Net Leverage Ratio vs Overall Leverage Ratio
Is my understanding correct:
Net Leverage Ratio = (NWP + Net Liability) / Equity
Overage Leverage Ratio = (NWP + Total Liability) / Equity ?
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Is my understanding correct:
Net Leverage Ratio = (NWP + Net Liability) / Equity
Overage Leverage Ratio = (NWP + Total Liability) / Equity ?
Comments
The term used in the MSA Ratio source text is: "Overall Net Leverage". I shortened it in the wiki to "Net Leverage".
The correct formula for this quantity is the first formula you listed above:
There is only 1 formula like this so your second formula (while still having meaning) is not something you would use for the exam. Actually, the term "Gross Leverage Ratio" would probably be more appropriate for something calculated using your second formula.
Thanks, but 2012_Fall (21) c. answer gave a confusing answer:
Overall Net Leverage = (NPW + Liabilities) / Equity
Net Underwriting Leverage Ratio = NPW / Equity
Net Loss Reserves to Equity = Net Loss Reserves / Equity
Overall Net Leverage – Net U/W Leverage Ratio = (NPW – NPW + Liabilities) / Equity = Liabilities / Equity
(Net Loss Reserves / Equity) / (Liabilities / Equity) = Net Loss Reserves / Liabilities
So, Net Loss Reserves to Equity / (Overall Net Leverage – Net U/W Leverage Ratio) = Net Loss reserves /
Liabilities = (185%) / (430% – 210%) = 84.1%
My understanding is that the "Liability" above actually refers to "Net Liability". But the question was asking about "net claims liabilities / total liabilities".
The definitions are really confusing me. Can you please explain a bit more?
I agree, this is confusing. A similar question has already been asked in the forum which you can find here:
See also footnote 3 in the BattleTable for the MSA.Ratios reading:
Hope that helps. If not, let me know.
Side note: That exam problem is more than 10 years old so if that is the only thing you are confused about regarding the MSA reading, I would just ignore it. The MSA reading is updated every year so there may have been changes to notation and terminology since then. Also, the people creating the questions will certainly have changed so it might not be worth getting bogged down in something was rather unclear even way back in 2012 when the question was written.