Altman Z-score

Lehman Brothers

Lehman Brothers was a prominent global financial services firm that specialized in investment banking. The firm was heavily exposed to the subprime mortgage market, which experienced a significant downturn and wave of defaults, ultimately leading to Lehman Brothers filing for bankruptcy on September 15, 2008.

Related

Incident

Introduction

Introdution

Problem Statement

Is Altman Z-score model an optimal model for predicting insurance companies’ bankruptcy?

Problem

Statement

Contribution

Contribution

• The study is the first study to apply Z-score model on Palestinian insurance companies.

• The lack of relative studies dealing with determination of stability and predicting bankruptcy in Palestine.

• This study should give stakeholders an early warning to any financial failure in the future.

Contributions of the Altman Z-score

study to actuarial practice

• Underwriting and Risk Assessment

• Solvency Analysis

• Mergers and Acquisitions

• Portfolio Management

• Investment Analysis

Significance of the study

Significance

of the study

• Predict the financial failure of insurance companies.

• Alert management about their current financial position

• Highlights the achieved results of Applying Z-score model.

• Determine the accuracy of the model in predicting Palestinian insurance companies’ bankruptcy for the period 2018-2022.

• Identifies the importance of choosing the optimal model to predict the financial failure.

Previous Models

William Beaver

1966

James Ohlson

1980

Previous

Models

Lov Grover

1997

Richard Taffler

1984

Altman Z-score models

Altman Z-score Models

Previous Studies that studied and

applied Altman Model

Previous

Studies

• Samarkoon and Hasan (2003)

• AlRawi and Kiyani and Vedd (2008)

• Gerantonis, Vergos and Christopoulos (2009)

• Manaseer and Oshaibat (2018)

• Branson and AlAreeni (2012)

Research Design

We will use a quantitative data, to have results that is:

Research

Design

• Measurable
• Objective
• Comparable
• More accurate

Data Collection

There are two main sources of data that the study depends on:

• Primary Data: financial reports

• Secondary Data: we used the Altman revised Z"-score model (1983)

Sample & Interval Selection

In order to predict the financial failure of insurance industry , a sample of eight insurance companies will be taken in this study, for the last five years 2018-2022.

• TRUST
• PICO
• MIC
• GUI

• AIG
• NIC
• TIC
• TPIC

Variables

Dependent variable : The Z"-score value

Independent variables :

• working capital/total assets
• retained earnings/total assets,
• earnings before interest and tax/total assets,
• market value of equity/book value of total liability.

Statistical tool

Z" = 6.56 X1 + 3.26 X2 +6.72 X3 +1.05 X4

Where,

X1: working capital/total assets

X2: retained earnings/total assets

X3: earnings before interest and tax/total assets

X4: market value of equity/book value of total liability

Discrimination zones:

1. Safe Zone: (Z"-score > 2.6)

2. Grey Zone: (1.1 < Z"-score < 2.6)

3. Distress Zone: (Z"-score < 1.1)

Hypothesis test

Ho: The Altman z-score model is valid and effectively predicts financial failure for insurance companies in Palestine.

Discriptive Analysis

Descriptive Analysis

Correlation between variables

Correlation

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