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CPCU540 > CPCU540 > Flashcards

CPCU540 Flashcards

1
Q

expense ratio

A

earned premium under GAAP

/ written premium under SAP

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2
Q

combined ratio

A

[profitability]

loss ratio + expense ratio

loss ratio = (losses & LAE) / earned premium

expense ratio = earned premium under GAAP / written premium under SAP

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3
Q

bond price

A

C(1+r) + C(1+r)^2 + … + C(1+r)^n + P(1+r)^n,

C = interest or coupon payment
P = principal repayment (face)
n = number of periods
r = discount rate or yield
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4
Q

variance

A

sum of squared differences

/ (n-1)

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5
Q

coefficient of variation (CV)

A

standard deviation

/ mean

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6
Q

working capital

A

current assets - current liabilities

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7
Q

acquisition economic gain

A

G = VAB - (VA + VB)
= VAB - (VA + purchase price of B),

VAB = value of combined companies A and B

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8
Q

weighted average cost of capital

A

WACC
= cost of equity * %e
+ cost of debt * %d

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9
Q

accounting equation

A

assets = liabilities + shareholder equity

shareholder equity aka
net worth
book value
surplus

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10
Q

gross profit

A

sales - COGS

markup = gross profit / COGs

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11
Q

comprehensive income

A

= net income

+ other income not included on income statement (e.g, unrealized gains/losses or foreign translation gains)

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12
Q

paid-in capital

A

= par value of stock issued

+ additional capital over par value

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13
Q

SAP Accounting equation (insurers)

A

total assets - nonadmitted assets

= liabilities + policyholder surplus

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14
Q

future value

A

FVn = PV * (1 + r/m)^(n*m),

n = years
m = # times per year interest is paid
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15
Q

present value

A

PV = FVn / (1+r)^n,

n = number of periods
r = rate of return
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16
Q

investment rate of return

A

solve for r

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17
Q

ordinary annuity: future value

A

FVA = A * FVAF,

FVAC = FV factor from table
A = fixed periodic payment
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18
Q

ordinary annuity: present value

A

PVA = A * PVAF,

PVAF = (1 - 1/(1+r)) * (1/r)
A = fixed periodic payment
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19
Q

annuity relationships: ordinary vs due

A

FV(annuity due) = (1+r) * FV(ordinary annuity)

PV(annuity due) = (1+r) * PV(ordinary annuity)

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20
Q

perpetuity present value

A

PVP = A / r,

A = periodic payment
r = discount rate

eg dividends on preferred stock

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21
Q

net present value

A

NPV
= PV(inflows) - PV(outflows)
= -Co + Ct(1+r)^(-t) + … + Cn(1+r)^(-n),

Co = beginning cash flow
Ct = cash flow at time t
r = discount rate
n = number of periods
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22
Q

payment for acquisition

goodwill

A

= book value + goodwill

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23
Q

cost of goods sold (COGS)

A

= beginning inventory
+ inventory additions
- ending inventory

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24
Q

gross margin

A

= gross profit / gross sales

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25
Q

operating income

A

= gross profit - general operating expenses

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26
Q

net income

A 
= revenue
- expenses (including depreciation)
\+ gains
- losses
- taxes
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27
Q

change in retained earnings

A

= net income - dividends

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28
Q

net profit margin

A

= net income / sales

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29
Q

equity multiplier

A

= total assets / shareholder equity

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30
Q

premium-to-surplus ratio

A

[capacity]

= written premiums net of reinsurance
/ policyholder surplus

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31
Q

reserves-to-surplus

A

[capacity]

= (loss & LAE reserves + unearned premium reserves)
/ policyholder surplus

32
Q

return on policyholder surplus ratio

A

= net income / surplus

if net income < 0, then ratio = 0%

33
Q

current ratio

A

= current assets

/ current liabilities

34
Q

debt-to-equity ratio

A

= long-term debt

/ shareholder equity

35
Q

earnings per share

A

EPS = net income / common shares outstanding

36
Q

return on equity (ROE)

A

= net income / shareholder equity

= net income / capital

= ROA * equity multiplier

net income = earnings
after bond issue: net income = earnings - interest owed

37
Q

return on assets (ROA)

A

= net income / total assets

= net profit margin * asset turnover ratio

= (net income / sales) * (sales / total assets)
= efficiency of controlling expenses * efficiency in use of assets

38
Q

debt-to-assets ratio

A

= total liabilities

/ total assets

39
Q

DuPont Identity (return on equity)

A

= net income / sales * sales / total assets * total assets / equity

40
Q

earned premium

A

= this year’s written premiums
+ unearned premium reserves
- unearned premium reserve @ end of last year

