Title page for ETD etd-03122010-155605

Document Type Master's Dissertation
Author Lekola, Kgomotso
URN etd-03122010-155605
Document Title Debt as a value creation tool in the short-term insurance industry
Degree MBA
Department Gordon Institute of Business Science
Advisor Name Title
Mr M MacKinsey Supervisor
  • insurance policies
Date 2009-11-13
Availability unrestricted

The role of debt in the capital structure of companies as a value driver (Modigliani and Miller, 1963; Jensen and Meckling, 1976; Ross, 1977) as well as in increasing the strategic agility of companies as can be concluded from O'Brien (2003), Kochhart and Hitt (1998), Barton and Gordon (1987) and Sandberg, Lewellen, and Stanley (1987), in general, is contentious given the potential risk of financial distress introduced by it. This study aims to assess whether the introduction of debt, and increase in financial leverage would have any impact on the firm value of short-term insurance companies given the nature of the business.

Tobinís Q (Staking and Babel, 1995), the ratio of the market value of a company to the liquidation value of the companyís assets is developed and used as a key proxy for the franchise value of an insurance company (O'Brien, 2003; DaDalt, Donaldson, and Garner, 2003; Keeley, 1990). Multiple regression analyses is then performed on a sample of listed short-term insurers over an 11 year period to assess the relationship between their financial leverage, franchise value and other key ratios used to determine the value of insurance companies (ROE and underwriting return), with risk being implicit in the franchise value variable.

The results show no causal relationship between financial leverage and franchise value or risk which would have been represented by a declining Q. Insurance leverage however is found to be a good predictor of Q. The implication is that short-term insurance companies could borrow money without destroying much value in the short run. The companies could use the borrowed money to fund strategic projects that could add value in the long run.

Copyright © 2008, University of Pretoria. All rights reserved. The copyright in this work vests in the University of Pretoria. No part of this work may be reproduced or transmitted in any form or by any means, without the prior written permission of the University of Pretoria

Please cite as follows:

Lekola, KDC 2008, Debt as a value creation tool in the short-term insurance industry, MBA dissertation, University of Pretoria, Pretoria, viewed yymmdd < http://upetd.up.ac.za/thesis/available/etd-03122010-155605/ >

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