Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CPCU 540 COPY > Final Review > Flashcards

Final Review Flashcards

1
Q

This GAAP principal requires assets to be reports at historical cost.

A

Cost principal

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are the current assets under GAAP?

A

Cash, inventory, accounts receivable, and marketable securities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the non-current assets under GAAP?

A

Tangible: buildings, equipment, land
Intangible: patents, copyrights, goodwill

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

List the current liabilities.

A

Accounts payable, short-term debt, unearned premium

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is long-term debt?

A

Debt payable in more than a year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Three types of assets unique to insurer balance sheets.

A

Premium receivables
Reinsurance recoverables
Deferred policy acquisition costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Two unique categories on an insurer balance sheet

A

Unpaid losses and lae.

Unearned premium reserves

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

How is net income calculated?

A

Revenue - cost of goods sold (gross profit) - general operating expenses (this equals operating income) +gains (investment) - losses - taxes = net income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

How is cost of goods calculated on income statement?

A

Beginning inventory + additions - ending

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

List the sections of the statement of changes in shareholders’ equity.

A

PIRATES (IR)

P aid in equity
R etained Earnings (net income - dividends paid)
A ccumulated other income 
T reasury stock
= 
S hareholders' equity
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

List the sections in the statement of cash flows.

A

Our cash flow es “fino”

operating activities (NI)

not affecting cash. (Depreciation, chg inn payables receivables, inventory change, cash from/for investing

Investing activities (additions to bldg/equipment, cash from/for investing

Financing activities (proceeds from debt or equity issuance, purchase treasury stock, $ from issuing stock, paid dividends)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What do the notes to financial statements contain?

A 
Nature of operations 
List of long-term debt
Summary of significant accounting polices
Report of information by business segment 
Summary of loss contingencies 
Product warranty obligations 
Hold-harmless agreements 
Risk to property by casualty
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is the quarterly SEC filing called?

A

10-Q

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What are the mandatory sections of the annual report?

A 
Statements and notes
report of management (signed by CEO)
Report of auditors 
Md&a
Selected data
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is the gross margin and how is it calculated?

A

Profit as a percentage of gross sales

Gross profit / sales

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Which statements is vertical analysis usually used for?

A

Balance sheet and income statement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is the best thing about vertical analysis?

A

It eliminates the effect of inflation. Good for comparing different sized companies.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is a problem with multiple-period vertical analysis?

A

It doesn’t address how much a company had grown it can grow.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Which statement is trend analysis usually used on?

A

Income statement to show profitability over the years

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What are the efficiency ratios?

A

AR turnover
Asset turnover
Inventory turnover

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Credit sales / accounts receivable

A

AR turnover ratio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Sales / total assets

A

Asset turnover ratio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Cost of goods sold / inventory

A

Inventory turnover ratio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What does an extremely high AR turnover mean?

A

Might not be giving enough time to pay

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What does an extremely high asset turnover mean?

A

Might be using old depreciated assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

What are the liquidity ratios?

A

Current ratio

Acid test

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Current assets / current liabilities

A

Current ratio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Current assets - inventory / total assets

A

Acid test

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

A high acid test ratio means?

A

Trouble selling inventory

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

What are the leverage ratios?

A

Debt-to-equity

Debt-to-assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

Long-term debt / sh equity

A

Debt to equity ratio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

Total debt / total assets

A

Debt-to-assets ratio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

High leverage ratio means?

A

Lots of debt to finance growth

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

If the debt-to-assets ratio is less than 1 it means that ?

A

Company is financing mostly through equity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

What are the profitability ratios?

A

NPM
ROA
ROE
DuPont Identifier

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

Net income / sales

A

NPM

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

Net income / total assets

A

ROA

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

This ratio tells which company uses resources better. A higher ratio is better.

A

Return on assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

This ratio tells how profitable a company is relative to shareholder investment.

A

ROE

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

Net income / sh equity

A

ROE

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

Taking on more debt does what to ROE?

A

Increases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

This ratio can tell you if ROA is due to controlling expenses or due to efficient use of resources

A

DuPont identifier

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

DuPont ROE formula

A

No Problem Mike ATEM

ROE=
Net profit margin * asset turnover ratio * equity multiplier

NI/sales * sales/assets * total assets/equity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

Total assets / equity

A

Equity multiplier

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

What does the equity multiplier do?

A

Shows how efficiently financial leverage is used

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
46
Q

Which items are not admitted under SAP?

A

Furniture, autos, equipment, uncollected premium > 90 days, prepaid expenses, loans to company personnel

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
47
Q

How are illiquid assets handled under SAP?

