Final Review Flashcards
0
Q
This GAAP principal requires assets to be reports at historical cost.
A
Cost principal
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.
2
Q
What are the current assets under GAAP?
A
Cash, inventory, accounts receivable, and marketable securities
3
Q
What are the non-current assets under GAAP?
A
Tangible: buildings, equipment, land
Intangible: patents, copyrights, goodwill
4
Q
List the current liabilities.
A
Accounts payable, short-term debt, unearned premium
5
Q
What is long-term debt?
A
Debt payable in more than a year
6
Q
Three types of assets unique to insurer balance sheets.
A
Premium receivables
Reinsurance recoverables
Deferred policy acquisition costs
7
Q
Two unique categories on an insurer balance sheet
A
Unpaid losses and lae.
Unearned premium reserves
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
9
Q
How is cost of goods calculated on income statement?
A
Beginning inventory + additions - ending
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
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)
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
13
Q
What is the quarterly SEC filing called?
A
10-Q
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
15
Q
What is the gross margin and how is it calculated?
A
Profit as a percentage of gross sales
Gross profit / sales
16
Q
Which statements is vertical analysis usually used for?
A
Balance sheet and income statement
17
Q
What is the best thing about vertical analysis?
A
It eliminates the effect of inflation. Good for comparing different sized companies.
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.
19
Q
Which statement is trend analysis usually used on?
A
Income statement to show profitability over the years
20
Q
What are the efficiency ratios?
A
AR turnover
Asset turnover
Inventory turnover
21
Q
Credit sales / accounts receivable
A
AR turnover ratio
22
Q
Sales / total assets
A
Asset turnover ratio
23
Q
Cost of goods sold / inventory
A
Inventory turnover ratio
24
What does an extremely high AR turnover mean?
Might not be giving enough time to pay
25
What does an extremely high asset turnover mean?
Might be using old depreciated assets
26
What are the liquidity ratios?
Current ratio
| Acid test
27
Current assets / current liabilities
Current ratio
28
Current assets - inventory / total assets
Acid test
29
A high acid test ratio means?
Trouble selling inventory
30
What are the leverage ratios?
Debt-to-equity
| Debt-to-assets
31
Long-term debt / sh equity
Debt to equity ratio
32
Total debt / total assets
Debt-to-assets ratio
33
High leverage ratio means?
Lots of debt to finance growth
34
If the debt-to-assets ratio is less than 1 it means that ?
Company is financing mostly through equity
35
What are the profitability ratios?
NPM
ROA
ROE
DuPont Identifier
36
Net income / sales
NPM
37
Net income / total assets
ROA
38
This ratio tells which company uses resources better. A higher ratio is better.
Return on assets
39
This ratio tells how profitable a company is relative to shareholder investment.
ROE
40
Net income / sh equity
ROE
41
Taking on more debt does what to ROE?
Increases
42
This ratio can tell you if ROA is due to controlling expenses or due to efficient use of resources
DuPont identifier
43
DuPont ROE formula
No Problem Mike ATEM
ROE=
Net profit margin * asset turnover ratio * equity multiplier
NI/sales * sales/assets * total assets/equity
44
Total assets / equity
Equity multiplier
45
What does the equity multiplier do?
Shows how efficiently financial leverage is used
46
Which items are not admitted under SAP?
Furniture, autos, equipment, uncollected premium > 90 days, prepaid expenses, loans to company personnel
47
How are illiquid assets handled under SAP?
Not admitted and are subtracted directly from surplus
48
How are bonds valued under SAP?
Amortized cost.
49
How are reinsurance recoverables handled under SAP?
Netted from loss and lae reserves
50
How are income taxes handled under SAP?
Only current taxes charged. Under GAAP deferred and current are reported
51
Where is the NAIC annual statement filed?
In any state business is done.
52
What are the sections of the NAIC Annual Report?
Balance sheet
Income statement
Statement of changes in capital and surplus
Cash flow statement
Notes, schedules, exhibits, interrogatories
53
Capacity ratio
Net premium written / ph surplus
54
Liquidity ratio
Cash + invested assets / reserves (un-ep, loss, lae)
55
What is a desirable liquidity ratio?
>= 1.0
56
What is the premium/surplus ratio recommended by the NAIC?
3/1
57
What is a ratio that measures leverage?
Reserves to surplus (un-ep, loss and lae ) / ph surplus
58
Net investment income / ep
Investment income ratio
59
What is the largest FSC size?
XV
60
What are the FSR qualitative tests?
```
Capital structure
Reinsurance agreements (soundness)
Loss reserves (uncertainty related to estimates)
Investment diversity
Management
Market position
Event risk
Surplus adequacy
```
61
What are the secure FSR scores?
A++ to B+
62
What are the categories of IRIS tests?
Overall
Profitability
Liquidity
63
What does a big difference between iris overall tests gross written premium to surplus and net premiums written to surplus mean?
Over reliance on reinsurance
64
What is an acceptable result for change in net writings?
33%
65
What can the two year reserve development to surplus ratio tell you?
If reserves were understated to inflate surplus
66
Currency market operates as
A dealer market
67
Which factors influence the YTM?
real rate of return
Inflation premium
Risk premium
68
Volatility theory that says that sock prices are due to supply and demand
Economic theory
69
Volatility theory that says stock prices are the discounted present value of future dividends.
Financial theory
70
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.
