When Do International Operations Lead to Improved Performance? An Analysis of Property‐Liability Insurers

ABSTRACT In recent decades, insurers have been increasing their exposure to international markets. This article seeks to investigate the relationship between property-liability insurers' international operations and their risk-adjusted returns using cross-section and time-series data for the years 1992 through 2000. Our findings indicate that the relationship between international operations and performance is contingent upon the degree of product diversification. Insurance companies with focused operations in terms of product lines achieve higher risk-adjusted performance as they increase their exposures to international markets. However, insurers who are highly diversified across product lines face declining returns with greater exposure to international markets. INTRODUCTION Growth through international operations of markets has been one of the strategic priorities for insurers (Greenwald, 1998). It has been widely argued by researchers and practitioners that international operations would help firms become more immune to business cycles, build competitive strengths against international rivals, build market share, diversify risks, and pursue new growth opportunities, while providing better service to existing clients who may be operating in other countries (see, e.g., Daniels and Bracker, 1989; Skipper, 1991; Fairlamb, 1995; Contractor et al, 2003). During the last decade a number of insurers have diversified into new markets seeking these benefits (Ostermiller, 1998). According to the Organisation for Economic Co-operation and Development (OECD), trade in insurance service has grown at a rate of 12.8 percent during the years 1997 to 2002. Evidence provided by the U.S. Department of Commerce (DOC) on U.S. insurers' overseas operations also supports these claims. According to the DOC, U.S. insurers' operations in foreign countries grew at twice the rate of domestic operations and were relatively more profitable than domestic operations (Jennings, 1998). A large number of empirical studies have investigated the relationship between international operations and corporate performance. The majority of these studies focus on manufacturing firms (e.g., Grant et al., 1988; Geringer et al., 1989; Hitt et al., 1997; Ruigrok and Wagner, 2003) while two of them focus on service firms. The first study using service firm data was done by Contractor et al. (2003), who investigated the relationship between international operations and performance using a sample of 103 service firms. Contractor et al. claimed that three phases exist in the relationship between internationalization and performance. In the first phase, the initial benefits of internationalization are outweighed by the cost of setting up international operations, resulting in reduction in firm performance. As firms expand internationally further, greater benefits of internationalization are achieved as costs are controlled, leading to increases in performance. In the third phase, with extensively increased internationalization, firms cross the optimal threshold of international operation, which leads to reduction in performance again. The second study using service firms was done by Capar and Kotabe (2003). This study reported a U-shaped relationship between internationalization and performance where performance decreases up to a certain point, beyond which increases in international operations result in increased performance. They reported that this change in the direction of relationship occurred when revenue from international operations exceed 18 percent of the total revenue generated by the firm. Despite the existence of these two studies on international operations of service firms, both these studies do not claim to include insurance firms in their sample.1 This article seeks to provide empirical evidence on the relationship between insurers' international operations and firm performance. The findings of this study have the potential to offer significant implications for firms planning international operations, as well as for insurance regulators making policies that may affect entry decisions of foreign firms in their markets. …