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CPCU 540 > Final Review > Flashcards

Final Review Flashcards

0
Q

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

A

Cost principal

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1
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.

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2
Q

What are the current assets under GAAP?

A

Cash, inventory, accounts receivable, and marketable securities

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3
Q

What are the non-current assets under GAAP?

A

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

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4
Q

List the current liabilities.

A

Accounts payable, short-term debt, unearned premium

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5
Q

What is long-term debt?

A

Debt payable in more than a year

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6
Q

Three types of assets unique to insurer balance sheets.

A

Premium receivables
Reinsurance recoverables
Deferred policy acquisition costs

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7
Q

Two unique categories on an insurer balance sheet

A

Unpaid losses and lae.

Unearned premium reserves

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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

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9
Q

How is cost of goods calculated on income statement?

A

Beginning inventory + additions - ending

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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
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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)

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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
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13
Q

What is the quarterly SEC filing called?

A

10-Q

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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
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15
Q

What is the gross margin and how is it calculated?

A

Profit as a percentage of gross sales

Gross profit / sales

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16
Q

Which statements is vertical analysis usually used for?

A

Balance sheet and income statement

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17
Q

What is the best thing about vertical analysis?

A

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

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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.

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19
Q

Which statement is trend analysis usually used on?

A

Income statement to show profitability over the years

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20
Q

What are the efficiency ratios?

A

AR turnover
Asset turnover
Inventory turnover

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21
Q

Credit sales / accounts receivable

A

AR turnover ratio

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22
Q

Sales / total assets

A

Asset turnover ratio

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23
Q

Cost of goods sold / inventory

A

Inventory turnover ratio

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24
Q

What does an extremely high AR turnover mean?

A

Might not be giving enough time to pay

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25
Q

What does an extremely high asset turnover mean?

A

Might be using old depreciated assets

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26
Q

What are the liquidity ratios?

A

Current ratio

Acid test

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27
Q

Current assets / current liabilities

A

Current ratio

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28
Q

Current assets - inventory / total assets

A

Acid test

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29
Q

A high acid test ratio means?

A

Trouble selling inventory

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30
Q

What are the leverage ratios?

A

Debt-to-equity

Debt-to-assets

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31
Q

Long-term debt / sh equity

A

Debt to equity ratio

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32
Q

Total debt / total assets

A

Debt-to-assets ratio

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33
Q

High leverage ratio means?

A

Lots of debt to finance growth

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34
Q

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

A

Company is financing mostly through equity

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35
Q

What are the profitability ratios?

A

NPM
ROA
ROE
DuPont Identifier

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36
Q

Net income / sales

A

NPM

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37
Q

Net income / total assets

A

ROA

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38
Q

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

A

Return on assets

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39
Q

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

A

ROE

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40
Q

Net income / sh equity

A

ROE

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41
Q

Taking on more debt does what to ROE?

A

Increases

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42
Q

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

A

DuPont identifier

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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

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44
Q

Total assets / equity

A

Equity multiplier

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45
Q

What does the equity multiplier do?

A

Shows how efficiently financial leverage is used

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46
Q

Which items are not admitted under SAP?

A

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

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47
Q

How are illiquid assets handled under SAP?

A

Not admitted and are subtracted directly from surplus

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48
Q

How are bonds valued under SAP?

A

Amortized cost.

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49
Q

How are reinsurance recoverables handled under SAP?

A

Netted from loss and lae reserves

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50
Q

How are income taxes handled under SAP?

A

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

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51
Q

Where is the NAIC annual statement filed?

A

In any state business is done.

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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

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

CPCU 540 (11 decks)

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