Abstract
This article examines the determinants of economic value added (EVA) in insurance industries. It addresses the key components of EVA, the value drivers that are more important in managing economic value and the combination of these value drivers that best explain EVA as a group. The study covers the life insurance sector in South Africa, specifically focusing on the big five companies: Discovery Holdings, Liberty Holdings, MMI Holdings, Old Mutual plc, and Sanlam Ltd for the period 2004-2014. Variance and principal component analyses are used to identify the main drivers of EVA. Five main drivers were prominent, namely: underwriting, asset management, costs, opportunity cost and strategic investments. The implications of the results for best practice in the insurance industry are discussed.
Highlights
Corporate finance teaches us that companies are in business to generate and maximise value for their shareholders
The economic value added (EVA) gained its fame for two reasons: (1) it adjusts net profits for opportunity cost to the shareholder by deducting cost of capital employed in generating profits; (2) it proposes over 100 potential adjustments in an attempt to convert accounting figures into economic equivalents (Stewart, 1991)
We found that Net Earned Premiums, Assets under Management, Fees & Commission Income, Return on Assets, General Marketing & Administration Expenses, Acquisition Costs, Cost of Capital, and Other Income are the main value drivers
Summary
Corporate finance teaches us that companies are in business to generate and maximise value for their shareholders. Managers have traditionally used accounting metrics such as revenue, profits before interest and tax (PBIT), profits after interest and tax (NPAT), earnings per share (EPS), return on equity (RoE) and return on capital (RoC), net asset value (NAV), free cashflow (FCF) as their own internal measures of value created. Another internal measure of value currently enjoying the spotlight is the economic value added (EVA) metric. Section six concludes the study by providing insights for best practice
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