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Analysis of The Insurance Industry Focusing Upon The Trends of Demutualization

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Analysis of The Insurance Industry Focusing Upon The Trends of Demutualization Research Conducted by David Germana Motivation for Research I work in the financial ... – PowerPoint PPT presentation

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Title: Analysis of The Insurance Industry Focusing Upon The Trends of Demutualization


1
Analysis of The Insurance Industry Focusing Upon
The Trends of Demutualization
Research Conducted by David Germana
2
Motivation for Research
  • I work in the financial services industry
    wanted to know why this has happened?
  • If the reasons for demutalization are centered
    upon the need for capital.
  • How customers or policy owners of mutual
    companies are impacted when demutualization
    occurs.
  • Is it likely that there will be further
    demutualization in the near future?

3
Review of Literature
  • Barbara Remmers, 2003
  • Life Insurer Demutualization in The Current Era
  • Finding
  • Research focuses upon the capital issues as they
    relate to the decision to demutualize.
  • The main question she attempts to answer is
    whether this access to capital is driving the
    recent trend of demutualization.

4
Remmers Continued
  • The results of her study show that most of the
    companies that undergo demutilization are already
    financially sound.
  • She rejected the phenomenon that firms tend to
    demutalize because of their need for capital.

5
Carson et al, 1997
  • Changes in Mutual Life Insurance Ownership Form
  • They presented industry statistics that help
    develop an understanding of where the insurance
    industry currently stands.
  • Mutual companies controlled approximately
    one-third of the 2.5 trillion dollars in assets.

6
Carson et al, 1997(continued)
  • Mutual companies also hold one-third of the 195
    million individual policies.
  • As of 1997 90 companies out of 1500 were mutual
    insurance companies.
  • Carson created testable hypotheses
  • 1 The relationship of demutualization is related
    to the level of surplus.
  • 2 The relationship of demutualization is related
    to the level of free cash flow.

7
Carson et al, 1997(continued)
  • Surplus is defined as the difference between
    assets and liabilities and this represents a
    margin of safety for life insurers.
  • Free cash flow is defined as the residual that
    exists after a company has invested in all
    beneficial projects.

8
Carson et al, 1997(continued)
  • A higher level of cash flow suggests a lower
    likelihood of using demutualization as a means to
    gain capital.
  • A strong relationship was found to exist between
    companies that had a high level of surplus and/or
    high levels of free cash flow and the trend to
    demutualize.
  • An interesting fact was discovered in their
    research that
  • 1 Policyholders were not completely informed of
    the implications of the demutualization.
  • 2 They were not fairly compensated for their
    ownership in the mutual company.

9
Sample Design
  • The data for the two regressions was collected
    from two primary sources.
  • The 2003 National Underwriter for Life Health
    Insurance.
  • The 2003 report for Life Insurance Companies,
    Statutory Annual Statements.

10
Variables
  • The chosen variables are asset growth, surplus,
    ROE (Return on Equity), ROA (Return on Assets),
    operating gain, net capital gain, mutual or
    stock, other financial changes, as it is related
    to the structural, and profitability the company.
  • Asset growth (regression 2) and surplus
    (regression 1) are each used as a dependant
    variable.
  • Within the computation of the data the (LOG) of
    all financial numbers were taken in order to
    improve the validity of the regressions.

11
Firms in Study
12
Regression 1
13
Results Regression 1
  • Approximately 55.6 of the variation in the
    independent variable is explained by the
    variation in the dependant variable.
  • Using an arbitrary rule for statistical analysis
    a basic t-critical value of 2.00 is used for the
    rejection criterion.
  • The operating gain variable in table 2 has a
    large t-statistic and its value is greater than
    the t-critical value (6.36 gt 2).
  • There is sufficient evidence to reject the claim
    that there is no difference between surplus and
    operating gain, therefore reject the claim Ho.
  • The coefficient for stock/mutual is very small
    resulting (.06) in minimal implications in the
    study for this variable.

14
Regression 2
15
Results Regression 2
  • Approximately 23.5 of the variation in the
    independent variable is explained by the
    variation in the dependant variable.
  • The 1-year growth variable in table 2 has a large
    t-statistic and its value is greater than the
    t-critical value (2.99 gt 2).
  • There is sufficient evidence to reject the claim
    that there is no difference between surplus and
    1-year growth, therefore reject the claim Ho.
  • The absolute value of the t-statistic for the
    return on assets (ROA) variable in table 2 is
    larger than the t-critical value (2.32 gt 2)
    reject the claim that the ROA does not affect
    surplus.

16
Conclusion
  • The findings of this study exhibit no correlation
    between a firms surplus/assets and their
    ambitions to demutualize. This effort is
    illustrated by research and analyses of multiple
    regressions.
  • This research supports the efforts of Remmers and
    Carson who both concluded that many of the
    companies demutualizing already have sufficient
    reserves of cash and the companies do not need
    access to cash for growth.
  • The most financially sound insurance companies
    ranked by assets do not differ in regards to
    whether they are a stock or mutual company.
  • Also there is no major significance between the
    financial strength of mutual versus stock
    insurance companies
  • The final results of my research and
    concluding efforts of the paper will be complete
    by Thursday the 17th of June.

17
Questions?
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