Consolidation in the European Insurance Industry: Do Mergers and Acquisitions Create Value for Shareholders?

Abstract

During the 1990s, financial markets in Europe were deregulated as part of the European Union’s (EU’s) objective of creating a single market for financial services. Insurance markets were particularly affected by the Third Generation Insurance Directives, implemented in 1994, which deregulated insurance markets with respect to virtually all price and product competition, retaining regulation primarily for solvency. The Directives implemented the concept of the “single passport,” whereby an insurer can do business in all EU countries provided that it is licensed in one EU country. Deregulation led to an unprecedented wave of mergers and acquisitions (M&As). From 1990-2002 there were 2,595 M&As involving European insurers of which 1,669 resulted in a change in control. Transactions occurred both cross-border (across national boundaries) and within-border as well as cross-industry (e.g., involving insurers and banks) and within-industry. The objective of this paper is to determine whether M&As in the European insurance market create value for shareholders by studying the stock price impact of M&A transactions on target and acquiring firms. The stock price effects are measured using a standard market model event study analysis. The stock price effect of M&As is measured by looking at abnormal returns on the transaction event day and surrounding days, i.e., by measuring the stock price impact on target and aquiring firms beyond what is predicted using a market model of stock returns. We also examine cumulative average abnormal returns (CAARs) which accumulate the abnormal returns over event windows surrounding the M&A transaction dates. The analysis show that European M&As created small negative cumulative average abnormal returns (CAARs) for acquirers (generally less than 1%) on average across various windows surrounding the transaction date. Targets, however, realized substantial positive CAARs in the range of 12% to 15%. Breaking down the transactions into cross-border and domestic (withincountry) transactions, we find that cross-border transactions were value-neutral for acquirers, whereas within-border transactions led to significant value loss (approximately 2%) for acquirers. For targets, both cross-border and within-border transactions led to substantial value-creation. Given that cross-border transactions are value-neutral for acquirers and value-creating for targets, these transactions seem to lead to clear economic gains. However, the gains for targets in within-border transactions are somewhat offset by losses sustained by acquirers.