Explanation of Ratios and Analysis
This document provides you with an explanation of how Tillinghast calculated the ratios and analyzed the results. It is broken down into five sections, as follows: Segmentation, Ratios, Financial Indicators, Scoring System and Overall Financial Condition. Segmentation Tillinghast conducted a high-level review of the financial condition of every membersociety, segmented by size into four peer groups, as follows: • • • • Group A: Group B: Group C: Group D: Assets greater than $1 billion (6 fraternals); Assets between $100 million and $1 billion (29 fraternals); Assets between $25 million and $100 million (22 fraternals); and Assets less than $25 million (19 fraternals).
Ratios The assessment of a member-society’s financial condition is based on the concept of using selected financial ratios that measure various aspects of financial stability. As such, 25 different ratios were developed in the following five categories: • • • • • Capital Adequacy: Four (4) ratios focused on size of capital, RBC levels, liquidity and recent changes in capital; Asset Risk: Five (5) ratios focused on the degree of riskier assets relative to surplus; Profitability: Eight (8) ratios focused on earnings, relationship of benefits to premiums and expense levels; Growth: Six (6) ratios focused on premiums and revenue; and Membership: Two (2) ratios focused on membership.
Financial Indicators With the exception of the membership ratios, each of the financial ratios for a given fraternal benefit society was compared against thresholds Tillinghast developed. Thresholds were developed based on the average ratio of each group, as well as a “reference rate” based on industry benchmarks of the top 100 commercial insurance companies. “Outliers” then were identified where the ratio for the fraternal fell outside of typical or expected levels based on the determined thresholds for each group. The financial indicator for a given ratio was set using the following approach: • • • Yellow highlighting (“Limited”) was used to indicate ratios that were moderately worse than the average and-or reference rates; Red highlighting (“Significant”) was used to indicate ratios that were significantly worse than the average and-or reference rates; and For the growth ratios only, green highlighting (“Growth”) was used to indicate ratios that were consistent with significant growth.
Explanation of Ratios and Analysis
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Scoring System A scoring system was established in order to objectively develop conclusions with respect to each of the categories of financial ratios (e.g., capital adequacy, asset risk, etc.), as opposed to viewing each of the ratios individually. In creating this scoring system, Tillinghast used the results obtained in the individual ratio analysis and attributed a given value to each financial indicator, as follows: • • • Yellow highlighting (“Limited”) was given a value of (-1); Red highlighting (“Significant”) was given a value of (-2); and Green highlighting (“Growth”) was given a value of (+2).
Tillinghast then developed a similar set of financial indicators for each category to identify those member-societies that fell outside of typical or expected levels for the entire category. Overall Financial Condition Finally, Tillinghast developed conclusions on the overall financial condition for each member-society. For this overall assessment, Tillinghast expanded the process described above and considered the results of all of the financial indicators on a combined basis. The financial indicators they used for the category and overall assessments were the following: • • • Yellow highlighting (“Limited”) was used to indicated limited warning signs; Red highlighting (“Significant”) was used to indicate significant warning signs; and For the growth category only, green highlighting (“Growth”) was used to indicate signs of significant growth.