Market structure change, efficiency and value of firms in the United States property-liability insurance industry

This dissertation studies the wave of mergers and acquisitions (M&As) in the US property-liability (P-L) insurance industry during the period 1993-2003 from the perspectives of the industry, the firms, and the stockholders. The first chapter examines efficiency and scale economies. It estimates technical, scale, cost, and revenue efficiency for firms in the US P-L insurance industry over the period 1993-2002 using data envelopment analysis (DEA), analyzes returns to scale of firms, and explains the variation in firms' performance using panel data analysis. The results indicate that, on average, the industry operates with low cost and revenue efficiency. Medium-size firms are found to be most scale efficient. The benefit of scale economies diminishes at certain asset size level and net premium-written level. Regression analysis shows that product mixture, distribution system, organizational form, and capitalization are important determinants of insurers' performance. The second chapter examines whether M&As enhance growth opportunities and improve firms' efficiencies and economies of scale. It finds that targets experience greater technical change, total factor productivity growth, and revenue efficiency growth than non-targets. Acquirers achieve moderately higher revenue efficiency growth than non-acquirers. Scale economies are not a major consideration in the P-L industry consolidation, whereas financial motivation is the main driving force. The final chapter analyzes acquisitions and divestitures in the US P-L insurance industry during the period 1997-2003. It estimates the valuation effects of firms' structural changes using an event study methodology; in particular, it examines the effects of diversification versus focus over the dimensions of both geographical areas and business sectors. The paper also analyzes the relationship between a firm's pre-acquisition efficiency and its event-induced abnormal returns. It finds that acquirers, targets and divesting firms all earn significant positive abnormal returns. Acquisitions that focus both geography and business earn the highest abnormal returns, while other types of acquisitions earn a close-to-zero abnormal return. Firms that sell units unrelated to their core-businesses earn higher abnormal returns, and the value created from the divestitures is not from buyers' overpayment. Acquirers with higher cost efficiency or revenue efficiency earn higher abnormal returns, while divesting firms with higher revenue efficiency earn lower abnormal returns.