Returns of Post-Catastrophe induced SEO Conducted by Property and Casualty Insurance Companies
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This paper examines returns post seasoned equity offerings (SEO) of property and casualty (PC) insurance companies traded in U.S. between 1981 and 2006. In addition to the return analysis post regular SEO, the unique features of catastrophe-induced SEO are studied in detail. We do not observe significant long term underperformance post SEO compared to the matching firms benchmarks, as is recorded in the finance literature studying SEO across industries. Probit analysis reveals that PC insurers who choose to conduct SEO post major catastrophes display different characteristics than the firms who choose not to. Insurers with CAT induced SEO tend to intriguingly either have higher leverage level or higher profitability. This is explained by the fact that the capital raised through SEO is used either to restore capital to survive the financial distress, or on the other end of the spectrum, to expand market share in the profitable hard market following catastrophes. Investors are found to be capable of distinguishing the motivations behind the decision of catastrophe induced SEO by analyzing firm characteristics as well as stock return performances between the hit of catastrophe events and the SEO date, and use it to assess the value of stocks post SEO accordingly.
Abstract
This paper examines returns post seasoned equity offerings (SEO) of property and casualty (PC) insurance companies traded in U.S. between 1981 and 2006. In addition to the return analysis post regular SEO, the unique features of catastrophe-induced SEO are studied in detail. We do not observe significant long term underperformance post SEO compared to the matching firms benchmarks, as is recorded in the finance literature studying SEO across industries. Probit analysis reveals that PC insurers who choose to conduct SEO post major catastrophes display different characteristics than the firms who choose not to. Insurers with CAT induced SEO tend to intriguingly either have higher leverage level or higher profitability. This is explained by the fact that the capital raised through SEO is used either to restore capital to survive the financial distress, or on the other end of the spectrum, to expand market share in the profitable hard market following catastrophes. Investors are found to be capable of distinguishing the motivations behind the decision of catastrophe induced SEO by analyzing firm characteristics as well as stock return performances between the hit of catastrophe events and the SEO date, and use it to assess the value of stocks post SEO accordingly.
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