The Merger or Insolvency Alternative in the Insurance Industry
J. OF RISK AND INSURANCE, Vol. 64 No. 1, March 1997
Posted: 10 Jun 1997
The reasons for mergers and acquisitions in the insurance industry are usually not disclosed by regulators, investors, or managers. This study explicates that accounting and financial information can explain merger or insolvency decisions in the industry. The study emphasizes that a timely merger can serve as a viable alternative to insolvency. We perform a logit analysis of solvent and insolvent insurers to generate the probability of insolvency for each merged insurer. Timely mergers serve as an alternative to insolvency for 20 to 46 percent of the merged insurers, which is higher than that found in other industries. The study identifies attributes that distinguish merged distressed insurers from insolvent insurers. Investors in firms that acquire distressed insurers earn significant negative returns and earn significantly lower returns than investors in firms that sell distressed insurers.
JEL Classification: G22, G34
Suggested Citation: Suggested Citation