Returns Post Catastrophe Induced Seasoned Equity Offerings of Property and Casualty Insurance Companies

39 Pages Posted: 28 May 2008 Last revised: 25 Mar 2009

See all articles by Qingyi (Freda) Song Drechsler

Qingyi (Freda) Song Drechsler

University of Pennsylvania - Wharton Research Data Services

Date Written: March 1, 2009

Abstract

This paper examines returns post seasoned equity offerings (SEO) of property and casualty (PC) insurance companies traded in U.S. between 1981 and 2006. In addition to the return analysis post regular SEO, the unique feature of catastrophe-induced SEO are studied in detail. Modified event study approach is applied to examine the short term return performance, while matching-firm (or industry index) methodology is used to study the long term performance. We do not observe significant long term underperformance compared to the matching firms benchmarks, as is recorded in the finance literature studying SEO across industries. Probit analysis reveals that PC insurers who choose to conduct SEO post major catastrophes display different characteristics than the firms who choose not to. Insurers with CAT induced SEO tend to display either higher leverage level or higher profitability, as the capital raised through SEO is used either to restore capital to survive the financial distress, or on the other end of the spectrum, to expand market share in the profitable hard market following catastrophes. Investors are found to be capable of distinguishing the motivations behind the decision of catastrophe induced SEO, by analyzing firm characteristics as well as stock return performances between the hit of catastrophe events and the SEO date, and use it to assess the value of stocks post SEO accordingly.

Keywords: SEO, Catastrophes, Insurance, Event Study

JEL Classification: G14, G22, G32

Suggested Citation

Drechsler, Qingyi (Freda) Song, Returns Post Catastrophe Induced Seasoned Equity Offerings of Property and Casualty Insurance Companies (March 1, 2009). Available at SSRN: https://ssrn.com/abstract=1138026 or http://dx.doi.org/10.2139/ssrn.1138026

Qingyi (Freda) Song Drechsler (Contact Author)

University of Pennsylvania - Wharton Research Data Services ( email )

3819 Chestnut St Suite 300A
St Leonard's Court
Philadelphia, PA 19104
United States

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