Chartered Property Casualty Underwriter (CPCU) 540 Practice Exam

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• Which statement best describes the yield to maturity of a bond?
• Why is it important to analyze leverage ratios?
• Which statement is true about preferred stock in liquidation?
• Unrealized capital gains affect a company's financials by being part of economic income and influencing net worth.
• Which system is used to evaluate reinsurer creditworthiness in the example?
• In corporate defense against a hostile takeover, which strategy involves granting a potential acquirer the right to purchase a block of the target company's stock at a favorable price to discourage the bid?
• A downward market fluctuation in an insurer’s equity investments is recognized in which income measure under fair value accounting?
• APD Insurance impairment of assets due to a class action settlement would be reflected where in the financial statements?
• Ceding commissions paid by the reinsurer to cover acquisition expenses help manage capital by providing what?
• Which asset exposes an organization to the greatest liquidity risk?
• Which investment would typically be most sensitive to changes in interest rates?
• An advantage of the auction market structure in the primary market is that it...
• A shark repellent tactic, such as staggering board terms, is an example of which corporate strategy?
• On an insurer's balance sheet, unearned premium is classified as which?
• A bond with a face value of $1,000 has had a 3% rate of return over the last year. If there had been a $10 capital gain over this period, what is the bond's coupon rate?
• Value at risk is a measure used to estimate the probability that losses exceed a threshold over what time horizon?
• Which category of fintech startups includes web-enabled platforms that facilitate nonequity and nondebt financing?
• In the context of mergers and acquisitions, which label applies to tactics used to prevent hostile takeovers?
• The use of telematics devices has greatly influenced ratemaking and risk management for which line of insurance?
• Which principle allows ignoring GAAP for insignificant items?
• Manufacturing Company has a large number of ten-year $1,000 face value bonds on the market with a 7% coupon paid annually and an 8% YTM. Which of the following would be the current price of an individual $1,000 bond?
• Which is the correct formula for asset turnover?
• Which statement about loss portfolio transfers is true?
• Staggering the terms of company board members is an example of what?
• ABC Company has current assets of 3 million and current liabilities of 1 million. What is ABC's current ratio (rounded to the nearest hundredth)?
• Which describes a section of the statement of cash flows?
• Which statement best describes what the Combined Ratio measures?
• Catastrophe bonds are issued to transfer risk to investors and provide which feature to the primary insurer?
• Which describes what the option premium compensates the seller for?
• Economic capital is defined as
• Where did NOP Corporation first report the amendments to two derivative contracts on April 30?
• What best explains the difference between dividends paid to shareholders and those paid to policyholders?
• Earned premium on the NAIC Annual Statement is calculated as
• The NAIC ORSA does all of the following, EXCEPT:
• In bond portfolio management, the most important objective is to construct a portfolio such that the amount and timing of investment cash inflows matches the firm's expected cash outflows.
• Ceding commissions paid by the reinsurer to cover acquisition expenses help manage capital by providing what?
• What is the sum of the standalone values for BenShield and Matco before the acquisition?
• With total assets of 5 million and total liabilities of 3 million, what is the insurer's equity?
• The differing profit margins reported by two analysts illustrate the importance of what concept?
• In A.M. Best's financial strength ratings, what does the modifier 'r' indicate?
• For underwriting purposes, which financial statement does the underwriter primarily rely on to determine a retailer's financial position as of the balance sheet date?
• The capital market is significant because it generally determines the cost of long-term financing. Which of the following statements is most accurate regarding the capital market's role?
• For a company with excess cash due to slowed growth, what is the best use of this cash to maximize future shareholder value?
• Capital gains and losses can influence an insurer's decision to pay stockholders dividends mainly because of what?
• Which document must publicly traded companies file annually with the SEC?
• Which of the following is a long-term liability?
• How does A.M. Best describe its evaluation of balance sheet strength?
• Which statement about forward contracts is typically true?
• Which asset class is most likely to contribute to liquidity risk in a portfolio due to its long time to sale?
• Under SAP, how is a bond valued on an insurer's balance sheet?
• Which statement is true regarding the cost of financial distress?
• Which information is included in Schedule F of the NAIC Annual Statement?
• In the acquisition scenario, the implied synergy value is calculated as combined value minus sum of standalone values.
