CPCU540 Flashcards
expense ratio
earned premium under GAAP
/ written premium under SAP
combined ratio
[profitability]
loss ratio + expense ratio
loss ratio = (losses & LAE) / earned premium
expense ratio = earned premium under GAAP / written premium under SAP
bond price
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
variance
sum of squared differences
/ (n-1)
coefficient of variation (CV)
standard deviation
/ mean
working capital
current assets - current liabilities
acquisition economic gain
G = VAB - (VA + VB)
= VAB - (VA + purchase price of B),
VAB = value of combined companies A and B
weighted average cost of capital
WACC
= cost of equity * %e
+ cost of debt * %d
accounting equation
assets = liabilities + shareholder equity
shareholder equity aka
net worth
book value
surplus
gross profit
sales - COGS
markup = gross profit / COGs
comprehensive income
= net income
+ other income not included on income statement (e.g, unrealized gains/losses or foreign translation gains)
paid-in capital
= par value of stock issued
+ additional capital over par value
SAP Accounting equation (insurers)
total assets - nonadmitted assets
= liabilities + policyholder surplus
future value
FVn = PV * (1 + r/m)^(n*m),
n = years m = # times per year interest is paid
present value
PV = FVn / (1+r)^n,
n = number of periods r = rate of return
investment rate of return
solve for r
ordinary annuity: future value
FVA = A * FVAF,
FVAC = FV factor from table A = fixed periodic payment
ordinary annuity: present value
PVA = A * PVAF,
PVAF = (1 - 1/(1+r)) * (1/r) A = fixed periodic payment
annuity relationships: ordinary vs due
FV(annuity due) = (1+r) * FV(ordinary annuity)
PV(annuity due) = (1+r) * PV(ordinary annuity)
perpetuity present value
PVP = A / r,
A = periodic payment r = discount rate
eg dividends on preferred stock
net present value
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
payment for acquisition
goodwill
= book value + goodwill
cost of goods sold (COGS)
= beginning inventory
+ inventory additions
- ending inventory
gross margin
= gross profit / gross sales
operating income
= gross profit - general operating expenses
net income
= revenue - expenses (including depreciation) \+ gains - losses - taxes
change in retained earnings
= net income - dividends
net profit margin
= net income / sales
equity multiplier
= total assets / shareholder equity
premium-to-surplus ratio
[capacity]
= written premiums net of reinsurance
/ policyholder surplus
reserves-to-surplus
[capacity]
= (loss & LAE reserves + unearned premium reserves)
/ policyholder surplus
return on policyholder surplus ratio
= net income / surplus
if net income < 0, then ratio = 0%
current ratio
= current assets
/ current liabilities
debt-to-equity ratio
= long-term debt
/ shareholder equity
earnings per share
EPS = net income / common shares outstanding
return on equity (ROE)
= net income / shareholder equity
= net income / capital
= ROA * equity multiplier
net income = earnings
after bond issue: net income = earnings - interest owed
return on assets (ROA)
= 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
debt-to-assets ratio
= total liabilities
/ total assets
DuPont Identity (return on equity)
= net income / sales * sales / total assets * total assets / equity
earned premium
= this year’s written premiums
+ unearned premium reserves
- unearned premium reserve @ end of last year
loss expenses
= losses paid during year
+ ending reserves
- beginning reserves
liquidity ratio
= (bonds + stock + cash + interest + short-term investments)
/ (loss & LAE reserves + unearned premium reserve)
operating ratio
[profitability]
= combined ratio - investment income ratio
investment yield rate
= net investment gain/loss
/ total cash invested assets
capital gain
= market price @ maturity - purchase price
annual RoR (bond)
= interest + capital gain
/ price @ beginning of year
annual RoR (stock)
= dividend + capital gain
/ share price @ beginning of year
accounts receivable turnover
= credit sales
/ accounts receivable
days sales outstanding
= 365 / accounts receivable turnover ratio
asset turnover
= sales
/ total assets
inventory turnover
= COGS
/ inventory
acid-test (quick) ratio
= (cash + marketable securities + accounts receivable)
/ current liabilities
insurance leverage
= insurance exposure * (reserves / premiums written)
OR
reserves / surplus) = (premiums / surplus) * (reserves / premiums
new value of shares purchased from acquired company
= (# acquired shares / new total shares) * Vab,
Vab = value of combined company
market value surplus (risk adjusted surplus)
MVS
= fair value assets - fair value liabilities
= fair value assets - present value liabilities + market value margin
cost of preferred stock capital
Kps = D / P,
D = dividend per share P = market price per share of preferred stock
estimate cost of debt/capital
cost of debt
Kd = (rf + risk premium) * (1 - T)
= (interest rate on debt)*(1-T),
rf = risk free rate T = tax rate 1-T = tax shield
capital asset pricing model (CAPM)
cost of equity (insurer)
Ke = rf + B*(rm - rf),
rf = risk free rate B = beta of security rm = expected market rate
discounted cash flow model (DCF)
cost of equity (insurer)
Ke = g + [d/P * (1+g)],
g = expected growth rate of dividend in perpetuity d = last annual dividend P = current share price
cost of capital from insurer operations
cost of funds
Kc = [(1 - T) * U]
/ [LR + PR],
T = tax rate U = underwriting loss LR = loss & LAE reserves PR = unearned premium reserve
loss ratio
= (losses & LAE)
/ earned premiums
Securities & Exchange Commission Filings: annual 10-K
large accelerated filers (>$700M public float) – 60 days
accelerated filers (> $75M public float) – 75 days
nonaccelerated filers – 90 days
Securities & Exchange Commission Filings: quarterly 10-Q
accelerated filers (>$75M public float) – 40 days
nonaccelerated filers – 45 days
Securities & Exchange Commission Filings: 8-K
within 4 days of triggering event
SEC company annual report
required sections
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
vertical analysis
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
ratio analysis
comparison to expectations
T bills
maturity <= 1 year, sold at discount to face value, repaid at face value
T notes
maturity 2-10 years, stated coupon rate, pay coupons X2 per year
T bonds
maturity 30 years, stated coupon rate, pay coupons x2 per year
treasury inflation protected securities (TIPS)
maturity 5, 10, or 20 years, pay coupons x2 per year. The principal is tied to inflation (CPI). If inflation increases, the principal increases.
eurobonds
maturity 3-7 years
risk based capital requirements
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
soft market
more sellers than buyers
price of common stock
price = dividend at next dividend date
/ (rm - dividend growth rate),
rm = market rate of return
liquidity ratio
= liquid assets /
(loss & LAE and unearned premium reserves)
market breadth
The percentage of the overall market that is participating in the market.
