Objective: develop the knowledge to understand insurance company operations Use
ID: 365969 • Letter: O
Question
Objective: develop the knowledge to understand insurance company operations Use the following financial information to answer from the perspective of the insurance company: STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY Statement of Condition (In Millions of Dollars) ssets Cash and Short Term Investments Bonds Unaffiliated Common&Preferred; Stocks Equity in Insurance Subsidiaries Other Assets 2016 2015 $ 1,224 1,345 41,766 43,120 34,842 17,784 17422 Total Assets $147,697 $138.495 1,945 48,626 38,118 Liabilities Claims and Claim Expenses Unearned Premiums Other Liabilities 30,556 28,566 11,518 15,780 12,380 17,188 Surplus Funds for Protection of State Farm Mutual Policyholders $ 20,962 $ 22,884 Investment Fluctuation Reserve Funds Assigned for Protection of Customers of Subsidiaries Funds Assigned for Catastrophe 24,034 39,898 Reinsurance Assumed from Affiliates2,679 20,618 36,632 2497 Total Liabilities and Surplus $147,697 $138,495 Summary of Operating Data (In Millions of Dollars) 2015 37,094 25,379 6,272 649 2016 39,593 Premium Earned Less: Dollars for Claims 30,656 6,167 (7,196) (4,206) (3,754) Expenses for Paying Claims Service and Administrative Fees Underwriting Gain or (Loss) Plus: Investment Gain and Other Income3442 Income before Dividends and Taxes Less: Dividends to Policyholders 1,134 ncome Taxes Incurred (Recoverable) ,200 (1,003) Net Income (2,554) S 2,137 Investment Gain is reported net of capital gains tax The financial statements of the Company are audited by an independent public accounting firm.Explanation / Answer
For 2016 For 2015 1) Losses + Losses adjustments = 30656 25379 Premiums = 39593 37094 Loss ratio = 77.43% 68.42% Other underwriting expenses = 16133 15921 Expense Ratio = 40.75% 42.92% Combined Ratio = 118.17% 111.34% Investment Gain 3442 5340 Operating Ratio = 109.48% 96.94% 2) We should look at operating ratio to assess if the firm has done well or worse. The lower the operating ratio, better it is. Since the operating ratio was better in 2015, the firm performed better in 2015. 3) The operating ratio is less than 100% in 2015, because the firm was able to generate more returns than it had to pay. While in 2016, the firm could not generate enough returns 4) As a policy holder, a firm with higher operating ratio will generally charge higher premiums. So it is better to purchase insurance from firms having a lower operating ratio
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