Since the 20th century, the insurance industry has experienced an unprecedented wave of M&A. However, in spite of the drastic increase in insurance M&A activity, there has been little consistent empirical evidence on the value enhancement of these deals. Hence, many open questions still exist in this research area. The most fundamental questions are whether insurance M&A actually create value and what determinants influence the success of these undertakings. This thesis attempts to find answers to these questions by first examining the status quo of academic literature published in this field of research and bringing together the empirical findings on the success of insurance M&A and its influencing factors. Overall, the literature review outlines that insurance M&A on average tend to create value for shareholders of the target firms as well as for the combined entity of acquirer and target. Moreover, shareholders of acquiring US insurance firms, on average, also benefit from these corporate undertakings. However, negative short-term as well as long-term wealth effects for acquiring insurers’ shareholders are the common finding in capital market studies analyzing the effects of M&A transactions in the European insurance industry. Secondly, the reliability and validity of the findings of previous research are tested in an own empirical analysis which uses a fairly new approach to evaluating the success of M&A by using the idea of stochastic dominance (SD). More precisely, using a sample of 102 transactions conducted by publicly traded Western European insurance firms between the years 1993 and 2009, this work analyzes whether investors in acquiring insurance firms benefit from M&A by comparing return distributions of acquiring firm portfolios with benchmark portfolios using the first two orders of SD. The results show that insurance M&A trigger a negative short-term capital market reaction for acquiring European insurance firms. However, this short-term underperformance diminishes over time, and over a longer period of time of up to three years after M&A announcement, there is no underperformance of acquiring European insurers. In conclusion, based on the accumulated evidence from past empirical studies as well as the empirical investigation of this thesis, it can be concluded that M&A, not only in the US insurance market but also in the European insurance market, seem to be a viable model and are likely to lead to success for all parties involved.
Table of Contents
1 Introduction
1.1 History of the Consolidation Process and Relevance of the Topic
1.2 Problem Statement and Research Gaps
1.3 Research Objectives and Development of Research Questions
1.4 Organization of the Study
2 Theoretical and Methodological Background
2.1 Overview
2.2 Theoretical Foundations
2.2.1 Growth Options of Insurance Companies
2.2.2 Definition of the Term Mergers and Acquisitions
2.2.3 Categorization of M&A
2.2.4 Phases of the M&A Process
2.2.5 Overview of M&A Waves
2.3 Methodological Foundations
2.3.1 Definition of M&A Success
2.3.2 Traditional Approaches to Testing the Success of M&A
2.3.2.1 Financial Statement-Based Approach
2.3.2.1.1 Basic Procedure
2.3.2.1.2 Strengths and Weaknesses of the Measure
2.3.2.2 Capital Market-Based Approach
2.3.2.2.1 Basic Procedure
2.3.2.2.2 Strengths and Weaknesses of the Measure
2.3.2.3 Retention/Divestment Approach
2.3.2.3.1 Basic Procedure
2.3.2.3.2 Strengths and Weaknesses of the Measure
2.3.2.4 Interview and Survey Approach
2.3.2.4.1 Basic Procedure
2.3.2.4.2 Strengths and Weaknesses of the Measure
2.3.2.5 Concluding Evaluation of the Approaches
3 Literature Review: Prior Research on the Success of Insurance M&A and its Determinants
3.1 Overview
3.2 Overview of Recent Studies
3.3 Selection of Prior Research
3.4 Literature Review Method
3.5 Development of Research Clusters
3.6 Review of Individual Studies on the Overall Success of Insurance M&A by Cluster
3.6.1 Accounting Ratio Analysis
3.6.2 Efficiency Analysis
3.6.3 Linkage of Event and Efficiency Analysis
3.6.4 Event Analysis
3.6.5 Summary
