Ratings agencies use a number of profitability measures to assess financial performance. S&P doesn't score profitability separately but includes it in its assessment of an insurers competitive position. A combined ratio above 100% means the company is paying out more to cover losses and expenses than it is receiving from premiums. Fitch states in its May 2020 rating report that Beazley PLC has low investment risk and a low level of risky assets. The Fitch calculated risk assets ratio for Beazley Plc for 2019 was 46% which equates to a AA score. Liquidity risk is the risk that an insurance company isn't able to pay financial obligations in full and on time. Most policies written by Non-Life companies are for one year, for example motor and property insurance. These insurers can plan and manage the liquidity risk more easily than for a Life insurer which may have liabilities up to 30 or 40 years in future. Fitch has a similar ratio for Life insurers called the Liquid Assets Ratio. The numerator is cash and short term invested assets, investment grade bonds, 50% of non-investment grade bonds/deposits, and publicly traded equities. The denominator is the policyholder reserves.
Key learning objectives:
Explain the calculations for Profitability
Explain asset quality on the basis of risk ratios
Explain asset and liability management