Journal of Financial Services Research

, Volume 39, Issue 3, pp 119–144 | Cite as

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

  • Jeungbo ShimEmail author


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.


Performance Mergers & acquisitions Product diversification Property-liability insurers 

JEL classification

G22 G34 L25 



The author is very grateful to an anonymous referee and Haluk Unal (the editor) for insightful comments and suggestions, which have led to substantial improvements in the paper. Any remaining errors or omissions are the sole responsibility of the author.


  1. Akhavein JD, Berger AN, Humphrey DB (1997) The effects of megamergers on efficiency and prices: evidence from a bank profit function. Rev Ind Organ 12:95–139CrossRefGoogle Scholar
  2. BarNiv R, Hathorn J (1997) The merger or insolvency alternative in the insurance industry. J Risk Insur 64:89–113CrossRefGoogle Scholar
  3. Berger AN, Humphrey DB (1992) Megamergers in banking and the use of cost efficiency as an antitrust defense. Antitrust Bull 37:541–600Google Scholar
  4. Berger PG, Ofek E (1995) Diversification’s effect on firm value. J Financ Econ 37:39–65CrossRefGoogle Scholar
  5. Berger AN, Cummins JD, Weiss MA (1997) The co-existence of multiple distribution systems for financial services: the case of property-liability insurance. J Bus 70(4):515–546CrossRefGoogle Scholar
  6. Berger AN, Saunders A, Scalise JM, Udell GF (1998) The effects of bank mergers and acquisition on small business lending. J Financ Econ 50:187–229CrossRefGoogle Scholar
  7. Berger AN, Cummins JD, Weiss MA, Zi H (2000) Conglomeration versus strategic focus: evidence from the insurance industry. J Financ Intermed 9:323–362CrossRefGoogle Scholar
  8. Bouwman C, Fuller K, Nain A (2003) The performance of stock-price driven acquistions. Working PaperGoogle Scholar
  9. Campello M (2002) Internal capital markets in financial conglomerates: evidence from small bank responses to monetary policy. J Finance 57:2773–2805CrossRefGoogle Scholar
  10. Chamberlain LS, Tennyson S (1998) Capital shocks and merger activity in the property-liability insurance industry. J Risk Insur 65:563–595CrossRefGoogle Scholar
  11. Colquitt LL, Sommer DW, Godwin NH (1999) Determinants of cash holding by property-liability insurers. J Risk Insur 66:401–415CrossRefGoogle Scholar
  12. Cummins JD, Weiss MA (1993) Measuring cost efficiency in the property liability insurance industry. J Bank Finance 17:463–482CrossRefGoogle Scholar
  13. Cummins JD, Sommer DW (1996) Capital and risk in property-liability insurance markets. J Bank Finance 20:1069–1092CrossRefGoogle Scholar
  14. Cummins JD, Zi H (1998) Comparison of frontier efficiency methods: an application to the U.S. life insurance industry. J Prod Anal 10:131–152CrossRefGoogle Scholar
  15. Cummins JD, Nini G (2002) Optimal capital utilization by financial firms: evidence from the property-liability insurance industry. J Financ Serv Res 21:15–53CrossRefGoogle Scholar
  16. Cummins JD, Xie X (2005) Efficiency and scale economies in the U.S. property-liability insurance industry. Working paper. University of PennsylvaniaGoogle Scholar
  17. Cummins JD, Xie X (2008) Mergers & acquisitions in the U.S. property-liability insurance industry: productivity and efficiency effects. J Bank Finance 32:30–55CrossRefGoogle Scholar
  18. Cummins JD, Tennyson S, Weiss MA (1999) Consolidation and efficiency in the U.S. life insurance industry. J Bank Finance 23:325–357CrossRefGoogle Scholar
  19. Cummins JD, Weiss MA, Xie X, Zi H (2010) Economies of scope in financial services: a DEA efficiency analysis of the US insurance industry. J Bank Finance 34:1525–1539CrossRefGoogle Scholar
  20. Demaris A (2004) Regression with social data: modeling continuous and limited response variables. A Wiley-Interscience Publication. WileyGoogle Scholar
  21. Eisenbeis RA, Kwast ML (1991) Are real estate specializing depositories viable? Evidence from commercial banks. J Financ Serv Res 5:5–24CrossRefGoogle Scholar
  22. Elango B, Ma Y, Pope N (2008) An investigation into the diversification–performance relationship in the U.S. property-liability insurance industry. J Risk Insur 75:567–591CrossRefGoogle Scholar
  23. Fiegenbaum A, Thomas H (1990) Strategic groups and performance: The U.S. insurance industry, 1970–84. Strateg Manage J 11:197–215CrossRefGoogle Scholar
  24. Gallo JG, Apilado VP, Kolari JW (1996) Commercial bank mutual fund activities: implications for bank risk and profitability. J Bank Finance 20:1775–1791CrossRefGoogle Scholar
  25. Gertner RH, Scharfstein DS, Stein JC (1994) Internal versus external capital markets. Q J Econ (November):1211–1230Google Scholar
  26. Grace MF, Timme SG (1992) An examination of cost economies in the U.S. life insurance industry. J Risk Insur 59:72–103CrossRefGoogle Scholar
  27. Greene WH, Segal D (2004) Profitability and efficiency in the U.S. life insurance industry. J Prod Anal 21:229–247CrossRefGoogle Scholar
  28. Hannan TH, Hanweck GA (1988) Bank insolvency risk and the market for large certificates of deposit. J Money Credit Bank 20:203–211CrossRefGoogle Scholar
