The Relationship of Underwriting, Investments, Leverage, and Exposure to Total Return on Owners' Equity

In recent years, insurance literature and research reflect a great deal of attention to investment return in property and liability insurance companies and a number of important considerations have been discussed. Many issues, however, have not necessarily been resolved and there remains a dearth of thoughtful material on property and liability company finance. There has been so little analysis of investment matters from an actuarial point of view that there is still a need for further development of and agreement on fundamental principles. Accordingly, this paper is written for the purpose of formulating some simple but basic relationships which depict the manner in which investment return, financial leverage, underwriting results, and the utilization of underwriting capacity (or the so-called insurance exposure) all combine to determine the return to stockholders of an insurance company.