Optimal Capital Structure for a Property-Liability Insurer

Stephen P D'Arcy () and Teresa Lwin ()
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Stephen P D'Arcy: Mihaylo College of Business and Economics, California State University Fullerton, 800 North State College Blvd, SGMH-5113, Fullerton, CA 92834-6848, U.S.A.
Teresa Lwin: Department of Finance, University of Chicago Booth School of Business, 5807 South Woodlawn Avenue, Chicago, IL 60637, U.S.A.

The Geneva Papers on Risk and Insurance - Issues and Practice, 2012, vol. 37, issue 3, 509-538

Abstract: Traditional finance studies have found that firm value is maximised at a mid-range level of leverage. This paper empirically tests the effect of leverage on firm value for property-liability insurers. We analysed an international data set of 96 insurers from 1992 to 2006 using two measures for firm value (price-to-earnings and market-to-book) and three measures of leverage (liabilities-to-equity, premiums-to-equity and surplus duration). We found that price-to-earnings at first increases with leverage, as measured by liabilities-to-equity and premiums-to-equity, but decreases past a certain point. Market-to-book exhibited a similar pattern for the premium-to-equity ratio but had a positive relationship with liabilities-to-equity and a negative relationship with surplus duration.

Date: 2012
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