Abstract
We examine the impact of demutualization announcements by 13 life insurance companies during 1996-2000 on the value of existing stock-owned life insurance companies and companies in other segments of the insurance industry. Demutualization announcements are associated with negative stock price reactions in the days around the announcement, and with larger and positive stock price reactions in the days following announcement. Overall, the results support the contention that life insurance company demutualizations signal favorable future industry conditions and/or increased likelihood of future acquisitions for all segments of the insurance industry. Active-minded investors may use these results to develop alpha-generating investment strategies.
Highlights
The life insurance industry and banking industry share a common dichotomy of organizational forms whereby some companies organized as mutually-owned firms, “mutuals,” and others organized as stock-owned firms, coexist in the industry
Do life insurance company demutualizations impact the value of competing stock-owned life insurance companies? And second, do life insurance company demutualizations impact the value of stock-owned companies in other segments of the insurance industry? With regard to the first research question, we find a statistically significant negative announcement effect around the event date, consistent with the competitive pressure hypothesis, and larger positive announcement effects in periods up to 30 days subsequent to the event date, consistent with the information effects hypothesis
These results indicate that there is significant information contained in demutualization announcements by life insurance companies
Summary
The life insurance industry and banking industry share a common dichotomy of organizational forms whereby some companies organized as mutually-owned firms, “mutuals,” (owned by policyholders or account holders) and others organized as stock-owned firms, (owned by shareholders) coexist in the industry. With regard to the second research question, we find a statistically significant negative announcement effect around the event date, consistent with the competitive pressure hypothesis, and larger positive announcement effects in periods up to 30 days subsequent to the event date, consistent with the information effects hypothesis. Taken together, these results indicate that there is significant information contained in demutualization announcements by life insurance companies.
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