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  1. ROE equation
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    • ROE = ROA x Ins leverage factor + ROS x Ins Exposure
    • investors = roe, society = roa, regulators / actuaries = ros
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    • ROE = ROA + Ins leverage (ROA + int cost on reserve)
  2. Insurance Leverage vs Returns
    incr leverage = incr volatility of return
  3. Optimum Capital Structure
    • mix of owner's eq & liab which maximizes firm value
    • factors affecting firm value = exp earning stream, disc rate
    • both those factors affected by mix of owner's eq & liab
    • writing more bus (1) incr earning stream (2) incr vol = incr disc
  4. Complications when determining opt cap structure
    • high debt = higher risk = creditors demand higher return
    • not as easy for insr: possible that high P = better diversification
  5. Uses of Capital Structure
    • show public that ocs calls for low R/S ratio -> less insd
    • can see if aggressive inv pf driving a low ratio of reserves
  6. ROE variables interact with each other
    • incr in P/S = decr in I/A: (1) $ from curr bus not inv (2) risk
    • incr in U/P = incr in P/S: can write more bus
    • incr in U/P = incr in I/A: can engage in aggressive inv
Card Set
The Relationship of Underwriting, Investment, Leverage, and Exposure to Total Return on Owner's Equity
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