Term Paper on "Risk and Insurance"

Term Paper 7 pages (2468 words) Sources: 1

[EXCERPT] . . . .

Risk and Insurance

Over the last several years, Ann Taylor would face a number of different challenges. Where, the company would go from having a consistent amount of improving earnings, to having their bottom line face a number of different challenges going forward. This is problematic, because changes in the company's underlying business model mean that risks could be increasing. As result, their insurance needs are changing to reflect, the challenges that the company is facing. To fully understand the overall scope of these issues requires: identifying the company's risk exposures, the likely perils they could face and obvious hazards. Together, these different elements will provide the greatest insights, as to how these changes in earnings could have an impact upon their insurance needs.

Ann Taylor's Risk Exposure

Ann Taylor is involved in retailing various: specialty shoes, clothing and apparel for women in the United States. Where, they focus on offering women a number of different products to include: career / casual separates, dresses, tops, weekend wear, shoes, and accessories. These are sold through the Ann Taylor retail locations, the Loft discount stores and over the internet. Currently, the company operates a total of 907 retail stores this includes: 291 Ann Taylor stores, 506 Loft stores, 92 Ann Taylor factory outlet stores and 35 Loft outlet locations. ("Ann Taylor Stores") This is important, because it shows how the company is largely dependent upon consumer spending, to maintain its earnings estimates. During times when there has been a severe contraction, this can cause earnings to become very volatile. A good example of this can be seen by comparing the recent earnings per share that the company has reported over the last year, as they would range from $ -.01 cents to $.37 cents. ("Ann Taylor Stores") This is important, because when earnings become volatile, is the point that the company can begin laying off employees and closing down locations. At which point, this will have an effect on the insurance needs for the company, as their risks have increased and needs have begun to change. When you put these two different elements together, this highlights how the company could be facing a number of changes in their insurance needs, due to the severity of the contraction and lack of spending taking place.

Ann Taylor's risk exposure will come from sudden changes in the economic cycle. Given the fact that the economy has been facing a number of different challenges, the company has been attempting to adjust to the changes that are taking place. Where, they have been increasing their cash and the various assets that they are holding. Evidence of this, can be seen by looking no further than the 10Q that was filed for the third quarter. Where, the cash equivalents would increase from $203 million in 2009 to $262 million for 2010. At the same time, the total current assets would increase from $482 million in 2009 to $571 million in 2010. Yet, when you a look a little further at these numbers, you can see how there is large amounts of volatility occurring. This can be seen by looking no further than, the total assets that the company was holding between 2009 and 2010. Where, they would decline from $976 million in 2009 to $947 million in 2010. This is important, because it underscores how the company is facing constant exposure, to slowdowns in consumer spending. ("10Q")

To corroborate these different views, you would compare short-term liabilities and net cash used for investing (the purchase of marketable securities, sale of marketable securities and purchase of new property / equipment). When you examine the two different figures, they show a divergence that is occurring within the company itself. As the short-term liabilities have been consistently increasing from $64 million to $93 million. At the same time, the net cash used for investing has continued to be negative, as it would come in at -$26 million for 2009 and -$13 million for 2010. This is important, because it confirms a divergence that is occurring in the company's investing activities and the amount of money that they owe. ("10Q")

When you look at: the cash equivalents, the total current assets, short-term liabilities and net cash for investing; it is clear that Ann Taylor is facing a number of different financial challenges. From a risk assessment standpoint, this means that their coverage is changing, with this increasing because of the deteriorating financial condition of the company. At the same time, the fact that the Ann Taylor is seeing increases in their short-term liabilities means that their needs are changing. Where, the company is focused on those businesses and locations that are most profitable for them. As a result, these changes mean that the risks have increased, along with the needs of the business (which more than likely require a change in insurance coverage). To mitigate these risks managers, must keep taking actions to shore up the balance sheet over the long-term by reducing the overall liabilities.

The Likely Perils Ann Taylor Could Face

The biggest challenges that Ann Taylor could face is possibly closing select locations. This would involve the economy going into a secondary recession or what is known as a double dip recession. ("Double Dip Recession") When this occurs, it can cause the company to face severe challenges, as their earnings will begin to implode once again. As many locations will have trouble remaining competitive, due to the severe slowdown in spending. This is problematic for Ann Taylor, because it could cause their overall amounts of insurance coverage to change. For example, in the event that a double dip recession would take place, the company would be forced to have a number of different layoffs (as part of cost cutting efforts to remain competitive). During this process, there will more than likely be increased costs that the company will have to pay for. This is because of the increased expenses from having to cover unemployment benefits and the possible closures of key stores. Once this takes place, it can cause the short-term liabilities to increase and the earnings to decline. That being said, this kind of scenario will not force the company into bankruptcy. As they have $2.10 million in debt and $262 million in cash. ("10Q") What more than likely would happen is that their underlying amounts of risks will increase and their insurance needs will begin to change. At which point, Ann Taylor may have to pay higher rates for insurance coverage, to reflect these risks that are being faced. This is significant, because it shows how Ann Taylor has a lower amount of risk in comparison with other companies. However, these risks could increase if the economic situation becomes worse over the next two to three years.

When you examine the underlying amounts of perils in comparison with assessing the risks of the company, it is clear that they are not facing as many severe challenges as their competitors. However, they are exposed to changes in consumer spending. This is problematic, because the company is seeing inconsistency in various numbers on its balance sheet, which highlights that they are still wrestling with these risks. If this happens it will cause their risk to increase, because managers are being forced to make draconian cuts in an effort to remain competitive (which will cause expenses to increase). As far as insurance is concerned this could cause the underlying amounts of coverage to change, based upon the effects that it will have for the company in the future. To mitigate these perils managers must ensure that they keep low inventory levels and maintain high amounts of cash.

Obvious Hazards

The obvious hazards that Ann Taylor could be facing is: changes in consumer tastes and a lack of focus on the part of management. The reason why is because, retail sales industry is very fickle, meaning that fashion trends and tastes are constantly changing. This is problematic for all retailers, as they must struggle to constantly reinvent themselves. Where, they will have to sell those products that are in most demand. Those organizations that do not keep on top of these changes could see sudden shifts that would occur in their balances sheets. As they are using a strategy that has worked in past, but is no longer working due to the change trends and tastes that are occurring. Once this begins to take place, it can mean that an organization will have a cancer eating away at its foundation. At which point, new strategies that are being utilized to help turn the negative trends around, can be difficult to implement. This is because the company has experienced such a large implosion in its customer base. A good example of this can be seen with Gap Stores. What happened was the company would assume that their relaxed style clothing would continue to be in demand when the company was having their clothes worn to the Oscars in 1998. Then, they would… READ MORE

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