Mergers and acquisitions in the international insurance industry

Abstract

This dissertation consists of four self-contained studies on mergers and acquisitions in the international insurance industry. It focuses on the wealth effects of merging parties and their competitors, change of risks and risk management, determinants of wealth effects, determinants of the risk changes, and managers and investors learning by observing information spilled over from previous merger activities. The first study investigates the risk and valuation change experienced by European banks when they acquire insurance companies. The empirical results indicate that total risk and systematic risk generally remain the same while positive wealth effects are documented. This finding supports the argument that regulators do not need to be overly concerned about bank and insurer mergers possibly introducing volatilities to the financial services industry. The second study extends insurance M&A literature by revealing that quality governance and favourable macro-economic conditions in the target firm’s country determine risk and wealth effects, as well as transaction and firm-specific factors. The third study extends the previous chapter by examining competitors’ wealth effects in the global banking and insurance industry arising from mergers and acquisitions. The empirical results indicate that rival firms are reassessed as next potential targets, this being a result of acquisition events. Investors revalue competitors according to an acquirer’s over-bidding premium and the rival firm’s characteristics. The fourth study provides evidence that insurance firm mergers result in improvements in long-term financial performance, and reduction in risk, and those improvements are significantly related to previous M&A activities. Past research proves that bank managers and investors have learnt from previous merger activities in regards to wealth creation (DeLong and DeYoung 2007). This insurance merger study contributes to literature by extending the research to include the risk management perspective. The empirical results support the argument that risk management is a main consideration in Mergers and Acquisitions, as well as wealth creation. In a high uncertainty environment, insurance mergers are new phenomenon for managers and investors. Managers learned from previous M&As in order to create wealth and reduce risk, while investors wrongly evaluated those mergers. Our findings are consistent with semi-strong market efficiency.