Financial Services

Definition (short). You earn by pricing and absorbing financial risk: banks capture interest spread (lend high, borrow low), insurers keep premium minus claims/expenses (combined ratio <100%). Profitability rests on margin (spread/ratio), volume (assets/premiums), and risk (defaults/claims).

Recent example. U.S. banks’ average net interest margin was 3.30% in 2023 (up 35 bps YoY). Net interest margin was 3.30% in 2023. U.S. P&C insurers’ combined ratio improved to 101.7% in 2023 (still an underwriting loss), then to ~96.5% in 2024 (profit) as price hikes beat claims. Combined ratio improved to 101.7% in 2023, then to ~96.5% in 2024. Historical example. Lloyd’s of London (1680s) pioneered marine underwriting; medieval moneylenders lived on interest spreads; 19th-century savings & loans profited on mortgage spreads; the “combined ratio” has been an insurance staple since early 20th century.

KPI Definitions

Net Interest/Underwriting Spread Profit Growth % (NISG). YoY growth of profit from core spread/underwriting before investment gains. Pseudo: ((Spread_Profit)_t - (Spread_Profit)_{t-1}) / (Spread_Profit)_{t-1} * 100. Why it matters: Captures whether you’re expanding the core engine (margin×volume) after losses/claims. Benchmark: Post-rate hikes, many U.S. banks grew spread profit double digits in 2023; P&C insurers returned to underwriting profit in 2024 (combined ~96.5%).

Net Interest Margin % (NIM). (Banks) Interest income minus interest expense, over average earning assets. Pseudo: (IntInc − IntExp) / Avg_Earning_Assets * 100. *Why it matters

:* It’s the core spread metric; a few bps swing moves billions for big banks. Benchmark: U.S. banks 3.30% in 2023; large money-center banks 2.6–3.2%; credit cards lenders 5–7%.

Combined Ratio % (CR). (Insurers) Loss ratio + expense ratio; <100% means underwriting profit. Pseudo: (Claims/Premiums + Expenses/Premiums) * 100. Why it matters: The single best underwriting KPI—tells if pricing outweighs claims+costs. Benchmark: U.S. P&C 101.7% in 2023 (loss), 96.5% in 2024 (profit). Top performers target <90–95%.

Volume of Earning Assets / Premiums (VOL). Loans outstanding or gross written premiums. Pseudo: Σ(loans) or Σ(premiums). Why it matters: Spread × volume = dollars. Scale matters, but not at the expense of risk. Benchmark: Healthy banks target 5–10% loan growth; P&C premium growth mid-single digits, spiking during “hard markets”.

Cost of Funds % (COF). Average interest rate paid on deposits/borrowings. Pseudo: IntExp / Avg_Funding * 100. Why it matters: Lower COF widens NIM without raising borrower rates. Benchmark: Large banks enjoy low-cost checking (near 0% for years), now rising but still below wholesale rates.

Average Yield on Assets % (YLD). Interest/ premium yield on loans/investments. Pseudo: IntInc / Avg_Earning_Assets * 100. Why it matters: Determines top side of NIM; asset mix and rate environment drive it. Benchmark: With 2023–24 rate hikes, banks’ asset yields rose several hundred bps; insurers’ bond portfolio new-money yields moved toward 4–5%.

Loss Ratio % (LR). Claims paid ÷ premiums (insurance). Pseudo: Claims / Premiums * 100. Why it matters: Core risk pricing—too high implies underpricing or bad luck (cats). Benchmark: Personal lines saw LR >70% in 2023; after rate hikes, LR fell, driving combined ratio down to 96.5%.

Expense Ratio % (ER). Operating expenses ÷ premiums. Pseudo: Underwriting_Expenses / Premiums * 100. Why it matters: Operational efficiency lever; trimming ER improves CR directly. Benchmark: Many P&C insurers run ~25–30% ER; best-in-class trims to low 20s.

Loan/Premium Growth % (GROW). Period-over-period growth in loans or premiums. Pseudo: (ThisPeriod − LastPeriod) / LastPeriod * 100. Why it matters: Indicates demand, share gain, and pricing power. Benchmark: Banks: mid-single digits normal, 10%+ aggressive. Insurers: 3–5% typical, >10% in hard market cycles.

Loan-to-Deposit Ratio % / Policy Retention % (LDR). Banks: loans ÷ deposits; Insurers: % of policies renewed. Pseudo: Loans/Deposits * 100 or Policies_Renewed/Policies_Up * 100. Why it matters: Funding stability (banks) and sticky business (insurers). Benchmark: Banks target 80–90% L/D; Insurers retention >85–90% in personal lines is strong.

Non-Performing Loan % / Charge-off % (NPL). Share of loans in default or written off. Pseudo: NPL / Total_Loans * 100. Why it matters: Credit quality; high NPL erodes spread via provisions. Benchmark: U.S. banks’ NPL often <2% in good times; credit cards charge-offs ~3%.

Catastrophe Loss % of Premiums (CAT). P&C cat claims as a % of earned premiums. Pseudo: CatLosses / Premiums * 100. Why it matters: Volatility driver; high CAT years wreck CR. Benchmark: 2024 saw $320 B global disaster losses; U.S. insurers still hit 96.5% CR thanks to pricing.

Investment Yield % (INVY) (aux). Return on invested assets/float. Pseudo: Investment_Income / Invested_Assets * 100. Why it matters: Insurers rely on investment income to offset underwriting cycles; banks too on securities portfolios. Benchmark: With rates up, insurers’ new money yields ~4–5%; bonds dominated portfolios.