41
Q

loss expenses

A

= losses paid during year
+ ending reserves
- beginning reserves

42
Q

liquidity ratio

A

= (bonds + stock + cash + interest + short-term investments)

/ (loss & LAE reserves + unearned premium reserve)

43
Q

operating ratio

A

[profitability]

= combined ratio - investment income ratio

44
Q

investment yield rate

A

= net investment gain/loss

/ total cash invested assets

45
Q

capital gain

A

= market price @ maturity - purchase price

46
Q

annual RoR (bond)

A

= interest + capital gain

/ price @ beginning of year

47
Q

annual RoR (stock)

A

= dividend + capital gain

/ share price @ beginning of year

48
Q

accounts receivable turnover

A

= credit sales

/ accounts receivable

49
Q

days sales outstanding

A

= 365 / accounts receivable turnover ratio

50
Q

asset turnover

A

= sales

/ total assets

51
Q

inventory turnover

A

= COGS

/ inventory

52
Q

acid-test (quick) ratio

A

= (cash + marketable securities + accounts receivable)

/ current liabilities

53
Q

insurance leverage

A

= insurance exposure * (reserves / premiums written)

OR
reserves / surplus) = (premiums / surplus) * (reserves / premiums

54
Q

new value of shares purchased from acquired company

A

= (# acquired shares / new total shares) * Vab,

Vab = value of combined company

55
Q

market value surplus (risk adjusted surplus)

A

MVS

= fair value assets - fair value liabilities

= fair value assets - present value liabilities + market value margin

56
Q

cost of preferred stock capital

A

Kps = D / P,

D = dividend per share
P = market price per share of preferred stock

estimate cost of debt/capital

57
Q

cost of debt

A

Kd = (rf + risk premium) * (1 - T)
= (interest rate on debt)*(1-T),

rf = risk free rate
T = tax rate
1-T = tax shield
58
Q

capital asset pricing model (CAPM)

cost of equity (insurer)

A

Ke = rf + B*(rm - rf),

rf = risk free rate
B = beta of security
rm = expected market rate
59
Q

discounted cash flow model (DCF)

cost of equity (insurer)

A

Ke = g + [d/P * (1+g)],

g = expected growth rate of dividend in perpetuity
d = last annual dividend
P = current share price
60
Q

cost of capital from insurer operations

cost of funds

A

Kc = [(1 - T) * U]
/ [LR + PR],

T = tax rate
U = underwriting loss
LR = loss &amp; LAE reserves
PR = unearned premium reserve
61
Q

loss ratio

A

= (losses & LAE)

/ earned premiums

62
Q

Securities & Exchange Commission Filings: annual 10-K

A

large accelerated filers (>$700M public float) – 60 days

accelerated filers (> $75M public float) – 75 days

nonaccelerated filers – 90 days

63
Q

Securities & Exchange Commission Filings: quarterly 10-Q

A

accelerated filers (>$75M public float) – 40 days

nonaccelerated filers – 45 days

64
Q

Securities & Exchange Commission Filings: 8-K

A

within 4 days of triggering event

65
Q

SEC company annual report

required sections

A 
financial statements and notes
auditor's report
report of management
management's discussion and analysis of results of operations and financial condition
selected financial data
66
Q

vertical analysis

A

common size statement

two or more companies

looks for unusual % that identify items that have an excessively large/small value when compared with competitors or a benchmark

67
Q

ratio analysis

A

comparison to expectations

68
Q

T bills

A

maturity <= 1 year, sold at discount to face value, repaid at face value

69
Q

T notes

A

maturity 2-10 years, stated coupon rate, pay coupons X2 per year

70
Q

T bonds

A

maturity 30 years, stated coupon rate, pay coupons x2 per year

71
Q

treasury inflation protected securities (TIPS)

A

maturity 5, 10, or 20 years, pay coupons x2 per year. The principal is tied to inflation (CPI). If inflation increases, the principal increases.

72
Q

eurobonds

A

maturity 3-7 years

73
Q

risk based capital requirements

A

no action if insurer’s capitalization level > 200%

company action level < 200% –> comprehensive financial plan

regulator action level < 150% –> examination & comprehensive financial plan

authorized control level < 100% –> insurer may be placed under control

mandatory control level < 70% -> insurer placed under control

74
Q

soft market

A

more sellers than buyers

75
Q

price of common stock

A

price = dividend at next dividend date
/ (rm - dividend growth rate),

rm = market rate of return

76
Q

liquidity ratio

A

= liquid assets /

(loss & LAE and unearned premium reserves)

77
Q

market breadth

A

The percentage of the overall market that is participating in the market.

CPCU540 (1 decks)

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