Academic journal article Journal of Risk and Insurance

Is Bancassurance a Viable Model for Financial Firms?

Academic journal article Journal of Risk and Insurance

Is Bancassurance a Viable Model for Financial Firms?

Article excerpt

ABSTRACT

The bancassurance (i.e., bank and insurance company combinations) model for financial firm architecture has been widely used in Europe and recently has been adopted by U.S. financial firms. We provide evidence regarding the viability of bancassurance combinations for U.S. and non-U.S. mergers between 1997 and 2002. We find positive gains and no significant risk shifts for shareholders of bidding firms, and that higher CEO stock ownership results in less positive gains for shareholders. These and other results suggest that bancassurance firms are viable entities that may play an important role in the future evolution of the U.S. financial system.

INTRODUCTION

Although mergers between banks and insurance companies, known as bancassurance mergers, have been frequent in Europe for many years, they have not been a part of the U.S. banking system because of prior legislative restrictions. Passage of the Financial Modernization Act (also known as the Gramm--Leach--Bliley Act) in 1999 fundamentally altered the expansion opportunities for commercial banks and insurance companies. For the first time since 1933 when the Glass--Steagall Act was adopted, these financial firms could acquire one another and operate under one corporate umbrella by forming Financial Holding Companies, variously referred to as universal banks, financial supermarkets, and financial conglomerates. (1) Indeed, since passage of this legislation, a large number of commercial banks and insurance companies have taken advantage of the reduced restrictions on their expansion into these and other financial service areas, both through acquisitions and through de novo means.

Deregulation that allows for diversification across both financial services as well as geographic areas (under the Interstate Banking and Branching Efficiency Act of 1994) together provide a potent rationale for the growth of banking and insurance combinations in the years ahead. As a result, mergers between commercial banks and insurance companies have the potential to fundamentally change the U.S. financial landscape. However, that potential will become reality only if the bancassurance model is, in fact, a viable one. Unfortunately, there currently exists little direct empirical evidence on the value and risk implications of this form of business combination.

We provide evidence in this article on the following questions: (1) Do bancassurance merger announcements increase the stock prices of bidding firms? If so, what financial, corporate governance, and other factors explain the higher stock prices among bidders? (2) Do bancassurance mergers alter the risk profile of the merged firm? To date few studies examine the bancassurance phenomenon, and those that do typically use simulated data or have extremely small sample sizes. Ours is the first study to examine this important issue using actual data from bancassurance mergers and to do so with a large sample of both U.S. and non-U.S, mergers.

We attempt to answer these questions by examining a relatively large sample of 129 bank-insurance mergers among U.S. and non-U.S. companies in the period 1997 through 2002. We find that bancassurance mergers do provide small positive wealth effects for bidders whether they are insurance companies or banks. In addition, transactions that result in geographic diversification for the combined firm result in positive announcement responses, as do transactions in which the bidder has a high return on assets. We also find that bidder returns in bancassurance mergers are associated with their governance characteristics. For example, mergers in which the bidder's CEO has a large fraction of his firm's stock are less well received. This suggests the possible existence of CEO entrenchment that allows for non-value-enhancing behavior on the part of the bidder. We do not, however, find that bank-insurance combinations alter the risk profile of acquiring firms. …

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