Issues in insurance: Capital structure, distribution and market power

Date of Completion

January 2007

Keywords

Economics, Finance

Degree

Ph.D.

Abstract

The dissertation consists of three essays examining issues in insurance capital structure, distribution and market power.^ The first essay consists of a review of capital structure swaps literature. A new model is developed for capital structure swaps for insurance companies under asymmetric information and/or comparative advantage. Model validity is demonstrated by comparing announcement period stock market returns and long-run profitability for insurance companies that issue equity and increase reinsurance in the same year. Evidence of value creation resulting from swaps shows that insurance company managers may be able to expropriate wealth from reinsurers and new equity investors when the reinsurance markets price loss reserves differently from primary insurers.^ The second essay includes examination of industry-level market valuation effects of attorney general litigation activity. If an attorney general lawsuit announcement against a subset of firms that threatens other firms in the industry (either with punitive sanctions or changes in, regulatory enforcement), the industry portfolio may also experience adverse valuation effects. Furthermore, the firm-level effect may be related to the intensity of the firm's use of the threatened technology. There was an industry-wide negative stock market reaction to New York State Attorney General Elliot Spitzer's lawsuit against select insurance carriers. Furthermore, firm-level valuation losses are related to the intensity of contingent use. These market value losses suggest that investors believed that contingent commissions were a value-enhancing tool for insurance carriers. Market valuation effects were concentrated about the lawsuit announcement, suggesting the investors did not believe that the public investigation contained credible information about future changes in regulatory enforcement.^ The third essay examines increasing concentration in the health insurance industry, determining whether such concentration increases are pro-competitive or anti-competitive. This study develops theory related to market structure and profitability, and examines health insurance mergers since 1998. The impact of mergers on rivals' stock market returns is estimated using event study methodology, and suggests that mergers are not believed to be either pro- or anti-competitive, but rather, rival returns suggest the presence of a signaling effect.^

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