Fundamental analysis
71
Type of stock price analysis that looks for patterns in market activity and past prices.
Technical analysis.
72
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.
Strong form
73
Type of EM where it is believed that stock prices reflect only historical and current information about the stock.
Weak
74
Type of EM that asserts that current prices reflect historical and current info about stock.
Semi-strong
75
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.
```
1000FV
50PMT
3 I/YR
9 N
PV
1155.72
```
76
Inflation 3%, calculate real return rate if currently paying 7%
(1+ NOM) / (1 - inflation) -1
1.07 / 1.03 - 1 = 1.0388 - 1 3.8%
77
Variance formula
Take the difference of each result and square it. Add all together and divide by (n-1). At end, square the difference.
78
What is downfall of variance?
Difficult to interpret due to squaring.
79
Standard deviation formula
Square root of variance
80
What are the pluses of standard deviation?
Uses same units and number of data points as variance.
81
What is downside of sd?
Larger values produce larger sd
82
Formula for coefficient of variation.
Sd / mean
83
What is good about the coefficient of variation
You can compare risk regardless of the magnitude of different data sets.
84
Why is var good?
Only two inputs: probability of loss and horizon in which loss could occur
Easy to understand
85
What is the downside of var?
Doesn't accurately measure the extent to which a loss exceeds the var threshold
86
What is the only kind of risk that can be diversified away?
Company-specific
87
What kind of risk does a bond with a coupon interest rate exposure have?
Reinvestment rate risk
88
What does duration do?
```
Compare price volatility of bonds
Estimate price changes when YTM changes
immunize portfolio (match uw to investments)
```
89
RBC level that would make insurer a candidate for seizure.
50%
90
What are the internal methods of generating capital?
Business operations, investment income, reevaluate balance sheet values (sale/leaseback), reduce dividends, reduce risk
91
Why doesn't issuing stock increase distress?
Not paying dividends isn't a default.
92
This source of capital is classified as surplus for SAP and increases RBC.
Surplus notes
93
Breakeven EBIT formula
(Total shares os if equity issues * cost of debt)/ additional shares
94
Which ratio is used to measure insurance leverage?
Reserves to ph surplus
95
If breakeven EBIT Is higher than current EBIT, should a company issue debt or equity?
Issue equity
96
Formula for reserves to ph surplus
(Written premium / ph surplus) * (reserves / written premium)
97
How is cost of insurer debt measured?
Underwriting results to reserves
98
Formula for Underwriting results to reserves
[uw loss * (1-tax rate)] / reserves (loss, lae, un-ep)
99
What are the restrictions on insurance leverage?
SAP requiring immediate recognition of acquisition costs
Minimum surplus requirements
Increased risk of uw loss as more policies written
100
Formula for determining cost of equity by DCF method (companies that pay dividends)
(Dividend * (1 + growth rate)) / (price + growth rate)
101
What is CAPM used for?
Determine cost of equity for companies that don't pay dividends.
102
Formula for cost of debt
(Rf + Rp) * (1 - tax rate)
103
CAPM formula
Rf + (b * (Mr - Rf))
104
What types of risk does rbc look at?
Asset risk
Credit risk
Underwriting risk
105
Regulatory action taken if RBC is ____.
100-150%
106
Authorized control level of RBC
71-99%
107
Mandatory control under RBC
< 70%
108
Which factors does economic capital assign probability to?
```
Market risk
Credit risk
Liquidity risk
Insurance risk
Operational risk
```
109
MVS formula
Fair value of assets - (present value of liabilities + market value margin)
110
What does it mean if MVS is greater than economic capital?
Insurer has excess capital
111
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?
(1.5/100)*(1.06)+.06=
(.02*1.06) + .06
.016 + .06
.076 or 7.6%
112
What happens to the target company in a merger?
Goes away
113
What happens to the target company in an acquisition?
May or may not go away.
114
What happens to the target company in a merger?
Both go away
115
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.
Bear hug
116
Trying to get more voting rights so you can appoint a new board, favorable to letting you takeover.
Proxy contest
117
What is a major tax benefit from an acquisition?
Sometime the acquisition will allow tax basis to be FMV.
118
When a target repurchases shares from a buyer at a premium (payment called greenmail) the strategy is called?
Targeted repurchase
119
Finding a friendly buyer to purchase to prevent hostile takeover.
White knight.
120
List the shark repellents
Golden parachute, super majority, staggered board, poison pills, poison puts , crown jewel, lockup
121
Shark repellant where shareholders can buy more shares at a discount if there is a takeover attempt.
Poison pill
122
Shark repellant where bond holders get the right to demand repayment if taken over.
Poison puts
123
Shark repellant where a friendly buyer is given a chance to buy key assets.
Lockup
124
This market starts when am insurer increases premium and tightens underwriting.
Hard market
125
Signs of this market are increased premiums, tighter underwriting, less competition, more profit, tough time getting coverage.
Hard market
126
What does an insurer do in a hard market?
Increase premium, restrict coverage, review reserves, restrict producers, increase staff, reunderwrite
127
This market has decreased premiums, more competition, looser standards, less profit, increased operating ratio.
Soft market in
128
What is an insurer's strategy in a soft market?
Lower premiums, lower standards, increase coverages, offer special products or rate credits, reduce staff
129
Which factors can influence the underwriting cycle?
Investment income, capacity, roe, cash flow
