<scp>The Role of Internal Capital Markets in Financial Intermediaries: Evidence From Insurer Groups</scp>

Powell, Lawrence S.; Sommer, David W.; Eckles, David L.

doi:10.1111/j.1539-6975.2008.00267.x

Cited by 59 publications

(24 citation statements)

References 29 publications

(54 reference statements)

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“…Because reinsurer pays for some portions of assumed liability shifted from ceding company, reinsurance can be used to increase a ceding insurer's underwriting capacity and surplus (capital) position. Insurer can also increase its surplus by selling its assets to affiliates for a price above book value or at the current market value (Powell et al 2008). Powell et al (2008) explore the efficiency of internal capital market in the U.S. property-liability insurance industry.…”

Section: Hypotheses Developmentmentioning

confidence: 99%

“…Insurer can also increase its surplus by selling its assets to affiliates for a price above book value or at the current market value (Powell et al 2008). Powell et al (2008) explore the efficiency of internal capital market in the U.S. property-liability insurance industry. They provide evidence that capital is allocated to subsidiaries with best expected performance, consistent with efficient internal capital markets.…”

Section: Hypotheses Developmentmentioning

confidence: 99%

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

Shim

2010

J Financ Serv Res

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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.

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Section: Hypotheses Developmentmentioning

confidence: 99%

Section: Hypotheses Developmentmentioning

confidence: 99%

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

Shim

2010

J Financ Serv Res

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“…For nonfinancial firms, the empirical evidence on the efficient functioning of such internal capital markets is mixed 7 . For financial intermediaries, however, recent empirical evidence documents active and efficient internal capital markets (see, e.g., Houston and James, 1998; Powell, Sommer, and Eckles, 2008). The differing results between studies of financial intermediaries and of firms in other industries are consistent with the prediction of Stein's (1997) model.…”

Section: Conceptual Background and Hypotheses Developmentmentioning

confidence: 99%

Capital Market Development, Competition, Property Rights, and the Value of Insurer Product‐Line Diversification: A Cross‐Country Analysis

Berry-Stölzle¹,

Hoyt²,

Wende³

2012

J of Risk & Insurance

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In this article, we show that the effect of product diversification on performance is not homogeneous across countries. Diversified insurance companies perform significantly worse than their focused competitors in countries with well‐developed capital markets, high levels of property rights protection, and high levels of competition. In addition, we find that the diversification–performance relationship for insurance companies depends on company size. For large insurers operating in countries with less developed capital markets, diversification significantly increases performance. Our results suggest that the optimal organizational structure may be different for insurers operating in emerging economies than for insurers operating in developed countries.

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“…There is a substantial body of literature on capital transfers within conglomerates (e.g., Stein, ; Campello, ). For the property–liability insurance industry, Powell, Sommer, and Eckles () document the existence of such active internal capital markets.…”

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confidence: 99%

External Financing in the Life Insurance Industry: Evidence From the Financial Crisis

Berry-Stölzle

Nini

Wende

2014

J of Risk & Insurance

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The financial crisis and subsequent recession generated sizable operating losses for life insurance companies, yet the consequences were far less significant than for other financial intermediaries. The ability to quickly generate new capital through external issuance and dividend reductions let life insurers maintain healthy levels of equity capital. We use this experience to examine the causes and consequences of external capital issuance by U.S. life insurance companies. We show that, in general, new capital is issued both to support the growth of new business and to replace capital depleted by operating losses. This second channel is particularly important during macroeconomic recessions. Notably, we do not find any evidence that insurers had difficulty generating new capital, unlike other financial service providers that required large amounts of public support. For life insurers, what changed following the financial crisis was the demand to raise external capital, but the supply of external capital appears to have remained constant.

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The Role of Internal Capital Markets in Financial Intermediaries: Evidence From Insurer Groups

Cited by 59 publications

References 29 publications

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

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

Capital Market Development, Competition, Property Rights, and the Value of Insurer Product‐Line Diversification: A Cross‐Country Analysis

External Financing in the Life Insurance Industry: Evidence From the Financial Crisis

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