Methodology chapter analysing the performance of insurance companies

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Contents

Chapter 4 Data and Methodology

4.0 Introduction

4.1 Data

4.1.1 Data Collection and Types of Data

4.1.2 Data sources

4.1.3 Sample Size

4.2. Variables

4.2.1 Conventional Performance

4.2.2 Stock Performance

4.3 Model

4.3.1 Advantages of the ARDL Model

4.3.2 Tests to be used

4.4 Constraints

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4.5 Summary

Chapter 4 Data and Methodology

4.0 Introduction

This paper traces the performance of the insurance companies quoted on the Stock Exchange of Mauritius namely, Mauritius Union Assurance Co. Ltd, Swan Insurance Co. Ltd, Mauritian Eagle Insurance Co. Ltd and Anglo Mauritius Assurance Society Ltd. There is hardly any related research on this topic and it is important therefore to understand the implication and development of the insurance companies in Mauritius. The Merriam-Webster Collegiate Dictionary (11th edition), defines research as “investigation or experimentation aimed at the discovery and interpretation of facts, revision of accepted theories or laws in the light of new facts, or practical application of such new or revised theories or laws”, which is in fact attempted throughout this dissertation.

4.1 Data

4.1.1 Data Collection and Types of Data

Data collection is an important constituent of research identified by Federer (1972) as a means of introducing calculations, to show errors, variability and inaccuracy as well as to have a set of data to explain methodology. Data takes up the form of primary and secondary data. For the purpose of this study, secondary data, such as financial data reported by the insurance companies has been used.

4.1.2 Data sources

The study carried out was based on quantitative as well as qualitative data about the insurance companies. Data used for this purpose come from various sources. Qualitative data collected was mainly from academic journals. Quantitative data such as annual reports were obtained from the different insurance companies mentioned above, the registrar of companies, the stock exchange of Mauritius and statistical bulletins from the FSC website.

  • Annual Reports

Section 210 of the Companies Act 2001 requires every company to prepare financial statements. They should conform to the International Accounting Standards (IAS) as per section 211(1) (a) of the act.

The SEM is a member of the World Federation of Exchanges (WFE), previously known as the “Federation Internationale des Bourses de Valeurs”, since November 2005. It is required therefore to act in accordance with the standards and market principles set up by the WFE. As such, it is a prerequisite for companies listed on the SEM to comply with the listing rules. Consequently, insurance companies listed on the official market under Banks & Insurance and other Finance, such as Mauritius Union Assurance Co. Ltd[1], Swan Insurance Co. Ltd and Mauritian Eagle Insurance Co. Ltd, should publish and submit their annual reports within specified time periods.

A recent mission of the SEM was the formation of the Development & Enterprise Market (DEM). The DEM was created not only for companies on the OTC market but also for Small and Medium-sized Enterprises (SMEs) such as the Anglo Mauritius Assurance Society Ltd. As the latter is listed on the DEM under Banks & Insurance and other Finance, its annual reports should conform to the IFRS and audited in accordance with the ISA.

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Annual reports were obtained from these insurance companies. Recent ones can be consulted on their websites while past financial statements were provided as hardcopies. Data obtained for Swan Insurance Co. Ltd covers the years 1955 to 2012, for Mauritian Eagle Insurance Co. Ltd, 1978 to 2012 while for Anglo Mauritius Assurance Society Co. Ltd, periods 1952 to 2012 are available.

  • FSC Bulletins

The different insurance business classes could be traced in the FSC statistical bulletins. Facts and detailed figures were obtained in them and through the various communiqués of the FSC.

4.1.3 Sample Size

For this analysis, a sample of 3 insurance companies was selected from a population of 22 insurance companies in Mauritius. The sample is a part of a population, or a small portion of participants drawn from a population that is capable of giving satisfactory results as would have been provided by the population (Kadam & Bhalerao, 2010). The study performed is on two insurance companies listed on the official market of the SEM and one on the DEM.

4.2. Variables

4.2.1 Conventional Performance

  • Return on investment (ROI)

Return on investment is a profitability ratio that shows the value a firm gets from making an investment. In other words, it is the cash benefits received from a project.

  • Return on Capital Employed

Return on capital employed is a measure of a company’s earnings to its amount of capital employed. To continue operation for a longer period, a company’s ROCE should be better than its cost of capital.