A

Not admitted and are subtracted directly from surplus

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
48
Q

How are bonds valued under SAP?

A

Amortized cost.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
49
Q

How are reinsurance recoverables handled under SAP?

A

Netted from loss and lae reserves

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
50
Q

How are income taxes handled under SAP?

A

Only current taxes charged. Under GAAP deferred and current are reported

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
51
Q

Where is the NAIC annual statement filed?

A

In any state business is done.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
52
Q

What are the sections of the NAIC Annual Report?

A

Balance sheet
Income statement
Statement of changes in capital and surplus
Cash flow statement
Notes, schedules, exhibits, interrogatories

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
53
Q

Capacity ratio

A

Net premium written / ph surplus

54
Q

Liquidity ratio

A

Cash + invested assets / reserves (un-ep, loss, lae)

55
Q

What is a desirable liquidity ratio?

A

> = 1.0

56
Q

What is the premium/surplus ratio recommended by the NAIC?

A

3/1

57
Q

What is a ratio that measures leverage?

A

Reserves to surplus (un-ep, loss and lae ) / ph surplus

58
Q

Net investment income / ep

A

Investment income ratio

59
Q

What is the largest FSC size?

A

XV

60
Q

What are the FSR qualitative tests?

A 
Capital structure 
Reinsurance agreements (soundness)
Loss reserves (uncertainty related to estimates)
Investment diversity
Management
Market position 
Event risk
Surplus adequacy
61
Q

What are the secure FSR scores?

A

A++ to B+

62
Q

What are the categories of IRIS tests?

A

Overall
Profitability
Liquidity

63
Q

What does a big difference between iris overall tests gross written premium to surplus and net premiums written to surplus mean?

A

Over reliance on reinsurance

64
Q

What is an acceptable result for change in net writings?

A

33%

65
Q

What can the two year reserve development to surplus ratio tell you?

A

If reserves were understated to inflate surplus

66
Q

Currency market operates as

A

A dealer market

67
Q

Which factors influence the YTM?

A

real rate of return
Inflation premium
Risk premium

68
Q

Volatility theory that says that sock prices are due to supply and demand

A

Economic theory

69
Q

Volatility theory that says stock prices are the discounted present value of future dividends.

A

Financial theory

70
Q

Type of stock price analysis that looks at a particular company; at things like sales stability, leverage, institutional ownership, etc and compares the company to s&p averages.

A

Fundamental analysis

71
Q

Type of stock price analysis that looks for patterns in market activity and past prices.

A

Technical analysis.

72
Q

Type of EM hypothesis where it is believed stock prices reflect historical info, public info, and insider info. People with these beliefs would want an indexed portfolio.

A

Strong form

73
Q

Type of EM where it is believed that stock prices reflect only historical and current information about the stock.

A

Weak

74
Q

Type of EM that asserts that current prices reflect historical and current info about stock.

A

Semi-strong

75
Q

Safety has a bond with a par value of $1000. The bond has a coupon rate of 5% and matures in 9 years. If YTM is 3%, calculate the current price.

A 
1000FV
50PMT
3 I/YR
9 N
PV
1155.72
76
Q

Inflation 3%, calculate real return rate if currently paying 7%

A

(1+ NOM) / (1 - inflation) -1

1.07 / 1.03 - 1 = 1.0388 - 1 3.8%

77
Q

Variance formula

A

Take the difference of each result and square it. Add all together and divide by (n-1). At end, square the difference.

78
Q

What is downfall of variance?

A

Difficult to interpret due to squaring.

79
Q

Standard deviation formula

A

Square root of variance

80
Q

What are the pluses of standard deviation?

A

Uses same units and number of data points as variance.

81
Q

What is downside of sd?

A

Larger values produce larger sd

82
Q

Formula for coefficient of variation.

A

Sd / mean

83
Q

What is good about the coefficient of variation

A

You can compare risk regardless of the magnitude of different data sets.

84
Q

Why is var good?

A

Only two inputs: probability of loss and horizon in which loss could occur

Easy to understand

85
Q

What is the downside of var?

A

Doesn’t accurately measure the extent to which a loss exceeds the var threshold

86
Q

What is the only kind of risk that can be diversified away?

A

Company-specific

87
Q

What kind of risk does a bond with a coupon interest rate exposure have?

A

Reinvestment rate risk

88
Q

What does duration do?

A 
Compare price volatility of bonds 
Estimate price changes when YTM changes 
immunize portfolio (match uw to investments)
89
Q

RBC level that would make insurer a candidate for seizure.

A

50%

90
Q

What are the internal methods of generating capital?

