The impact of hybrid capital on insurance companies' performance: A study in the context of Solvency II
Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
The recent development within the European regulatory environment, namely the Solvency II regime, causes complex challenges the European insurance industry has to cope with. One of those affects capital structure decisions as sufficient regulatory capital has to be provided to meet the stringent capital requirements. Hence, insurance companies aim for an efficient as well as, from a regulatory point of view, complying capital structure. In this context, hybrid capital is an increasingly embraced funding source offering attractive features and opportunities.
The field of hybrid capital is not sufficiently researched yet, in particular not with regards to the insurance industry. For this reason, the goal of this study is to fill an existing research gap that concerns the impact of hybrid capital on performance. Empirical evidence from the European insurance market is the basis for answering the research question which asks for whether the degree of hybrid capital endowment has an impact on insurance companies’ performance.
For this purpose, the investigation builds upon a six-year time frame (2009-2014) and a population that comprises 39 listed European insurance companies. Several criteria are defined in order to establish a population that allows the authors to conduct this study properly. In addition, two sub-populations are derived in order to extend the investigations. While the first sub-population consists of 22 insurance companies that are headquartered in one of the three largest European (re-)insurance markets, the second one involves 18 insurance companies that are headquartered in a European non-EURO country.
In order to examine the correlation between the degree of hybrid capital endowment and performance, different performance indicators are considered and statistically analysed through panel data regression models, namely the fixed effects, random effects and ordinary least square model. Additionally, likelihood ratio tests are performed to reinforce the results. The majority of the outcomes do not reveal the existence of any correlation. However, a negative correlation is observable with regards to the return on assets. This applies for main as well as the two sub-populations. Ultimately, the authors are able to answer the research question in the affirmative and demonstrate that the traditional theories of capital structure are poorly applicable to hybrid capital.
Place, publisher, year, edition, pages
2015. , 99 p.
Hybrid capital, hybrids, performance, capital structure, pecking-order, trade-off, insurance companies, Solvency II
IdentifiersURN: urn:nbn:se:umu:diva-105790OAI: oai:DiVA.org:umu-105790DiVA: diva2:828470
Master's Programme in Finance