Financial Analysis & Valuation Flashcards
7 cards from real ACE practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Financial Analysis & Valuation flashcards as text
An insurance company's combined ratio is 108%. What does this indicate about its underwriting performance?
Answer: The company is losing money on underwriting operations
A combined ratio above 100% means the insurer is paying out more in losses and expenses than it collects in premiums, indicating an underwriting loss.
Which financial statement component best reflects an insurer's ability to meet short-term policyholder obligations?
Answer: Liquid assets on the balance sheet
Liquid assets (cash and short-term investments) on the balance sheet indicate an insurer's immediate capacity to pay short-term obligations.
In the context of ACORD data standards, which metric is used to assess the adequacy of an insurer's loss reserves relative to its earned premiums?
Answer: Reserve development ratio
The reserve development ratio tracks how original reserve estimates change over time, indicating whether initial reserves were adequate.
What does the term 'policyholder surplus' represent on an insurance company's balance sheet?
Answer: The excess of assets over liabilities, representing net worth
Policyholder surplus is the difference between an insurer's total admitted assets and total liabilities, representing the company's net worth.
Which valuation approach would be MOST appropriate when assessing a specialty insurance line with limited market comparables?
Answer: Income-based discounted cash flow approach
When market comparables are scarce, a discounted cash flow (DCF) approach is preferred as it values the business based on projected future earnings.
An insurer's operating leverage ratio measures the relationship between:
Answer: Net premiums written and policyholder surplus
Operating leverage (net premiums written to surplus) measures how much premium volume an insurer writes relative to its capital base.
When analyzing an insurer's return on equity (ROE), which factor distinguishes insurance ROE from that of non-financial companies?
Answer: Investment income from the float is a significant ROE component
Insurers generate significant investment income from holding premium payments (the float) before claims are paid, making it a key ROE driver unique to the industry.