  29. Hanweck GA, Hogan AM (1996) The structure of the property/casualty insurance industry. J Econ Bus 48:141–155CrossRefGoogle Scholar
  30. Hocking RR (2003) Methods and applications of linear models: regression and the analysis of variance, 2nd ed. A Wiley-Interscience Publication. WileyGoogle Scholar
  31. Houston J, James C, Marcus D (1997) Capital market frictions and the role of internal capital markets in banking. J Financ Econ 46:135–164CrossRefGoogle Scholar
  32. Hubbard G, Palia D (1999) A re-examination of the conglomerate merger wave in the 1960s: an internal capital market view. Journal of Finance 54:1131–1152CrossRefGoogle Scholar
  33. Hughes J, Lang W, Mester L, Moon C, Pagano M (2003) Do bankers sacrifice value to build empires? managerial incentives, industry consolidation, and financial performance. J Bank Finance 27:417–447CrossRefGoogle Scholar
  34. Hunter WC, Timme SG, Yang WK (1990) An examination of cost subadditivity and multiproduct production in large U.S. banks. J Money Credit Bank 22:504–525CrossRefGoogle Scholar
  35. Jensen M (1986) Agency costs of free cash flow, corporate finance, and takeovers. Am Econ Rev 76:323–329Google Scholar
  36. Jensen M, Meckling W (1976) Theory of the firm: managerial behavior, agency costs, and capital structure. J Financ Econ 3:305–360CrossRefGoogle Scholar
  37. Lai GC, Limpaphayom P (2003) Organizational structure and performance: evidence from the nonlife insurance industry in Japan. J Risk Insur 70:735–758CrossRefGoogle Scholar
  38. Lawless JF (2003) Statistical models and methods for lifetime data. 2nd ed. A Wiley-Interscience Publication. WileyGoogle Scholar
  39. Liebenberg AP, Sommer DW (2008) Effects of corporate diversification: evidence from the property-liability insurance industry. J Risk Insur 75:893–919CrossRefGoogle Scholar
  40. Meador JW, Ryan HE, Schellhorn CD (2000) Product Focus versus Diversification: Estimates of X-Efficiency for the US Life Insurance Industry. In: Patrck TH, Savros AZ (eds) Performance of financial institution: efficiency, innovation, regulation. Cambridge University Press, New YorkGoogle Scholar
  41. Myers SC, Majluf NS (1984) Corporate financing and investment decisions when firms have information that investors do not have. J Financ Econ 13:187–221CrossRefGoogle Scholar
  42. Myers SC, Read JA (2001) Capital allocation for insurance companies. J Risk Insur 68:545–580CrossRefGoogle Scholar
  43. Noulas AG, Ray SC, Miller SM (1990) Returns to scale and input substitution for large U.S. banks. J Money Credit Bank 22:94–108CrossRefGoogle Scholar
  44. Powell LS, Sommer DW (2007) Internal versus external capital markets in the insurance industry: the role of reinsurance. J Financ Serv Res 31:173–188CrossRefGoogle Scholar
  45. Powell LS, Sommer DW, Eckles DL (2008) The role of internal capital markets in financial intermediaries: evidence from insurance groups. J Risk Insur 75:439–461CrossRefGoogle Scholar
  46. Rajan RG, Servaes H, Zingales L (2000) The cost of diversity: the diversification discount and inefficient investment. J Finance 55:35–80CrossRefGoogle Scholar
  47. Rau PR, Vermaelen T (1998) Glamour, value and the post-acquisition performance of acquiring firms. J Financ Econ 49:223–253CrossRefGoogle Scholar
  48. Roll R (1986) The hubris hypothesis of corporate takeovers. J Bus 59:197–216CrossRefGoogle Scholar
  49. Sapienza P (2002) The effects of banking mergers on loan contracts. J Finance 57:329–367CrossRefGoogle Scholar
  50. Scharfstein DS (1998) The dark side of internal capital markets II: evidence from diversified conglomerates. NBER Working Paper No. 6352Google Scholar
  51. Scharfstein DS, Stein JC (2000) The dark side of internal capital markets: divisional rent-seeking and inefficient investment. J Finance 55:2537–2564CrossRefGoogle Scholar
  52. Servaes H (1996) The value of diversification during the conglomerate merger wave. J Finance 51:1201–1225CrossRefGoogle Scholar
  53. Shim J (2010) Capital-based regulation, portfolio risk and capital determination: empirical evidence from the US property-liability insurers. J Bank Financ 34:2450–2461Google Scholar
  54. Shin H, Stulz RM (1998) Are internal capital markets efficient? Quarterly Journal of Economics, May, pp 531–552Google Scholar
  55. Shleifer A, Vishny R (1989) Management entrenchment: the case of manager-specific investment. J Financ Econ 25:123–139CrossRefGoogle Scholar
  56. Sinkey JF, Nash RC (1993) Assessing the riskiness and profitability of credit-card banks. J Financ Serv Res 7:127–150CrossRefGoogle Scholar
  57. Stein JC (1997) Internal capital markets and the competition for corporate resources. J Finance 52:111–133CrossRefGoogle Scholar
  58. Stiroh KJ, Rumble A (2006) The dark side of diversification: the case of US financial holding companies. J Bank Finance 30:2131–2161CrossRefGoogle Scholar
  59. Teece DJ (1980) Economies of scope and the scope of the enterprise. J Econ Behav Organ 1:223–247CrossRefGoogle Scholar
  60. Weston JF (1970) The nature and significance of conglomerate firms. St John’s Law Rev 44:66–80Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.Illinois Wesleyan UniversityBloomingtonUSA

Personalised recommendations