3.7 Review and Results of Prior Capital Market Research on the Overall Success of Insurance M&A
3.7.1 Acquiring Firm Stockholder Returns
3.7.1.1 Short-Term Results
3.7.1.2 Medium- and Long-Term Results
3.7.2 Target Firm Stockholder Returns
3.7.2.1 Short-Term Results
3.7.2.2 Medium- and Long-Term Results
3.7.3 Total Stockholder Returns of Combined Firms
3.7.3.1 Short-Term Results
3.7.3.2 Medium- and Long-Term Results
3.7.4 Comparison of Short-Term and Medium- and Long-Term Results
3.7.5 Summary of the Evidence on the Overall Success of Insurance M&A
3.8 Review and Results of Prior Capital Market Research on the Determinants of M&A Success in the Insurance Industry
3.8.1 Overview
3.8.2 Characteristics of Acquiring Companies
3.8.3 Characteristics of the Target Companies
3.8.4 Characteristics of Transaction Structuring and Management
3.8.5 Influences of the Economic Environment
3.8.6 Comparison of Short-Term and Medium- and Long-Term Results
3.8.7 Summary of the Evidence on the Determinants of M&A in the Insurance Industry
4 Evidence from the European Insurance Sector: Empirical Analysis of the Success of M&A and its Determinants
4.1 Overview
4.2 Formulation of Hypotheses
4.2.1 Success of M&A in the European Insurance Industry
4.2.2 Determinants of M&A Success in the European Insurance Industry
4.3 Specification of the Empirical Study
4.3.1 Estimation Methodology
4.3.1.1 Overview
4.3.1.2 The Stochastic Dominance Model
4.3.1.3 Orders of Stochastic Dominance
4.3.1.3.1 First-Order Stochastic Dominance
4.3.1.3.2 Second-Order Stochastic Dominance
4.3.1.3.3 Kth-Order Stochastic Dominance
4.3.1.4 Testing for Stochastic Dominance
4.3.1.4.1 Descriptive Approach
4.3.1.4.2 Statistical Tests
4.3.1.5 Calculation of Returns
4.3.1.5.1 Short-Term Returns
4.3.1.5.2 Long-Term Returns
4.3.2 Operationalization of Determinants of M&A Success
4.3.3 Selection of Investigated Time Periods
4.3.4 Selection of Geographic Areas
4.3.5 Selection of Firms
4.3.5.1 Acquiring Insurance Firms
4.3.5.2 Control Firms
4.3.6 Selection of Investigated M&A Transactions
4.3.7 Procedure for Testing Stochastic Dominance
4.3.8 Generation of M&A and Reference Data
4.3.9 Extraction of Stock Prices
4.3.10 Characteristics of M&A Transactions
4.4 Results of the Empirical Study
4.4.1 Success of M&A in the European Insurance Industry
4.4.1.1 Results of Short-Term Analysis
4.4.1.2 Results of Medium- and Long-Term Analysis
4.4.2 Determinants of M&A Success in the European Insurance Industry
4.4.2.1 Characteristics of Acquiring Companies
4.4.2.2 Characteristics of Target Companies
4.4.2.3 Characteristics of Transaction Structuring and Management
4.4.2.4 Influences of the Economic Environment
4.5 Summary of the Findings of the Empirical Analysis
5 Conclusion
5.1 Summary
5.2 Limitations
5.3 Implications
Research Objectives and Topics
This doctoral dissertation aims to investigate the performance and success of mergers and acquisitions (M&A) within the insurance industry. By analyzing both theoretical foundations and prior empirical research, the study seeks to clarify the controversial and inconclusive results found in existing literature regarding value creation in insurance M&A. A central focus is placed on whether M&A transactions in this sector truly create value for shareholders and which specific factors determine success or failure. To overcome limitations of traditional methods, the work employs innovative techniques like stochastic dominance to provide more robust empirical evidence, specifically targeting the European insurance market.
- Analysis of valuation effects and financial success of insurance M&A transactions.
- Development of research clusters to categorize and synthesize diverse findings from previous academic literature.
- Application of the stochastic dominance methodology to evaluate returns as an alternative to traditional event study approaches.
- Identification of determinants of M&A success, including acquirer characteristics, target features, and economic environment influences.
- Empirical investigation of European insurance company transactions from 1993 to 2009.
