Credit Capital Dynamics Between 2005 And 2009

Finding the perfect capital structure in terms of risk and reward can ensure a company meets shareholder expectations and protects a firm in times of recession. Capital structure refers to how a business puts its money to “work”. The two forms of capital structure are equity capital and debt capital. Both have their benefits and limitations. Striking that perfect balance between the two can mean the difference between thriving versus trying to survive.

The insurance industry’s performance is highly correlated with the state of the economy and specifically GDP growth. From the data outlined in this report, it is evident that the insurance industry flourishes alongside the economy where factors such as output, unemployment, and other variables are growing as well. Since the 2008 crisis, the Canadian economy has recovered quite well. One of the key concerns going forward is the current exchange rate of the Canadian dollar. Going forward, as the economy goes into a boom it will be crucial for the insurance industry to reach its potential.

Effective February 7, 2013, SeaBright Insurance Company (“Seabright”), a Seattle-based insurance company specializing in workers compensation, entered into run-off. In 2012, Enstar Group Limited (“Enstar”), a run-off specialist, purchased SeaBright. SeaBright continues to manage existing claims but no longer writes new or renewal business, which means that premium activity has slowed down. In 2015, a major change occurred when all of SeaBright’s net liabilities (i.e. loss reserves associated with its prior workers comp business) were shifted to an Enstar affiliate, Clarendon National Insurance Company, through a reinsurance agreement. Circumstances that led the company to run-off: SeaBright was placed into run-off driven by weakened underwriting performance associated with reserve strengthening actions for accident years 2007 through 2009, primarily related to increasing medical cost trends. Additionally, SeaBright was facing marketplace challenges associated with its geographic and coverage lines expansion. Seabright has had to deal with significant pressure from its workers comp book developing adversely year-over-year and having to liquidate investments to satisfy claims and expenses. The reinsurance contract with Clarendon did provide major relief but SeaBright still remains a going concern and without premiums coming in and asset base rapidly shrinking, its solvency status as an insurance company remains questionable. The key now is to track the level of credit risk

Various attempts have been made by Equitable Life to avoid insolvency, primarily at the expense of policyholders, but it was too late. The liability, worth £1.5 billion at the time it froze the value of all current with-profit policies, was going to swell even more if interest rate were to fall further, and nothing could possibly stop this from happening. There is still a lot of debate about the adequacy of regulation, and possible measures the Financial Services Authority (FSA) should have imposed on Equitable Life and other life insurers when it formally took over responsibility for the regulation of insurance in January 1999. There are also many fingers pointed at regulators who did not express any concern over the liabilities of Equitable Life in the early 1990s, when there was possibly still enough time to reverse the misfortune. One thing for sure: by failing to properly hedge its liabilities, Equitable robbed its policyholders of their peaceful retirement, and mistakes of such an enormous scale should never happen again. On 2/12/00, The Times published a

Insurance is an arrangement by which a company gives customers financial protection against loss or harm such as theft and illness in return for premium payments. One of the most important ways that external economic factors are affecting insurance industries is by experiencing a slow pattern in the economy. Insurance companies are affected by lower sales and lower rates of returns on their investments. Companies have to sell certain products for which they have the commitment and the

However, two known authors in this field of study believe that companies with low business risk obtains factors of production at a lower cost which may also pave to the ability of the firm to operate more efficiently (Amit & Wernerfet, 1990). Therefore, many stockholders faced a high of uncertainty; this is because some companies do not have the financial strengths to cover its debts that even may result to bankruptcy.

The insurance industry has long been applying game theory to evaluate whether or not individuals are insurable and determine how much premium to charge them based on their apparent needs. This interaction between the consumer and the insurance company can be characterized as a game because not only are they playing against one another but each party is waging on an outcome more beneficial to them. In a traditional life insurance, there are many variables to consider when utilizing game theory to form a strategy as there are investment components along with complex riders. Thus, in order to keep the game relatively simple, this paper will assume the insurance being considered is term life and use game

There have been a number of proposed and upcoming changes to GAAP and solvency reporting standards in the US, Canada and Europe in recent years. In particular, significant efforts have been made to increase convergence between US GAAP and IFRS. The following report discusses the pros and cons of convergence between standards in different jurisdictions, as well as convergence between GAAP and solvency standards, in relation to insurance contracts. Here, the term ‘GAAP’ refers to financial reporting for investors, shareholders and creditors. Solvency standards refer to the regulatory requirements imposed on insurers. The jurisdictions discussed have been limited to those in which The Greatest Life Insurance Company operates in: namely, the US, Canada and Europe.

A capital structure policy aims to balance the trade-off between the benefits of debt financing (interest tax shield) and the costs of debt financing (financial distress and agency costs). Every firm should set its target capital structure such that its cost and benefits of leverage ultimately maximise the firm’s value. Graham and Harvey asked 392 firms’ chief financial officers whether they use target debt ratios. Results show that the majority of them do, although the level of strictness of the target policy varies across different companies. Only 19% of the firms avoid target ratios, of which most are likely to be the relatively smaller firms. This clearly

The literature review discusses the various literatures that derived the study of capital structure of firms and its impact on profitability and financial performance. In this chapter, we discussed the literature on capital structure first considering definitions and theories of capital structure and then empirical literature. It follows the conceptual framework, incorporate scholarly works and theories. The rationale of the study is to ascertain the role capital structure played in determining profitability. The literature under review obtained from journal articles, websites and text books.

In this paper I will discuss and summarize three articles, “Human Capital, Asset Allocation, and Life Insurance” by Peng Chen, Roger G. Ibbotson, Moshe A. Milevsky, and Kevin X. Zhu, “Asset Allocation in a Crisis” by Brian Jacobsen, and “The Pool and the Stream” written by Susan Trammell.

In this paper I will discuss and summarize three articles, “Human Capital, Asset Allocation, and Life Insurance” by Peng Chen, Roger G. Ibbotson, Moshe A. Milevsky, and Kevin X. Zhu, “Asset Allocation in a Crisis” by Brian Jacobsen, and “The Pool and the Stream” written by Susan Trammell.

From this set of problems, we can see that leverage is good for the firm. Leverage has increased the value of the firm as a whole and increased the price per share. Although the cost of debt increases the firm's risk because it increases the probability of default and bankruptcy, therefore shareholders will require higher rates of return on the equity they provide, debt also provides tax savings. And we can see that in table 4, where we calculated the total value of the firm as the pure business cash flows plus the tax savings. Another reason why debt increases firm value is the fact that it reduces WACC, because the cost of debt is generally lower than the cost of equity. Another option that shareholders can do is using homemade leverage. Shareholders should pay a premium for the shares of a levered firm when the addition of debt increases value.

This study will further lead to the dynamics of KSE listed firms. Investor trends towards highly leveraged firms and determination whether the optimum capital structure effects the decision of investor resulting change in the balance sheet of a company.

In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm 's capital structure is then the composition or 'structure ' of its liabilities. Simply, capital structure refers to the mix of debt and equity used by a firm in financing its assets. The capital structure decision is one of the most important decisions made by financial management. The capital structure decision is at the center of many other decisions in the area of corporate finance. These include dividend policy, project financing, issue of long term securities, financing of mergers, buyouts and so on. One of the many objectives of