National Property Casualty has $9,500,000 in premiums on its auto insurance line
ID: 2757008 • Letter: N
Question
National Property Casualty has $9,500,000 in premiums on its auto insurance line. The line’s losses amount to $6,245,900, expenses are $2,906,430, and dividends are $189,650. The insurer earns $397,110 in the investment of its premiums. Calculate the auto insurance line’s loss ratio, expense ratio, dividend ratio, combined ratio, investment ratio, operating ratio, and overall profitability. Goode Investment Bank agrees to underwrite 1,000,000 CFS Company’s shares on a best efforts basis. It then sells 800,000 shares to the public for $20 each. The agreement is that Goode will charge 1.50 per share sold. a. How much money does CFS receive? b. How much money does CFS pay? c. What Is Goode’s profit? d. What is the stock price of CFS? Complete your 2-4 page response using Microsoft Word and/or Excel, but be sure to submit only one document for grading. For calculations, you must show work
Explanation / Answer
Combined ratio=Incurred losses + expenses/Earned premium
= $6245900+$2906430/$397110 = $23.047
Loss ratio = Loss adjustment/premium earned
=$6245900/$397110 = $15.728
Expese ratio = under writing expenses/Net premiums earned
=$2906430/$397110=$7.31
Dividend ratio = Dividends/Premiums earned
=$189650/$397110 = $0.477
Investment ratio = Net investment income/Premium earned
=$9500000/$397110 = $23.922
Operating ratio = Combined ratio after dividends-Investment return
= $23.047 - $23.922 =$ -0.875
Over all profitability = 100-operating ratio
= 100-(-0.875) = $100.875
CFS company sells shares to the public=800000*$20 =$16000000
Goode will charge =800000*$1.5 = $1200000
CFS receive money= $16000000-$1200000= $14800000
Goode's profit = $1200000.
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