Case Study: Financial Analysis of XYZ Insurance Company (BUSI7126)

This case study analyzes the financial decisions facing XYZ Insurance Company, which started as a small business and grew over six decades. The analysis focuses on an individual's investment of 100,000 shares and evaluates the potential returns over a 10-year period under various scenarios, including holding the shares or selling them and investing the proceeds. The analysis utilizes decision trees to map out potential outcomes, considering factors like company sales, market conditions, and investment returns. The study calculates payoffs, expected monetary values, and the value of perfect information to determine the optimal investment strategy. The assignment also includes a probability diagram to show the probability of company selling with correct and wrong predictions. The case study aims to provide a comprehensive financial analysis and decision-making framework for the investor.

Statistics
Introduction
The report related to case study of an individual (i.e. the writer) who held 1,00,000 shares in
an insurance company which started with a humble beginning almost 60 years back by two
brothers in a garage in Richmond Virginia. The company was a big success for two brothers
and their family and withstood the great recession and other troubles as business grew. The
company operated in seven states and 60% of the business of the company flew from casualty
insurance. The company paid dividend very thinly. Since, the business of the company is
dependent heavily on weather, any distress weather call shall result in huge outflow of
resources for the company in the form of insurance claims. The name of the insurance
company is XYZ.
Analysis
The case study relates to numerous situation which may occur in the short term which shall
impact the earning in the 10 year horizon. The growth rate of money over the 10 year period
has been taken at 8%. Further, it has been assumed that closing value of the revenue is not
taxable or does not trigger capital gain tax. If the said assumption is withdrawn, the predicted
answer might differ.
In the present case, an individual is predicting his return over the 10 year horizon under two
steps:
(a) Holding the shares of the company over a horizon of 10 years;
(b) Selling the shares right now and investing the proceeds at 8% return over a period of 10
years.
Post above, if the shares are held there are two possible outcomes i.e :
(a) The company may be sold during the tenure of 10 years;
(b) The company may not be sold during 10 years;
Further, there are two possible outcomes, if the company is sold to third pary:
(a) Company is sold to Stock Company;
(b) Company is sold to Mutual Company.
Also, there are three possible outcomes, if company is not sold during the period of 10 years
i.e.:
(a) Value of Shares grew to 44;
(b) Value of shares grew to 40;
(c) Value of shares grew to 36.
The current value of shares is 34
Answer 1
On the basis of above, probable outcome, the decision tree has prepared here-in-below:

Decision Tree
The pay-off under different scenarios have been computed as under:
Sl. No Particulars Computation Amount ($)
1
When the shares are sold
immediately and invested for
10 years at the rate of 8%
compounded annually
=3,400,000*(1.08)10 7,300,000
2
When the shares are not sold
immediately and company is
taken over by a stock company
and shares are held in the
company for 10 years
=111*100,000 11,100,000
3
When the shares are not sold
immediately and company is
taken over by a insurance
company. Further, the net
proceeds realised is invested at
the rate of 8% for 10 years.
= 53.5*100,000*(1.08)10 9,900,000
4
When the shares are held and
the company is not sold and
the market storm becomes less
frequent
=44*100,000 4,400,000
5
When the shares are held and
the company is not sold and
the market storm are with same
frequency
=40*100,000 4,000,000
6
When the shares are held and
the company is not sold and
the market storm is intensified
=36*100,000 3,600,000
7 Return when the shares are
held and the company is not
=0.3*4,400,000 +
0.3*4,000,000 +
3,960,000