A

Business operations, investment income, reevaluate balance sheet values (sale/leaseback), reduce dividends, reduce risk

91
Q

Why doesn’t issuing stock increase distress?

A

Not paying dividends isn’t a default.

92
Q

This source of capital is classified as surplus for SAP and increases RBC.

A

Surplus notes

93
Q

Breakeven EBIT formula

A

(Total shares os if equity issues * cost of debt)/ additional shares

94
Q

Which ratio is used to measure insurance leverage?

A

Reserves to ph surplus

95
Q

If breakeven EBIT Is higher than current EBIT, should a company issue debt or equity?

A

Issue equity

96
Q

Formula for reserves to ph surplus

A

(Written premium / ph surplus) * (reserves / written premium)

97
Q

How is cost of insurer debt measured?

A

Underwriting results to reserves

98
Q

Formula for Underwriting results to reserves

A

[uw loss * (1-tax rate)] / reserves (loss, lae, un-ep)

99
Q

What are the restrictions on insurance leverage?

A

SAP requiring immediate recognition of acquisition costs
Minimum surplus requirements
Increased risk of uw loss as more policies written

100
Q

Formula for determining cost of equity by DCF method (companies that pay dividends)

A

(Dividend * (1 + growth rate)) / (price + growth rate)

101
Q

What is CAPM used for?

A

Determine cost of equity for companies that don’t pay dividends.

102
Q

Formula for cost of debt

A

(Rf + Rp) * (1 - tax rate)

103
Q

CAPM formula

A

Rf + (b * (Mr - Rf))

104
Q

What types of risk does rbc look at?

A

Asset risk
Credit risk
Underwriting risk

105
Q

Regulatory action taken if RBC is ____.

A

100-150%

106
Q

Authorized control level of RBC

A

71-99%

107
Q

Mandatory control under RBC

A

< 70%

108
Q

Which factors does economic capital assign probability to?

A 
Market risk
Credit risk 
Liquidity risk
Insurance risk
Operational risk
109
Q

MVS formula

A

Fair value of assets - (present value of liabilities + market value margin)

110
Q

What does it mean if MVS is greater than economic capital?

A

Insurer has excess capital

111
Q

SAFT paid a $1.50 dividend last year with a 6% growth rate and current share price of $100. What is their cost of equity?

A

(1.5/100)(1.06)+.06=
(.021.06) + .06
.016 + .06
.076 or 7.6%

112
Q

What happens to the target company in a merger?

A

Goes away

113
Q

What happens to the target company in an acquisition?

A

May or may not go away.

114
Q

What happens to the target company in a merger?

A

Both go away

115
Q

A hostile takeover where a bidder offers target shareholders a ton of money (tender offer). One he gets 5% of the shares the SEC gets notified.

A

Bear hug

116
Q

Trying to get more voting rights so you can appoint a new board, favorable to letting you takeover.

A

Proxy contest

117
Q

What is a major tax benefit from an acquisition?

A

Sometime the acquisition will allow tax basis to be FMV.

118
Q

When a target repurchases shares from a buyer at a premium (payment called greenmail) the strategy is called?

A

Targeted repurchase

119
Q

Finding a friendly buyer to purchase to prevent hostile takeover.

A

White knight.

120
Q

List the shark repellents

A

Golden parachute, super majority, staggered board, poison pills, poison puts , crown jewel, lockup

121
Q

Shark repellant where shareholders can buy more shares at a discount if there is a takeover attempt.

A

Poison pill

122
Q

Shark repellant where bond holders get the right to demand repayment if taken over.

A

Poison puts

123
Q

Shark repellant where a friendly buyer is given a chance to buy key assets.

A

Lockup

124
Q

This market starts when am insurer increases premium and tightens underwriting.

A

Hard market

125
Q

Signs of this market are increased premiums, tighter underwriting, less competition, more profit, tough time getting coverage.

A

Hard market

126
Q

What does an insurer do in a hard market?

A

Increase premium, restrict coverage, review reserves, restrict producers, increase staff, reunderwrite

127
Q

This market has decreased premiums, more competition, looser standards, less profit, increased operating ratio.

A

Soft market in

128
Q

What is an insurer’s strategy in a soft market?

A

Lower premiums, lower standards, increase coverages, offer special products or rate credits, reduce staff

129
Q

Which factors can influence the underwriting cycle?

A

Investment income, capacity, roe, cash flow

130
Q

With regard to Sarbanes-Oxley, what are the responsibilities of the principal officers?

A

They have to certify that they have reviewed the quarterly and annual report and, to the best of their knowledge, they contain no untrue statements of material fact.

CPCU 540 COPY (11 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions