determinants of capital in the canadian property and casualty insurance industry discussant comments...
TRANSCRIPT
Determinants of Capital in the Canadian Property and Casualty
Insurance Industry
Discussant Comments by
Richard D. PhillipsGeorgia State University
Paper Overview
o Stated Purposed: Empirical investigate the demand for capital by Canadian P&C insurers
o Panel Data o Years: 1996 – 2005o 221 companies
o All Canadian P&C insurers? o Eliminate firms with less than 3 years data (sample selection bias?)o 1459 firm-year observations
o Empirical Methodologyo Random effects regression techniqueo Model estimated on
o All firm-year observations, and o Split sample
Hypotheses
o Difference in the level of capital across insurers can be explained by
o Differences in risks underwritten, e.g., o Exposure to earthquakeso Earnings volatilityo Concentration geographically and across product lines
o Economic/financial environment variables, e.g., o CPI and interest rate levelso Volatility of interest rate and Canadian equity markets
Hypotheses (2)
o Difference in the level of capital across insurers can be explained by
o Product market differenceso Premiums in commercial lines vs. personal lines
o Agency costs e.g., o Mutual organizational formo Firm size
o Informational asymmetry/Strategic opportunities, e.g., o M&A transactions indicatorso Commitment to maintain an A+ rating
Summary of Findings
o Financial Distress: Capital levels areo Positively related with exposure to rate regulationo Positively related to lagged ROEo Unrelated to earthquake exposure
o Unrelated to earnings volatility ROE
o Negatively related to geographic and product-market concentration
o Financial/Economic Environment: Capital levels areo Mildly related to level of inflation
Summary of Findings (2)
o Product Market: Capital levels areo Unrelated to % of DPW in commercial lines of insurance
o Agency Costs: Capital levels areo Positively related to firm sizeo Higher for mutual insurers
o Informational Asymmetry/Strategic Opportunities: Capital levels areo Positively related to commitment to maintain an A+
ratingo M&A activity in years t, t+1 and t+2
Overall Comments
o Paper motivation
o Empirical test is misspecified
o There are a number of findings inconsistent with prior literature – why?o Definition of the dependent variableo Differences in definition of some explanatory variables
o Tie to theory needs to be stronger
Micro Comments
o Hypothesis development should be discussed in paper
o Comments on specific hypotheses: e.g., o Financial/Economic environment hypotheseso Exposure to rate regulation reduces investment incentives
o Variable definitions are not clearly defined: e.g., o Commitment to maintain A+ ratingo Earthquake exposure
o Comments on methodologyo M&A activity and capital levels likely jointly determinedo Commitment to maintain A+ rating jointly determined with
capital structure?o Random effects vs. fixed effects
Suggested Readings
o Graham, J., and C. Harvey, 2002, “How Do CFO’s Make Capital Budgeting Decisions,” Journal of Applied Corporate Finance 15(1): 8-23.
o Titman, S., and R. Wessels, 1988, “The Determinants of Capital Structure Choice,” Journal of Finance 43, 1-19.
o Hennessey C., and T. Whited, 2005, “Debt Dynamics,” Journal of Finance 60: 1129-1165.