Financial service companies especially insurers need few operating assets to generate revenue but are required to hold equity capital at levels sufficient to support their operations. For that reason unlike the non financial service firms for which turnover ratios are calculated relative to assets insurers’ turnover is more appropriately evaluated relative to equity.
Turnover ratios inform on earnings quality for numerous reasons. The low revenue ratio may recommend that equity is overstated either because the insurer understated its liabilities or contra assets (loss reserve, liability for future policy benefits, tax valuation allowance), over capitalized expenditures (including operating expenses) or understated amortization or write downs (investment assets). Low turnover ratio may as well imply that the insurer does not use its equity efficiently.
This ratio, which reflects net asset turnover, is measured as follows:
Turnover ratios inform on earnings quality for numerous reasons. The low revenue ratio may recommend that equity is overstated either because the insurer understated its liabilities or contra assets (loss reserve, liability for future policy benefits, tax valuation allowance), over capitalized expenditures (including operating expenses) or understated amortization or write downs (investment assets). Low turnover ratio may as well imply that the insurer does not use its equity efficiently.
This ratio, which reflects net asset turnover, is measured as follows: