1. 1 A Study of Exit Forms and Insurer Characteristics: Evidence from the US Property/Liability Insurance Markets American Risk and Insurance Association Conference August 5-8, 2007 Quebec City, Canada W. Jean Kwon, Ph.D., CPCU St. John’s University, New York Hunsoo Kim, Ph.D. SoonChunHyang University, Korea

2. 2 Forms of Exit Life cycle of firms Normal firms Merger/acquisition Voluntary exit Involuntary exit Governing laws General bankruptcy code Specific provision in the insurance act Informal action Formal action

3. 3 Forms of Exit Normal Firm Falling Firm Value Stable/Rising Firm Value RehabilitationM&A Voluntary Liquidation Recovery Status Quo Recovery Involuntary Liquidation Financial/Operational Difficulty Sound Operation

4. 4 Factors Affecting the Decision Process Wealth maximization motive Firm owners and their agents have every incentive to recover their investment capital as much as legally permitted (Peach, 1998). A firm at a declining stage of business life cycle may form an exit strategy instead of making a further capital commitment (Resnick, 1998). Policyholder interest protection motive

5. 5 Empirical Examination Multinomial logistic (MNL) regression model to get natural log of odd-ratio: The risk ratio of two probabilities (e.g., voluntary vs. involuntary liquidation)

6. 6 Factors Affecting the Decision Process CategoryVariableDescription Fina ncial ProfitabilityROA INVYD Net income ÷ Assets Two-year investment yield average based on cash + invested assets (IRIS6) a Underwriting Performance LR CR Loss ratio (Losses & LAE incurred ÷ Premiums earned) Combined ratio LiquidityLQAST AGBAL Liabilities ÷ Liquid assets (IRIS8) Agents’ balance to surplus (IRIS9) Capital Adequacy NPWSUR BCAR b Net premiums written ÷ Surplus (IRIS2) Best’s Capital Adequacy ratio CapitalLn(Asset) SURPLUS Log of total assets Policyholders’ surplus Managerial CONCENT b DISTRI b OWNER Line concentration (a Herfindale index) Agency vs. direct vs. mixed marketing channels Dummy (stock vs. mutual ownership) Political COMMDummy (appointed vs. elected commissioner)

7. 7 Empirical estimation Data Liquidated, merged and acquired firm data from A.M. Best Database for 1999-2004 Financial data based on t-1 period from the year of exit 2,200 U.S. property-liability insurance firms

8. 8 Parameter Estimates Normal firm as base A rise in (net premium written to surplus) more related to voluntary liquidation rather than staying in business Similar relationship for profitability, underwriting performance and liquidity, but the actual impact is negligent Getting large firms in terms of In(Asset) likely to stay in the market rather than to consider voluntary liquidation Little difference in behavior between normal firms and merged/acquired firms Between normal and involuntarily liquidated insurers, a rise in profitability or capital adequacy likely to cause them to consider involuntary liquidation rather than staying in the market

9. X Parameter  Estimate Std. ErrorWaldProb a eβ beβ b 1. VLIntercept- 2.6581.1505.3440,021* ROA 0.1180.0673.0990.078*1.125 LR0.001 3.7050.054*1.001 LQAST 0.0020.0014.1340.042*1.002 NPWSUR0.0050.00165.5110.000**1.005 Ln(Asset)- 0.3040.0999.3260.002**0.738 COMM- 0.1580.3620.1910.6620.854 OWNER0.7510.5122.1520.1422.120 2. M&AIntercept- 4.0531.5446.8880.009* ROA- 0.2080.1382.2480.1340.813 LR- 0.0010.0030.1780.6730.999 LQAST- 0.0060.0080.5330.4660.994 NPWSUR0.0100.0063.1820.074*0.990 Ln(Asset)0.2200.1382.5500.1101.246 COMM- 0.8510.5192.6860.101*0.427 OWNER- 0.7530.5631.7840.1820.471 3. INVIntercept2.3541.5392.3410.126 ROA0.1410.0694.2090.040*1.151 LR- 0.100.0045.8780.015*0.990 LQAST- 0.0020.0040.3180.5730.998 NPWSUR0.0040.0018.4450.004**1.004 Ln(Asset)- 0.8490.16028.1200.000**0.428 COMM0.8320.6211.7970.1802.298 OWNER0.6530.5721.3010.2541.921

10. 10 Parameter Estimates M&A firm as base [Voluntary – M&A] An increase in size(Ln(Asset)) leads a merger/acquisition deal. Capital adequacy (NPWSUR) also very significant. [Involuntary – M&A] A rise in ROA, NPWSUR and COMM lead to involuntary liquidation. However, An increase in Ln(Asset), the most significant variable, leads to M&A rather than involuntary liquidation.

11. 11 Parameter Estimates Involuntary liquidated firm as base Larger insurers—probably with a stronger wealth motive—more likely to respond to signals indicating financial or operational difficulty before they are captured by the regulator [Voluntary – Involuntary ] A rise in ROA, NPWSUR and OWNER lead to the involuntary exits rather than voluntary exits.

12. 12 To be Refined Separation of healthy M&As from regulator- led M&As Expansion of the time period, which is currently t-1 Further empirical exploration when a firm is considering all choices concurrently Further study on interpretation of empirical results (e.g., profitability )

13. 13 Thank You!