Sl. No Particulars Computation Amount ($)
sold 0.4*3,600,000
8 Return when the shares are
held and the company is sold
=0.8*11,100,000 +
0.2*9,900,000 10,860,000
9 Pay off Hold Strategy =0.3*
10,860,000+0.7*3,96,000 6,030,000
Answer 2
We should sell the shares now as the pay-off is higher in case the shares are sold now and the
proceeds are invested at 8% to generate a return of 7,300,000. The computation of pay off
under hold strategy and the sell strategy has been detailed here-in-below:
Sl. No Particulars Computation Amount ($)
1
When the shares are sold
immediately and invested for
10 years at the rate of 8%
compounded annually
=3,400,000*(1.08)10 7,300,000
2
When the shares are not sold
immediately and company is
taken over by a stock company
and shares are held in the
company for 10 years
=111*100,000 11,100,000
3
When the shares are not sold
immediately and company is
taken over by a insurance
company. Further, the net
proceeds realised is invested at
the rate of 8% for 10 years.
= 53.5*100,000*(1.08)10 9,900,000
4
When the shares are held and
the company is not sold and
the market storm becomes less
frequent
=44*100,000 4,400,000
5
When the shares are held and
the company is not sold and
the market storm are with same
frequency
=40*100,000 4,000,000
6
When the shares are held and
the company is not sold and
the market storm is intensified
=36*100,000 3,600,000
7
Return when the shares are
held and the company is not
sold
=0.3*4,400,000 +
0.3*4,000,000 +
0.4*3,600,000
3,960,000
8 Return when the shares are
held and the company is sold
=0.8*11,100,000 +
0.2*9,900,000 10,860,000
9 Pay off Hold Strategy =0.3*
10,860,000+0.7*3,96,000 6,030,000
Answer 3
The decision tree has been detailed here-in-below:

Decision Tree
The pay-off under different scenarios have been computed as under:
Sl. No Particulars Computation Amount ($)
1
When the shares are sold
immediately and invested for
10 years at the rate of 8%
compounded annually
=3,400,000*(1.08)10 7,300,000
2
When the shares are not sold
immediately and company is
taken over by a stock company
and shares are held in the
company for 10 years
=111*100,000 11,100,000
3
When the shares are not sold
immediately and company is
taken over by a insurance
company. Further, the net
proceeds realised is invested at
the rate of 8% for 10 years.
= 53.5*100,000*(1.08)10 9,900,000
4
When the shares are held and
the company is not sold and
the market storm becomes less
frequent
=44*100,000 4,400,000
5
When the shares are held and
the company is not sold and
the market storm are with same
frequency
=40*100,000 4,000,000
6 When the shares are held and
the company is not sold and
=36*100,000 3,600,000

Sl. No Particulars Computation Amount ($)
the market storm is intensified
7
Return when the shares are
held and the company is not
sold
=0.3*4,400,000 +
0.3*4,000,000 +
0.4*3,600,000
3,960,000
8 Return when the shares are
held and the company is sold
=0.8*11,100,000 +
0.2*9,900,000 10,860,000
9 Pay off Hold Strategy =0.3*
10,860,000+0.7*3,96,000 6,030,000
The expected value of perfect information has been detailed here-in-below:
Sl. No Particulars Amount ($)
1 Pay off of Hold Strategy when company is not
sold 3,960,000
2 Pay off of Hold Strategy when company is sold 10,860,000
3 EMV (2-1) 6,030,000
4 EV given perfect information 10,860,000
5 EVPI1 (4-3) 4,830,000
Answer 4
The decision tree has been detailed here-in-below:
Decision Tree
1 https://www.academia.edu/10629605/Decision_Making_Under_Uncertainty_DISCUSSION_QUESTIONS

Probability Diagram
The probability table for correct information
Sl. No Particulars Probablity
1 Probability 2of Company Selling with correct Prediction 0.45
2 Probability of Company Selling with wrong Prediction 0.05
3 Probability of Company not Selling with wrong Prediction 0.1
4 Probability of Company not Selling with Correct Prediction 0.4
The computation of probability has been done by multiplying the leg of two probability
together. For instance, for computing Probability of Company Selling with correct Prediction is
0.5*0.9= 0.45. Similarly, other values have been computed.
Further, the computed value of information has been detailed here-in-below:
Sl. No Particulars Amount
1 Value of Perfect Information 48,30,000.00
2 Probability of Correct prediction 0.45
3 Information Worth 21,73,500.00
2 http://www.stat.yale.edu/Courses/1997-98/101/condprob.htm