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

Perhaps the most important development in the financial services market of the past two decades has been the integration of the financial services sector. Deregulation, advances in communications and information technology, and economic forces have led to the breakdown of the "fire-walls" that traditionally separated financial intermediaries such as commercial banks, thrift institutions, investment banks, mutual fund companies, and insurance companies. The European Union gradually deregulated the financial services sector through a series of banking and insurance directives, culminating in the virtual deregulation of financial services (except for solvency) in the Second Banking Coordination Directive, implemented in the early 1990s, and the Third-Generation Insurance Directives, implemented in 1994.¹ The objective of the banking and insurance directives was to create a single European market in financial services. The introduction of the euro in 1999 also profoundly changed the economic landscape for financial services firms in the European market. European deregulation in insurance was particularly important, because insurers traditionally had been limited to operating within specific European countries, with little or no price competition and cross-border transactions limited mainly to reinsurance and some commercial coverages. The Third Generation Insurance Directives introduced true price and product competition in European retail insurance markets for the first time in both life and non-life insurance.

The result of deregulation and other economic drivers of financial sector integration has been an unprecedented wave of mergers and acquisitions (M&As) of European financial institutions. There were 2,549 reported consolidation transactions involving European financial firms valued at $504 billion from 1990 through 1999.² This total included 507 insurance transactions, valued at $127 billion. Significant consolidation occurred both cross-border and within-border as financial services firms sought to consolidate their position within national markets and to take advantage of deregulation and the monetary union to open up or expand their markets in neighboring countries. The consolidation dramatically changed the structure of insurance markets in most European countries and led to lower prices in most European national insurance markets.³

In spite of the dramatic changes in European financial markets, there has been little research to date on the economic impact of these developments. This is particularly true for the insurance market, where some of the more dynamic changes in market structure have been taking place. The purpose of this paper is to remedy this limitation in the existing literature by analyzing the market value effects of mergers and acquisitions in the European insurance industry. We analyze M&A transactions over the period 1990-2002, as reported in Thomson Financial Securities Data's Worldwide Merger and Acquisitions (SDC) database. The sample is defined as including all transactions where either the acquiring firm or the target firm was a European insurance company. Included in the analysis are all transactions reported in SDC that involved significant acquisition of value as well as the subset of these transactions that involved a change in control, defined as an acquisition that increased the stake of the acquiring institution from less than 50 percent to 50 percent or more of the ownership shares of the target institution.

We conduct an event-study analysis to determine the market value effects of the transactions included in our sample. Specifically, we obtained stock price data from the Datastream database and studied the market reaction to the M&A transactions for both target and acquirer firms in a series of event windows surrounding the transaction dates. The use of market value data is more powerful than other approaches in studying the effects of events such as mergers and acquisitions because market prices immediately reflect the market's assessment of new information on the target and acquiring firms.⁴ In effect, conducting an event study enables us to capture the market's expectation of the net effect of an M&A transaction on the present value of the expected future cash flow of firms involved in the transaction and thus to determine whether M&As tend to create value for shareholders. Although M&As clearly can have...