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Abstract
The DuPont System of equations has been used for many years when performing financial analysis on corporate financial statements. It has not been used, however, for analyzing property and casualty insurance company performance. With minor modifications, the DuPont System can be applied to the analysis of property and casualty insurance companies. It aids in understanding the relationship between underwriting operations and investment results and illuminates the role played by the interaction of assets, premiums, reserves, and surplus.
In this article, analysis is performed on industry data for the 30-year period from 1970-1999. The author hopes that the modified DuPont System presented in the article can become a standard when performing financial analysis on property and casualty insurance companies.
The property and casualty insurance industry has changed dramatically over the past 30 years. Events such as significant changes in legal doctrines; mergers and acquisitions; major insurance policy changes; modifications of underwriting processes and procedures; economic occurrences such as inflation, recession, low unemployment, and a booming stock market; a seemingly endless stream of natural catastrophes; significant shifts in regulatory practices; globalization of the insurance industry; and the intrusion of other financial service industries such as banks and stockbrokers are just some of the most important factors that have impacted the industry during this time period. While all of these factors have been widely researched, publicized, and dissected by the media and by members of the insurance industry, more subtle and less publicized changes have been occurring regarding the financial underpinnings of the property and casualty insurance industry.
These financial changes have not been widely researched or analyzed and, therefore, are not well understood by most members of the insurance industry. The purpose of this article is to present a thorough financial analysis of the property and casualty insurance industry in order to clearly show the significant changes that have occurred over the past 30 years.
The Modified DuPont System of Analysis
One of the most widely used methods of financial analysis is the DuPont System. While it has been used extensively to analyze many corporations and industries, it has not been widely used in the insurance industry, in large part because of the significant differences in the financial statements found in the insurance...