This project was funded by the Katie School of Insurance and Financial Services

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This project was funded by the Katie School of
Insurance and Financial Services
INTERNATIONALIZATION AND PERFORMANCE AN
ANALYSIS OF PROPERTY-LIABILITY INSURERS
YU-LUEN MA B. ELANGO
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Trade in Insurance

• U.S. Trade In Insurance Services
• 1997 Exports 1.4B/Imports 4.0B
• 2002 Exports 2.8B/Imports 15.3B
• 20 Annual Growth Rate during the years
  1997-2002
• OCED Trade In Insurance Services
• 2002 Exports 38.7B and Imports 46.2B
• 12.8 Annual Growth Rate during the years
  1997-2002
• aggregate numbers as reported by U.S.
  Department of Commerce and OCED

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Foreign Sales of Property/Casualty Insurance by
U.S. Majority Owned Companies
Includes accident and health insurance
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Why Bother?

• Important dimension in firm strategy
• In our review we did not find any study on
  insurance firms internationalization and
  performance.
• Therefore one could say a need exists to
  understand the relationship between
  internationalization and performance
• Internationalization refers to the extant of
  premiums written in foreign countries relative to
  total premiums underwritten by the firm.

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Literature Overview

• Researchers have traditionally argued that
  internationalization offers significant benefits
  for a firm.
• Examples include new market opportunities
  (Buhner, 1987) economies of scale and scope
  (Porter, 1985) exploiting distinctive
  capabilities (Hymer, 1967) learning (Ghoshal,
  1987) flexibility (Kogut, 1985a, 1985b) risk
  reduction (Shaked, 1986) cross-subsidization
  (Hamel and Prahalad, 1985), as well as many other
  competitive benefits such as foreclosing entry by
  rivals, competitive avoidance in home markets,
  etc.
• If these benefits accrue to a firm seeking
  international markets, the underlying assumption
  is that internationalization will or should
  result in higher performance.

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Previous Findings

• While empirical findings have been inconsistent,
  a large number of studies report an non-linear
  relationship (e.g.), Daniels and Bracker (1989)
  Geringer, Beamish and daCosta (1989) Sullivan
  (1994) Hitt, Hoskisson and Kim (1997) Gomes and
  Ramaswamy (1999) Mauri and Sambharya (2001)
  Capar and Kotabe (2003).
• Barring Capar and Kotabe all of the above
  studies focus on manufacturing firms.

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Research Question

• What type of relationship exists between an
  insurers extent of internationalization and
  performance?
• Is this relationship between internationalization
  and performance moderated by the extent of
  product diversification?

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Key Measurements

• Financial Performance
• Industry Adjusted Return on Asset (IJROA)
• Firm ROA Industry ROA
• Risk Adjusted Return on Asset (RAROA)
• Firm ROA-Industry ROA/Std Deviation (ROA)
• Internationalization
• Foreign Premiums/Total Premiums

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Data

• Data source NAIC AM Best (1992-2000)
• Property-liability insurers with foreign presence
  
• Non-negative values premiums by state and by line
• Organization form is stock or mutual
• Insurance group members are consolidated
• Final sample 535 observations

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Empirical Model

• One-way fixed effect models
• Financial Performance ?t ?1internationalizatio
  nit
• ?2internationalization2it ?3product
  diversificationit
• ?4internationalizationproduct
  diversificationit
• ?5internationalization2product
  diversificationit
• ?6geographic diversificationit ?7firm sizeit
• ?8group affiliationit ?9organization formit
• ?10agencyit ?11stockit ?12lossratioit
• ?13expratioit uit
• where ?t represents time specific intercepts

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Basic Statistics
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Empirical Results
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Conclusion

• Study findings generally provide support for
  internationalization of operations.
• Internationalization enhances performance even
  after adjusting for risks.
• Internationalization is not beneficial for firms
  with significant product diversification