• What is a significant limitation of financial ratio analysis?
• Which of the following is NOT one of the four primary financial statements?
• A portfolio that cannot be sold quickly and consists primarily of commercial real estate is highly exposed to which risk?
• Why might a buyer pay more for a target than the market value of its recorded assets?
• Beta is defined as which of the following?
• To determine an insurer's liquidity, which items are compared?
• Which statement describes capital structure?
• Which key rating factor considers the insurer's management ability and diversification of its business mix?
• Which statement best describes diversification effect?
• Which of the following best describes 'Other income' for an insurer?
• In real estate valuation, the cap rate is defined as the ratio of net operating income to property value, effectively:
• Comprehensive income includes net income and which other item?
• To express investment risk in the same units as returns, variance is converted by taking the square root. This yields which measure?
• If the end-of-year unearned premium reserve increases, what is the effect on earned premium, all else equal?
• Which justification best explains why companies pursue acquisitions?
• If a rating agency downgrades a bond from AA to BBB, the yield would...
• Which statement correctly defines net profit margin?
• Which instrument is typically used by corporations to raise capital in the form of ownership?
• Which statement best describes risk-averse behavior?
• An investor bought 100 shares at $52 per share. During the year, they received dividends of $0.10 per share. At year end, price is $56 per share. What is the annual rate of return?
• Which of the following is not typically a financial intermediary?
• A stock purchased for $100 with a year-end price of $110 and a $2 per-share dividend yields what total return?
• On an insurer's balance sheet, incurred but not reported (IBNR) losses are classified as what?
• When premiums earned during any accounting period are less than incurred losses plus underwriting expenses there will be an
• One year ago, Stan borrowed 10,000 from Susan and agreed to pay the entire amount today. He offers to pay 5,000 now and 5,500 in one year. If Susan's required rate of return is eight percent, the total value today of these two payments is:
• The value of BenShield Insurance is $540 million dollars. They are acquiring The Matco Company, valued at $180 million. The two companies combined are valued at $810 million. If BenShield pays $216 million in cash to the Matco owners, the BenShield shareholders gain
• What does public float represent?
• What is the primary purpose of Form 10-K?
• Return on equity is calculated by dividing net income by which metric?
• Economic capital is the amount of capital required to maintain solvency at a given risk tolerance level.
• Which inherent exposure for financial institutions has only a down side?
• A financial manager invests in a five-year ordinary annuity with annual payments of 450 at 4% interest. The present value is closest to:
• A jumbo CD pays 250,000 in one year. It is priced so the investor earns 3% over the year. What is the price today?
• Upon a downgrade from AA to BBB, the bond's yield tends to
• What is the rate of return on an investment of 10,000 that will be worth 11,576 in three years?
• Under SAP, unrealized capital gains are included in which component?
• An analyst performing vertical analysis notes a decline in gross profit margin. Which scenario would explain this?
• What term describes a corporation's mix of long-term debt and equity?
• Morgan calculated two ratios over the last five years, where underwriting expenses as a percentage of direct premiums written declined while direct premiums written per underwriter increased. What type of analysis is this?
• Which statement best describes Form 10-K?
• After a corporate acquisition, a tax advantage can occur because the amount of allowable depreciation increases reducing the income that the combined company must pay taxes on. For an acquisition with no net operating loss carryover, which one of the following best explains why there is an increase in the depreciation amount?
• McBrothers and Sons, Inc. earned premium of $4,523,584,371, and incurred losses and LAE of $4,568,662,935, underwriting expenses of $916,828,986, and written premiums of $4,615,768,451. Which statement is true?
• If a bond's price rises because of increased demand, its yield to maturity generally:
• Which option best describes how insurers generate leverage given limited traditional debt?
• Which statement about convertible preferred stock is correct?
• Which statement concerning insurer financial relationships is true?
• Which statement about preferred stock is true?
• Which item is included in current assets?
• Which factor explains why buyers sometimes pay above market value for a target?
• Which item is NOT used to determine an insurer's capacity?
• Regarding vertical analysis based on common-size statements, which statement is true?
• The annual coupon payment of a bond with a 7% coupon rate and a par value of $1,000 is:
• Which statement best describes the weak-form efficient market hypothesis?
• Which statement about catastrophe bonds is true?