Excerpt from the Book
1.1 History of the Consolidation Process and Relevance of the Topic
Similar to the general trend of increasing corporate expansion, the financial services industry, the insurance industry in particular, has experienced an unprecedented wave of mergers and acquisitions (hereafter, M&A) in the last 50 years. This ongoing transformation process can be attributed to several factors, such as improvements in computing and communication technology, changes in risk and interest rates, insurance premium deregulation, market saturation, and economic forces (Swiss Re, 1999, 2000; OECD, 2000; CEA, 2013b; Okura & Yanase, 2013). Moreover, the standardization of accounting rules (IFRS 4), the development of EU-wide solvency standards (Solvency II), the implementation of the euro, and the European Union’s Third Generation Insurance Directives in 1994, which deregulated the European insurance market, led to a rising number of cross-border EU transactions (transactions across national boundaries).
Regulatory changes in the form of the EU’s Second Banking Coordination Directive of 1993 and later amendments, as well as the Gramm-Leach-Bliley Act in the US (1999), also helped push forward the integration of the financial services industry, resulting in an increasing amount of cross-industry transactions (deals involving companies of different industries, e.g., banks and insurers). As a result of this consolidation process, the number of financial services firms has declined substantially in recent years, although the number of insurance companies has remained fairly constant. This suggests that the restructuring process in the insurance sector was primarily conducted for strategic purposes, such as to focus on a core business or geographical expansion into new regions, instead of consolidations in which the acquired insurer merged with the acquirer. In summary, corporate expansion through mergers and acquisitions has become an increasingly popular means of restructuring and repositioning in the global market; as such, M&A activity has become an important dynamic in the insurance landscape.
Summary of Chapters
1 Introduction: Provides an overview of the consolidation trends in the insurance industry, identifies current research gaps, and outlines the objectives and structure of the dissertation.
2 Theoretical and Methodological Background: Establishes the conceptual framework, defines key terms like "mergers and acquisitions," explains the M&A process phases, and evaluates traditional methodologies for measuring M&A success.
3 Literature Review: Prior Research on the Success of Insurance M&A and its Determinants: Reviews existing empirical studies, categorizes them into research clusters, and synthesizes findings regarding value creation and its determinants in insurance M&A.
4 Evidence from the European Insurance Sector: Empirical Analysis of the Success of M&A and its Determinants: Presents the primary empirical analysis of 102 European insurance M&A transactions, applying stochastic dominance to test hypotheses concerning overall performance and success determinants.
5 Conclusion: Summarizes the research findings, highlights the study's limitations, and discusses implications for managers, investors, and future academic research.
Keywords
Mergers and Acquisitions, M&A, Insurance Industry, Shareholder Value, Corporate Performance, Stochastic Dominance, Event Study, Consolidation, Financial Synergy, Acquisition Strategy, Post-Merger Integration, Determinants of Success, European Insurance Sector, Market Efficiency, Corporate Growth.
Frequently Asked Questions
What is the core focus of this research?
This work focuses on analyzing the success and valuation effects of mergers and acquisitions within the global insurance industry, with a specific empirical emphasis on the European market.
What are the primary themes addressed?
The research explores theoretical foundations of M&A, synthesizes existing empirical literature, and investigates determinants of success such as acquirer characteristics, deal structure, and economic conditions.
What is the main research objective?
The objective is to understand why previous empirical findings on insurance M&A are conflicting and to provide a more consistent view of whether these transactions generate value for shareholders.
Which scientific methods are applied?
The study reviews traditional event study methodologies and introduces the stochastic dominance approach as an alternative, more robust method for evaluating the success of M&A transactions.
What is covered in the main body of the work?
The main part includes a comprehensive literature review, the classification of studies into research clusters, and a detailed empirical analysis of 102 European insurance transactions using stochastic dominance tests.
What defines the core set of keywords?
The study is characterized by concepts such as M&A success, insurance industry consolidation, stochastic dominance, shareholder wealth maximization, and financial/strategic determinants.
How does the stochastic dominance approach differ from event studies?
While traditional event studies often rely on mean returns and market efficiency assumptions, the stochastic dominance approach evaluates the entire return distribution, allowing for a broader comparison that does not require restrictive assumptions about investor utility or return distributions.
What conclusion does the author draw for European insurance firms?
The author concludes that while short-term market reactions to M&A announcements in Europe are often negative, these effects tend to diminish over time, and M&A transactions are generally considered a viable model for growth.
- Quote paper
- Sven Bach (Author), 2014, Success of Mergers and Acquisitions in the Insurance Industry: What Can We Learn From Previous Empirical Research?, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/279361
