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Free asset ratio

D

dChetty

Member
A company could improve its free asset ratio by taking actions such as cutting back on capital investment in new projects. Please clarify.

Enhancing the free asset ratio would be to raise capital through securitisation or selling off blocks of business. Please explain.
 
dChetty said:
A company could improve its free asset ratio by taking actions such as cutting back on capital investment in new projects. Please clarify.

Enhancing the free asset ratio would be to raise capital through securitisation or selling off blocks of business. Please explain.
Click to expand...

The free assets are given by the assets minus the liabilities. Free assets might also be called free surplus or the available capital.

When a company invests in new project (eg launching a new product) they will incur costs that reduce the assets. So their free assets fall. So free assets will be higher if a company cuts back on new projects than they would have been if the new projects went ahead.

A company can raise its available capital in a number of ways, eg it could have a rights issue. A securitisation involves selling a special type of corporate bond such that the insurer only needs to make repayments if profits emerge - the sale of the bond increases the insurer's assets, but the liabilities may not increase (depending on the solvency rules) as repayments are only made if profits emerge.

Similarly, selling a block of business will increase free assets if the receiving insurer is prepared to pay the insurer a cash sum for the profits it expects to make on that business.

Be careful not to confuse available capital with required capital. Available capital is the capital we have (ie assets in excess of liabilities). Required capital is the amount of capital that the regulator requires us to hold. The above methods will increase the available capital.

Best wishes

Mark
 
The securitisation was difficult to understand initially but I read it a few times and it makes sense now.
Thanks.
 
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