                                       1,488,697      856,201

http://announcements.bursamalaysia.com/EDMS/subweb.nsf/7f04516f8098680348256c6f0017a6bf/750d1c101e37ba4b482576b10032f4e8/$FILE/LPI-Page%20116%20to%20ProxyForm%20(3.2MB).pdf

Property/Casualty Insurance Accounting 101

Let us investigate how the PC insurance business works on an income statement and balance sheet.  Premium revenue (also known as earned premium) is used to fund claim payments (loss expense), sales commissions for insurance agents (commission expense), and operating expenses (OPEX).  Insurers typically express each of these expenses as ratios to earned premiums.  Claim expenses, for example, typically consume 75% of an insurer's net revenues.

Adding together these three ratios produces the combined ratio - an insurance company's key underwriting profit measures.  A combined ratio under 100 indicates an underwriting profit.  A combined ratio exceeding 100 indicates an underwriting loss.

Companies with combined ratios exceeding 105 for more than a short time have a difficult time recouping their losses via investment earnings, and this type of poor underwriting track record suggests that an insurer's competitive position is unusually weak.  Insurers unable to earn even the occasional underwriting profit will produce the industry's poorest returns and may be tempted to accept large investment risks to boost profitability.

Insurers also make money from investment income, which they often report as a ratio of premiums.  Adding the investment ratio to the combined ratio yields the operating profit ratio.  In many instances, investment income is a key profit determinant because it offsets underwriting losses.

On the balance sheet, the key asset for most insurers is investments.  In addition to float, most insurers invest a large portion of their own retained earnings as well.  The investments account reveals the size of an insurers investments relative to its asset base and details the asset allocation employed.  As a starting point, look for insurers with no more than 30% invested in equities (unless the company is run by Warren Buffett).

Finally, unearned premiums represent premiums received but not yet considered revenue.  This oddity reflects an accounting convention.  When an insurer receives a premium, it is deemed to earn it gradually across the year.  After all, if a customer cancels a policy, the insurer must refund that portion of the coverage not consumed.  After six months, an annual auto policy would be 50% earned, but half the premium would be considered revenue.  Before this occurs, the premiums are held in the unearned premium account, and the insurer is free to invest them.

Nirvana for an insurer is being able to consistently earn underwriting profits on a large, growing customer base.  In effect, this insurer would be getting paid to profit from investing other people's money and could retain this float indefinitely (as long as it grows).  Unfortunately, for investors, these situations rarely occur.

Insurers' business model

Insurers' business model

[edit]Underwriting and investing

The business model is to collect more in premium and investment income than is paid out in losses, and to also offer a competitive price which consumers will accept.

Profit can be reduced to a simple equation: 

Profit = earned premium + investment income - incurred loss - underwriting expenses.

Insurers make money in two ways:

1. Through underwriting, the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks;
2. By investing the premiums they collect from insured parties.

The most complicated aspect of the insurance business is the actuarial science of ratemaking (price-setting) of policies, which uses statistics and probability to approximate the rate of future claims based on a given risk. After producing rates, the insurer will use discretion to reject or accept risks through the underwriting process.

At the most basic level, initial ratemaking involves looking at the frequency and severity of insured perils and the expected average payout resulting from these perils. Thereafter an insurance company will collect historical loss data, bring the loss data to present value, and comparing these prior losses to the premium collected in order to assess rate adequacy.^[8]Loss ratios and expense loads are also used. Rating for different risk characteristics involves at the most basic level comparing the losses with "loss relativities" - a policy with twice as money policies would therefore be charged twice as much. However, more complex multivariate analyses through generalized linear modeling are sometimes used when multiple characteristics are involved and a univariate analysis could produce confounded results. Other statistical methods may be used in assessing the probability of future losses.

Upon termination of a given policy, the amount of premium collected and the investment gains thereon, minus the amount paid out in claims, is the insurer's underwriting profit on that policy. An insurer's underwriting performance is measured in its combined ratio^[9] which is the ratio of losses and expenses to earned premiums. A combined ratio of less than 100 percent indicates underwriting profitability, while anything over 100 indicates an underwriting loss. A company with a combined ratio over 100% may nevertheless remain profitable due to investment earnings.

Insurance companies earn investment profits on "float". Float, or available reserve, is the amount of money on hand at any given moment that an insurer has collected in insurance premiums but has not paid out in claims. Insurers start investing insurance premiums as soon as they are collected and continue to earn interest or other income on them until claims are paid out. The Association of British Insurers (gathering 400 insurance companies and 94% of UK insurance services) has almost 20% of the investments in the London Stock Exchange.^[10]

In the United States, the underwriting loss of property and casualty insurance companies was $142.3 billion in the five years ending 2003. But overall profit for the same period was $68.4 billion, as the result of float. Some insurance industry insiders, most notably Hank Greenberg, do not believe that it is forever possible to sustain a profit from float without an underwriting profit as well, but this opinion is not universally held.

Naturally, the float method is difficult to carry out in an economically-depressed period. Bear markets do cause insurers to shift away from investments and to toughen up their underwriting standards, so a poor economy generally means high insurance premiums. This tendency to swing between profitable and unprofitable periods over time is commonly known as the underwriting, or insurance, cycle.^[11]

[edit]

Claims

Claims and loss handling is the materialized utility of insurance; it is the actual "product" paid for. Claims may be filed by insureds directly with the insurer or through brokers or agents. The insurer may require that the claim be filed on its own proprietary forms, or may accept claims on a standard industry form, such as those produced by ACORD.

Insurance company claims departments employ a large number of claims adjusters supported by a staff of records management and data entry clerks. Incoming claims are classified based on severity and are assigned to adjusters whose settlement authority varies with their knowledge and experience. The adjuster undertakes an investigation of each claim, usually in close cooperation with the insured, determines if coverage is available under the terms of the insurance contract, and if so, the reasonable monetary value of the claim, and authorizes payment.

The policyholder may hire their own public adjuster to negotiate the settlement with the insurance company on their behalf. For policies that are complicated, where claims may be complex, the insured may take out a separate insurance policy add on, called loss recovery insurance, which covers the cost of a public adjuster in the case of a claim.

Adjusting liability insurance claims is particularly difficult because there is a third party involved, the plaintiff, who is under no contractual obligation to cooperate with the insurer and may in fact regard the insurer as a deep pocket. The adjuster must obtain legal counsel for the insured (either inside "house" counsel or outside "panel" counsel), monitor litigation that may take years to complete, and appear in person or over the telephone with settlement authority at a mandatory settlement conference when requested by the judge.

If a claims adjuster suspects underinsurance, the condition of average may come into play to limit the insurance company's exposure.

In managing the claims handling function, insurers seek to balance the elements of customer satisfaction, administrative handling expenses, and claims overpayment leakages. As part of this balancing act, fraudulent insurance practices are a major business risk that must be managed and overcome. Disputes between insurers and insureds over the validity of claims or claims handling practices occasionally escalate into litigation (see insurance bad faith).

[edit]

Marketing

Insurers will often use insurance agents to initially market or underwrite their customers. Agents can be captive, meaning they write only for one company, or independent, meaning that they can issue policies from several companies. Commissions to agents represent a significant portion of an insurance cost and insurers such as State Farm that sell policies directly via mass marketing campaigns can offer lower prices. The existence and success of companies using insurance agents (with higher prices) is likely due to improved and personalized service.^[12]

http://en.wikipedia.org/wiki/Insurance

Related:
Analyzing Insurance Stocks:  The Income Statement
http://myinvestingnotes.blogspot.com/2010/07/analyzing-insurance-stocks-income.html