• When property-casualty insurers act as financial intermediaries, which is the policyholder's typical role?
• If an investment of 60,000 earns 12% compounded quarterly for five years, the amount at maturity is closest to?
• To raise capital, corporations generally do which of the following?
• Activity within the financial markets is important to corporations. The capital market is significant because it generally determines the cost of long-term financing. Which statement best describes this relationship?
• What is the indicated value of the combined firm after the acquisition in the given example?
• William wants to sell his historic bed and breakfast property. The inn's net operating income has been approximately 50,000 for the past five years. A potential buyer's cap rate is 8%. What is the present value of the property?
• Which financial statement shows revenues and expenses over a period?
• Which measure represents the owners' residual interest after liabilities are deducted?
• In equity market analysis, which factor is not included in financial statements but influences prices?
• If an insurer purchases a U.S. Treasury bond at a discount from its face value, next year's financial statements will indicate that the effective coupon payment is higher than the actual coupon payment received.
• Which statement describes a balance sheet's timing characteristic?
• Which statement about various schedules to the NAIC Annual Statement is true?
• ABC owns 10,000 shares of Coke stock. Each share paid a dividend of $1.60 during the year, but the share price declined from $53.80 to $51.80 during the year. What is ABC's percentage total return for this year?
• In the scenario with Van Financial, which dividend policy action is most likely?
• Which of the following is an example of an efficiency ratio?
• The risk-based capital system determines the minimum amount of capital an insurer needs to support its operations. In addition to an objective test of an insurer's solvency it
• How is the value of an insurer's reputation typically reflected on its balance sheet?
• Which statement describes the current ratio?
• Which statement about bond duration is correct?
• As a component of insurer income, other income consists of revenues and expenses that are not related to income from either underwriting or investment activities.
• An insurer's capacity is primarily determined by comparing its capital to its what?
• The present value factor for a five-year ordinary annuity at 4% interest is approximately:
• Which factor complicates an insurer's decision to pay stockholder dividends?
• The term for forming a new company from part of an existing company is
• Cash flows for a new project include an initial expenditure of 2,500,000 on January 1 and cash inflows on January 1 of the following 10 years of 475,000 each year. If the appropriate rate of return for this project is 12.5%, what is the net present value of this project?
• How much cash did BenShield pay for Matco in the example?
• The ABC Company has net written premiums in the amount of $4,123,892,369 and a policyholders' surplus of $2,836,586,123. LMN Inc. has net written premiums in the amount of $9,852,239,444 and a policyholders' surplus of $3,552,453,811. Looking at these two insurers,
• What term describes the premium paid for control or strategic value beyond tangible assets?
• What is the overriding business reason for pursuing acquisitions?
• The return on equity (ROE) is a common measure used to evaluate what aspect of an insurer’s investors’ return?
• Which action aligns with technical analysis for evaluating how a portfolio may respond to anticipated changes in interest rates?
• Which statement best describes policyholder dividends?
• Which statement about Treasury Inflation-Protected Securities is true?
• What is the primary role of PHS?
• An underwriter finds a current ratio of 1.2. Which adjustment should be made to reflect short-term obligations?
• The common stock of QRS Corp is currently selling for $99. It just paid an annual dividend of $5, and the dividend has been growing at a constant rate of 4%. Using the dividend growth model, what is the cost of equity for QRS's stock?
• The DuPont identity breaks ROA into which two components?
• Impairment losses on financial assets primarily reduce which financial statement line item?
• Which type of insurance is most affected by telematics-based risk management and ratemaking?
• IIA insurance Company reserves average duration six years. With $100 million in reserves, cost of these reserves in the same manner as the cost of debt. The yield to the six-year duration of the reserves is 6 percent and IIA has a marginal tax rate of 40 percent. Which one of the following is the after-tax rate of these reserves?
• Which of the following is a commonly cited reason a buyer may value a target beyond its recorded assets?
• From the data: total assets of 5 million and total liabilities of 3 million. What is the debt ratio?
• Which investment would be most exposed to interest rate risk?
• For the purposes of an insurer's income statement, incurred losses are
• Where would you find information on Tylo Industries' long-term debt nearing maturity in its financial statements?
• Which statement about underwriting loss and period metrics is correct?
• Which asset class is most associated with high liquidity risk due to difficulty in quick sale?
