Mergers & Acquisitions, Diversification and Performance in the U.S. Property-Liability Insurance Industry

Abstract

This paper examines the relationship between mergers & acquisitions (M & As), diversification and financial performance in the U.S. property-liability insurance industry over the period 1989-2004. The risk-adjusted return on assets (ROA), return on equity (ROE), Z-score and total risk measured by earnings volatility are considered as a relevant indicator of performance. We find that acquirers' financial performance decreases and earnings volatility increases during the gestation period after the M & As perhaps due to increased frictional costs associated with post-merger integration and agency problems. We find that more focused insurers outperform the product-diversified insurers, implying that the costs of diversification outweigh the benefits. These findings are robust to alternative risk and diversification measures. We also find that marginal increases in commercial line share are associated with higher risk-adjusted profits, but these gains are offset by the extra costs from product diversity when its initial share is low. For insurers initially concentrated in commercial line, a marginal increase in commercial line share is related to higher performance due to positive effects of both direct exposure and indirect focus.

The Combined Effect of Enterprise Risk Management and Diversification on Property and Casualty Insurer Performance

“…Despite these issues, however, the diversification discount has been shown to be robust to the value measure choices, with effects seen on stock returns (Hoyt and Trieschman, ), Tobin's Q, and various accounting measures, such as return on assets (ROA) and return on equity (ROE) (Elango, Ma, and Pope, ; Liebenberg and Sommer, ). In a related study, Shim () specifically looks at the value effects of diversification in mergers and acquisitions (M&As). He finds that acquirers suffer a diversification discount and experience greater earnings volatility during and after the M&As, perhaps as the result of increased frictions and agency problems.…”

AN INVESTIGATIONOF MARKET CONCENTRATIONAND FINANCIAL STABILITYIN PROPERTY–LIABILITY INSURANCE INDUSTRY

“…On the contrary, Lai and Limpaphayom () show an inverse relationship between firm size and profitability in the Japanese nonlife insurance industry. Shim () finds that acquirers' overall financial performance decreases and volatility of earnings increases during the gestation period following M&As, implying that firm size may be inversely related to financial stability. These divergent results indicate that the expected relationship remains unclear.…”

Solvency II: A Driver for Mergers and Acquisitions?

“…For overestimation as a reason for value-reducing effects, see also Roll (1986); Rau and Vermaelen (1998). Empirical studies by Shim (2011);Cummins et al (2010); Cummins and Nini (2002); Liebenberg and Sommer (2008) provide further evidence of the applicability of the strategic focus hypothesis in the insurance sector. 11 Berger et al (2000).…”