W. Jean Kwon , Ph.D., CPCU St. John’s University, New York Hunsoo Kim , Ph.D. SoonChunHyang University, Korea

1. A Study of Exit Forms and Insurer Characteristics: Evidence from the US Property/Liability Insurance MarketsAmerican 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. 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. Forms of Exit Recovery FallingFirm Value VoluntaryLiquidation Financial/OperationalDifficulty Normal Firm Recovery Rehabilitation M&A Sound Operation Stable/RisingFirm Value InvoluntaryLiquidation Status Quo

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. 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. Factors Affecting the Decision Process

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. 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

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. 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. 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. Thank You!