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
Which regulatory capital requirement framework does the NAIC use to assess whether a U.S. insurer holds adequate capital?
Answer: Risk-Based Capital (RBC) requirements
The NAIC's Risk-Based Capital (RBC) system requires U.S. insurers to hold capital proportional to their specific underwriting, asset, credit, and operational risks.
An insurer has a loss ratio of 65% and an expense ratio of 32%. What is its combined ratio, and what does it indicate?
Answer: 97% — the insurer is profitable on an underwriting basis
Combined ratio = loss ratio + expense ratio = 65% + 32% = 97%, which is below 100%, indicating an underwriting profit.
What is the significance of 'surplus strain' in evaluating an insurer's rapid premium growth?
Answer: Rapid premium growth can deplete surplus because expenses are recognized before premiums are fully earned
Surplus strain occurs when an insurer writes significant new business because acquisition costs are expensed immediately while the related premiums are earned over the policy period.
In the ACORD Insurance Data Model, what does the 'coverage' object primarily define for financial valuation purposes?
Answer: The terms, limits, and conditions that define the insurer's maximum financial exposure
The coverage object in the ACORD data model defines policy limits, deductibles, and conditions that bound the insurer's maximum contractual liability on any given risk.
Which technique do analysts use to normalize an insurer's reported earnings for catastrophe losses when projecting future profitability?
Answer: Replace actual catastrophe losses with long-run expected catastrophe loads
Analysts substitute actual (lumpy) catastrophe losses with a normalized expected catastrophe load based on long-run historical averages or model outputs to smooth earnings projections.
What does the 'float' represent in Warren Buffett's description of insurance company economics, and why is it financially valuable?
Answer: Premium cash held between collection and claim payment that can be invested at the insurer's benefit
The float is the pool of policyholder funds held by the insurer from premium receipt until claims are paid, representing essentially interest-free capital that can generate investment income.
When comparing two insurers' price-to-book (P/B) ratios, a higher P/B for Insurer A most likely reflects:
Answer: Superior expected return on equity relative to its cost of equity
A higher P/B ratio indicates the market expects Insurer A to generate returns on equity that exceed its cost of equity, justifying a premium to book value.