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Valuation Reserve

Definition of 'Valuation Reserve'
The funds set aside by life insurers as required by state law to compensate for declines in the value of investment instruments that are held by the insurance company as assets. Valuation reserves are required because life insurance contracts can be in effect for long periods of time, and the securities valuation reserve is intended to protect the company's loss reserves in the event that the insurer's investments are underperforming.

Investopedia explains 'Valuation Reserve'
Prior to 1992, the mandatory securities valuation reserve (MSVR) required a liability reserve to be maintained by the National Association of Insurance Commissioners (NAIC) to protect against value changes in an insurance company's securities investments. Following 1992, the requirements set forth by the MSVR were transferred into the asset valuation reserve.

Contingent Liability
Definition of 'Contingent Liability'
A potential obligation that may be incurred depending on the outcome of a future event. A contingent liability is one where the outcome of an existing situation is uncertain, and this uncertainty will be resolved by a future event. A contingent liability is recorded in the books of accounts only if the contingency is probable and the amount of the liability can be estimated.

Investopedia explains 'Contingent Liability'
Outstanding lawsuits and product warranties are common examples of contingent liabilities. For example, a company may be facing a lawsuit from a rival firm for patent infringement. If the company's legal department thinks that the rival firm has a strong case, and the company estimates that the damages payable if the rival firm wins the case are $2 million, it would book a contingent liability of this amount on its balance sheet. If, on the other hand, the company's legal department is of the opinion that the lawsuit is frivolous and very unlikely to be won by the rival company, no contingent liability would be necessary.

Capital Reserve Definition of 'Capital Reserve' A type of account on a municipality's or company's balance sheet that is reserved for long-term capital investment projects or any other large and anticipated expense(s) that will be incurred in the future. Investopedia explains 'Capital Reserve' Contributions to the capital reserve account can be made from government subsidies. . donated funds. Once recorded on the reporting entity's balance sheet. or can be set aside from the firm's or municipality's regular revenuegenerating operations. excluding any unforeseen circumstances. these funds are only to be spent on the capital expenditure projects for which they were initially intended. This type of reserve fund is set aside to ensure that the company or municipality has adequate funding to at least partially finance the project.

Profitability Ratios Definition of 'Profitability Ratios' A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. for example. Investopedia explains 'Profitability Ratios' Some examples of profitability ratios are profit margin. It is important to note that a little bit of background knowledge is necessary in order to make relevant comparisons when analyzing these ratios. For most of these ratios. The retail industry. . having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well. On the other hand. it would not be too useful to compare a retailer's fourthquarter profit margin with its first-quarter profit margin. return on assets and return on equity. For instance. comparing a retailer's fourth-quarter profit margin with the profit margin from the same period a year before would be far more informative. Therefore. some industries experience seasonality in their operations. typically experiences higher revenues and earnings for the Christmas season.

and measures the risk an insurer faces of claims it cannot cover. Measuring cash flow rather than net income is a better determinant of solvency. companies in debt-heavy industries like utilities and pipelines may have lower solvency ratios than those in sectors such as technology. The solvency ratio indicates whether a company’s cash flow is sufficient to meet its short-term and long-term liabilities. The measure is usually calculated as follows: Investopedia explains 'Solvency Ratio' Solvency ratio. The lower a company's solvency ratio. the solvency ratio should be compared for all utility companies. the solvency ratio is a comprehensive measure of solvency. Apart from debt and borrowings. Similarly. total debt to total assets. especially for companies that incur large amounts of depreciation for their assets but have low levels of actual profitability. However. Other solvency ratios include debt to equity. to get a true picture of relative solvency. To make an apples-to-apples comparison. as it measures cash flow – rather than net income – by including depreciation to assess a company’s capacity to stay afloat.Solvency Ratio Definition of 'Solvency Ratio' A key metric used to measure an enterprise’s ability to meet its debt and other obligations. the greater the probability that it will default on its debt obligations. means the size of its capital relative to the premiums written. The solvency ratio is only one of the metrics used to determine whether a company can stay solvent. and interest coverage ratios. rather than only debt. assessing a company’s ability to meet all its obligations – rather than debt alone – provides a more accurate picture of solvency. for example. other liabilities include shortterm ones such as accounts payable and long-term ones such as capital lease and pension plan obligations. For example. its solvency position may not be as solid as would be indicated by measures that include only debt. but if its cash management practices are poor and accounts payable is surging as a result. It measures this cash flow capacity in relation to all liabilities. with regard to an insurance company. . A company may have a low debt amount. A company’s solvency ratio should also be compared with its competitors in the s ame industry rather than viewed in isolation.

Debt ratios vary widely across industries.Debt Ratio/ Capitalisation Ratio Definition of 'Debt Ratio' A financial ratio that measures the extent of a company’s or consumer’s leverage. where cash flows are stable and higher debt ratios are the norm. expressed in percentage. The debt ratio is defined as the ratio of total debt to total assets. A debt ratio of 30% may be too high for a company that operates in a sector where cash flows are volatile and its peers have little debt. . the more leveraged the company and the greater its financial risk. Acceptable levels of the total debt service ratio. A debt ratio of greater than 1 indicates that a company has more debt than assets. Conversely. the debt ratio can help investors determine a company's risk level. a debt level of 40% may be easily manageable for a company in a sector such as utilities. home insurance and property costs) to monthly income. Meanwhile. Is this company in a better financial situation than one with a debt ratio of 40%? It depends on the industry in which the companies operate. Used in conjunction with other measures of financial health. In the consumer lending and mortgage businesses. in percentage terms. debt ratio is defined as the ratio of total debt service obligations to gross annual income. Investopedia explains 'Debt Ratio' A company with total assets of $100 million and total debt of $30 million has a debt ratio of 30%. two common debt ratios used to assess a borrower’s ability to repay a loan or mortgage are the gross debt service ratio and the total debt service ratio. range from the mid-30s to the low-40s. while the total debt service ratio is the ratio of monthly housing costs plus other debt such as car payments and credit card borrowings to monthly income. The higher this ratio. with capital-intensive businesses such as utilities and pipelines having much higher debt ratios than other industries like technology. The gross debt ratio is defined as the ratio of monthly housing costs (including mortgage payments. since this debt level may reduce its financial flexibility and competitive advantage. and can be interpreted as the proportion of a company’s assets that are financed by debt. a debt ratio of less than 1 indicates that a company has more assets than debt. In the consumer lending and mortgages business.

cash. Investopedia explains 'Activity Ratios' Companies will typically try to turn their production into cash or sales as fast as possible because this will generally lead to higher revenues. The total assets turnover ratio and inventory turnover ratio are two popular examples of activity ratios used widely across most industries. . from its resources. Activity ratios are used to measure the relative efficiency of a firm based on its use of its assets. leverage or other such balance sheet items. etc. These ratios are important in determining whether a company's management is doing a good enough job of generating revenues. Such ratios are frequently used when performing fundamental analysis on different companies.Activity Ratios Definition of 'Activity Ratios' Accounting ratios that measure a firm's ability to convert different accounts within its balance sheets into cash or sales.