  • Earnings per share

Earnings per share show how much profit after tax and preference dividend is attributable to each ordinary share. It is often regarded as a convenient measure of success for a company.

  • Dividend per share

Dividend per share is the sum of declared dividends for every ordinary share issued. It is calculated by dividing the total dividends paid out by the number of outstanding ordinary shares issued.

4.2.2 Stock Performance

  • Price earnings Ratio

The price earnings ratio relates the market price of a share to the earnings per share. It determines whether a stock is overvalued or undervalued.

  • Market Value per share
  • Market Capitalisation

Market Capitalisation refers to the market value of the owner’s equity in a company. It is assessed by multiplying the stock price by the number of shares.

  • Revenue

IAS 18 defines revenue as the total receipt of economic benefits in terms of cash or other related incomes produced from the daily performance of a firm.

  • Debt Ratio

The debt to asset ratio is a solvency ratio. It indicates how much levered a company is. It is a measure of the percentage of a firm’s assets which is being covered through debt.

  • Loss Ratio

The loss ratio looks at the link which exists between claims incurred and premiums earned by insurance companies. A low loss ratio shows less insurance outflows settled with individuals. If loss ratios are high, risk management policies must be reviewed.

4.3 Model

The model in this study is adapted from Pesaran (1997), who attempts to identify the long run connection of different economic variables in a model. For the purpose of my study, a time series analysis is being done on the financial performance of three insurance companies in Mauritius namely Swan Insurance Co. Ltd, Mauritian Eagle Insurance Co. Ltd and Anglo Mauritius Assurance Society Co. Ltd, based on different variables defined in section 4.2.0.1. By taking into account important events such as their listing on the SEM, mergers and relevant crises, dummy variables will be introduced in the course of the study as noted in the work of Pahlavani, Wilson and Worthington (2005).

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A simple autoregressive model can be written as:

4.3.1 Advantages of the ARDL Model

Pesaran and al (2001) identified several benefits of the ARDL in their empirical literature. For instance, the model overcomes the shortcomings of the Johansen cointegration techniques which favour large samples of data. As such, it is more reasonable as it requires a small sample of data[2]. Furthermore, the ARDL ignores the fact that all variables in a model should be of the same magnitude. The ARDL is applicable regardless of the variables being I(0), I(1) or the regression containing a combination of both (Pesaran and al, 2001). Another advantage of the ARDL is that it is suitable to be used in case researchers do not understand the unit root features. Problems associated to its testing are waned and this leaves out any wrong judgment about the results[3].

4.3.2 Tests to be used

  • Testing for stationarity

The annual time series data should be tested for unit roots to check for stationarity. Normally, the Dickey Fuller (DF), the Augmented Dickey Fuller (ADF) or the Phillips-Peron (PP) unit root tests can be carried out. In this analysis, the ADF test is used. Non-stationary time series may lead to the problem of spurious regression and the results of the regression analysis will not be valid. Differentiating a non stationary time series will convert it to stationary.

  • Testing for cointegration

Once variables are found to be stationary, we have to find out whether they are cointegrated. That is, whether a long term relationship exists between two variables or is there equilibrium. Although individual variables are found to be nonstationary, a linear combination of two or more time series can be stationary. To test for cointegration, the Augmented Engle-Granger (AEG) test can be used.

  • Testing for causality

4.4 Constraints

  1. Data Collection was a lengthy process whereby several appointments were fixed with the different institutions so as to get the relevant information. A letter from the university was required to be presented to each insurance company, to the stock exchange of Mauritius and to the Registrar of companies for the purpose of collecting data. Photocopies of past financial statements were done and compiling the relevant figures was quite a time consuming phase.
  1. Past data for Mauritius Union Assurance Ltd were not available since they were already archived and retrieving the data would have taken a lot of time as the company was undergoing an interim audit.
  1. The adoption of the International Financial Standards has caused certain comparability problems to occur as past financial statements and recent ones do not have the same headings.

4.5 Summary

The data and methodology chapter shows how to proceed with the regression, the data to be used and the econometrics techniques. The different tests have been calculated using the Eviews 7 software package.

Pesaran, M. H. (1997). An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis ¤.


[1] Past annual reports for Mauritius Union Assurance Co. Ltd were not available as they were archived.

[2] Ghatak and Siddiki (2001)

[3] Bahmanio-Skooee (2001)