• All of a firm's risks are considered together to estimate the probability that the market value of liabilities will exceed assets by various amounts over a one-year period. This probability measure is called
• Given ABC's portfolio is expected to return 14% this year with a risk-free rate of 5% and a market return of 15%, what is the portfolio's beta?
• How can a tax reduction affect cash flow in this context?
• For a primary insurer, one main benefit of purchasing an excess of loss reinsurance treaty is that it can
• If an insurer reduces its loss reserves in the year of adjustment, what is the effect on net income and policyholders' surplus?
• With sales of 8 million, gross profit of 5 million, and net income of 2 million, what is the net profit margin?
• Insurers report the value of publicly traded shares using which accounting method?
• An insurer's adjuster reviewing a fire loss claim would primarily use the store's most recent financial statements to estimate which item?
• Which statement is correct regarding A.M. Best's review of an insurer's balance sheet strength?
• The risk that customers will fail to make promised payments as they come due is
• For an acquisition to make economic sense, which of the following must occur?
• If NOI remains 50,000 and cap rate increases from 8% to 9%, the property's value would:
• If the price paid for a target surpasses its standalone value by more than the anticipated economic gain, what is the likely consequence?
• Which of the following is most likely to involve short-tail losses?
• Which of the following is considered long-term debt?
• Which risk management technique used to avoid credit risk has been known to lead to systemic risk?
• Capital markets primarily trade in which type of securities?
• Market value surplus (MVS) of an insurer =
• Which of the following is a primary measure used to assess insurer liquidity?
• Bedrock Insurance Company has assets of $600 million, liabilities of $500 million, and net income of $5 million. What is ROE?
• How can an insurer generate insurance leverage when it has limited traditional debt or fixed assets?
• Which activity has been associated with creating systemic risk in financial markets?
• Which ratio excludes inventory when assessing liquidity?
• If a bond's yield to maturity exceeds its coupon rate, how does the bond trade relative to par?
• Which condition is required for an acquisition to be economically meaningful?
• Beta of a portfolio consisting entirely of U.S. Treasury securities is which of the following?
• Fair value accounting uses the term market value surplus for an organization's net worth. Which one of the following is the term used for an insurer's net worth under SAP
• What is meant by 'franchise value' in the context of acquisitions?
• Which of the following is a current asset example?
• Direct premiums written per underwriter measures what?
• How does accounting for pension contributions for nonvested employees differ between SAP and GAAP?
• Which statement best describes 'franchise value' in acquisitions?
• Which metric measures profitability as a percentage of sales?
• Technical analysis relies primarily on which type of data to forecast price movements?
• If the next year's dividend D1 equals D0 times (1 plus growth g), which of the following expresses D1 given D0 and g?
• What does the balance sheet primarily represent?
• The NAIC's threshold for an acceptable change in net premiums written ratio is what percent?
• Which of the following is NOT an external factor that can affect an insurer's underwriting profit?
• A shark repellent is an example of what?
• Which is a reason underwriting operations do not have to generate an underwriting profit to provide insurance leverage?
• The liquidity ratio for Beacon Insurance is 1.1. Regulators may be concerned because
• If a company has total assets of $700 million, liabilities of $500 million, and net income of $14 million, what is ROE?
• Sun Company's investment scenario: They placed 60,000 in an investment at 12% compounded quarterly for five years. At maturity, with a computer replacement cost of 100,000, how much additional money will be needed?
• When a portfolio is properly diversified, the insurer can expect which outcome?
• The way in which the change of ownership and control is accomplished depends on
• If a company's asset turnover is computed as sales divided by total assets, and the value is 0.25, what is the asset turnover?
• Which statement about insurance leverage is true?
• An investor buys a stock at $50, receives $1 dividend, and ends the year at $60. What is the annual rate of return?
• Leverage ratios measure which of the following?
• The creation of a new company from part of an existing company is known as a
• When reviewing a rating unit's operating performance, which ratio indicates whether an insurer has made an underwriting loss or gain?
• What is the primary reason a corporation adopts a code of ethics?
• Which term best describes a contract obligating one party to buy and another to sell a specific financial instrument or physical commodity at a specified future date and price?
• Premium balances due from agents under SAP are accounted on insurer's financial statements as what until the premium is remitted?