CPCU 540 Practice Exam 2

1. With respect to capital structure management, which one of the following represents a major question a financial manager needs to answer?

2. Cost of goods sold is reported as:

3. Which one of the following represents a liquidity ratio that measures an organization’s ability to meet its current financial obligations?

4. RealGood Insurance (RI) is domiciled in the state of Oklahoma. They are entering into a reinsurance arrangement with Awesome Reinsurers (AR). AR is not licensed in the state of Oklahoma. Under statutory accounting principles, RI would be required to create a liability for reinsurance recoverables on its balance sheet, unless:

5. Super Insurance Company had the following financial data:
• Written Premium - $12,000,000
• Losses - $4,000,000
• Underwriting Expenses - $1,200,000
• Net Income - $1,500,000
• Policyholders’ Surplus - $18,000,000
• Cash - $3,500,000
• Marketable Securities - $12,000,000
• Liabilities - $8,500,000
What is their return on policyholder surplus?

6. Joe’s daughter plans to enroll in college in six years. At the time of her enrollment, tuition costs are expected to be $15,000 per year. Assuming Joe can earn 7% compounded semi-annually on his investments, how much must he invest today to fund his daughter’s first year tuition in six years?

7. A specialty insurer has been the only insurer offering liability insurance in West Texas over the last few years. Another insurer has decided to start offering liability insurance in West Texas beginning next month. Which one of the following risks is the specialty insurer exposed to in this situation?

8. A credit card company sold its receivables to David for cash. The interest and principal repayments on the credit cards will be passed directly to David after passing through the credit card company. David has purchased a(n):

9. Which one of the stocks listed below is the least risky investment based on the coefficient of variation?

	Standard Deviation	Average Return
Stock 1	15.5%	7.9%
Stock 2	17.8%	11.1%
Stock 3	19.5%	9.6%
Stock 4	22.2%	12.7%

10. Which one of the following statements is correct regarding an insurer’s use of external methods to meet capital needs?

11. Under the risk-based capital (RBC) measure, three categories of risk are considered. Which one of the following risks would be categorized as underwriting risk?

12. In the United States, which entity is recognized by the Securities and Exchange Commission (SEC) as the private-sector authority charged with establishing and maintaining accounting standards?

13. The SEC requires publicly traded companies to file a quarterly report for each of the first three quarters of the fiscal year. This report includes unaudited financial statements and a list of material events that have occurred with the company during the prior three months. This report filed is called the:

14. Perfect Insurance Company financials reflect the following amounts for the year:
• Premiums earned - $10,000,000
• Losses incurred - $6,000,000
• Loss adjustment expenses incurred - $1,000,000
• Other underwriting expenses - $2,500,000
• Federal income tax - $300,000
Under statutory accounting, Perfect has a net underwriting gain of:

15. Storage services contractually provided from remote locations through the internet or another network without a direct server connection is referred to as:

16. David purchased CoolCo stock for $50 per share. He received a dividend of $2 per share, then sold the stock for $45. What was David’s rate of return on his investment?

17. Cash matching provides a means of eliminating interest rate risk. Cash matching can be implemented by an insurer by:

18. Which one of the following is a type of unsecured debt security issued by insurers that exhibits the characteristics of both equity and debt?

19. Assume the following for ABC Insurance Company:
• Total assets according to statutory accounting: $460,000,000
• Fair value of assets: $490,000,000
• Present value of liabilities: $300,000,000
• Market value margin: $15,000,000
What is ABC’s market value surplus (MVS)?

20. Although GAAP and International Financial Reporting Standards (IFRS) have many similarities, one difference is in the reporting of property, plant, and equipment. Property, plant, and equipment is reported using:

21. On GAAP financial statements for an insurer, incurred but not reported losses are reflected as part of:

22. Instead of paying a dividend, ABC Company is considering the purchase of an ownership interest in XYZ Company. Which one of the following represents a justification for this alternative?

23. Which one of the following ratios measures the extent to which an insurer can meet its obligations as they come due?

24. The profitability of a company is calculated on which one of the following financial statements?

25. In which of the following situations would a company be required to file Form 8-K with the SEC?

26. Which one of the following investments would be best to match an insurer’s investment portfolio maturity to the insurance company’s expected loss payments?

27. Janice is interested in purchasing preferred stock to add to her investment portfolio. She has identified a preferred stock that pays a $2.50 annual dividend per share. If Janice has an 8% required rate of return on her investment, what would she be willing to pay to purchase one share of the preferred stock?

28. XYZ Company has the following:

• Cash – $300,000
• Marketable Securities – $200,000
• Accounts Receivable – $100,000
• Inventory – $800,000
• Long-term Investments – $2,000,000
• Current Liabilities – $750,000

What is the quick ratio for XYZ Company?

29. An insurance company has historically sold property and casualty insurance but will begin selling liability insurance. How will the sale of liability insurance affect the company’s leverage?

30. ABC Company has the following income and expenses:

• Sales - $400,000
• Cost of Goods Sold – $300,000
• Operating Expenses – $50,000
• Investment Income – $15,000
• Investment Expenses – $12,000
• Income Taxes – $18,000

What is the gross profit for ABC Company?

31. An investor sold his entire portfolio of individual stocks and used the sales proceeds to purchase index funds. Based on this investment strategy, the investor believes in:

32. Which one of the following ratios is considered an efficiency ratio?

33. Which of the following represents the ratio of a company’s dividends to the company’s earnings?

34. Which one of the following statements is correct regarding municipal bonds?

35. A main goal of corporate finance is maximizing shareholder wealth. Which one of the following best describes this goal?

36. A.M. Best’s Financial Strength Rating (FSR) begins with a detailed review of several key rating factors. Which one of the following represents a key rating factor?

37. Sitwell Industries has the following information:

• Sales – $30,000
• Cost of Goods Sold – $22,000
• Selling, General, and Administrative Expenses – $6,000
• Income Taxes – $1,000

What is the net profit margin percentage for Sitwell Industries?

38. Which one of the following would result in the highest effective rate?

39. A company issued stock as follows:
• 1,000 shares issued.
• $10 per share issue price.
• $1 per share par value.
What is the amount of Additional Paid-in Capital that will be reported on their balance sheet?

40. Which one of the following types of risk best describes the risk of holding an individual security?

41. An insurer experiences an increase in their loss reserves during the year. What impact will this have to the insurer?

42. A company will issue $2,000,000 of bonds, paying a 7% coupon rate. The issue of these bonds will decrease the cost of capital due to the:

43. Which one of the following statements is correct regarding the comparison of corporate bonds and Treasury bonds?

44. Where would a premium that is 90 days late in being paid by the insured be reflected on an insurance company’s statutory financial statements?

45. The Risk-Based Capital System was developed by the National Association of Insurance Commissioners (NAIC) for what purpose?

46. Which one of the following statements is correct regarding financial intermediaries?

47. Which one of the following represents a reason why the National Association of Insurance Commissioners (NAIC) requires insurers to produce an Own Risk and Solvency Assessment (ORSA)?

48. Which one of the following items may not be fairly represented on a company’s balance sheet due to the cost principle of accounting?

49. Asset classes are organized into two broad categories on the balance sheet of the National Association of Insurance Commissioners (NAIC) Annual Statement. These are:

50. Which one of the following best describes the difference between financial statements prepared under generally accepted accounting principles (GAAP) and those prepared using international financial reporting standards (IFRS)?