The Relationship Between Growth and Profitability: An Empirical Analysis of U.S. Property and Liability Insurers

Abstract

Using a data set of insurers operated in the U.S. property and liability (P-L) insurance market during the sample period, this study examines the interactions between firm growth and profitability. Dynamic panel regressions are conducted to investigate its relationship and other factors in the growth and profit equations. Regression models include firm specific variables and industry cycle variables to control and deliver a better estimation. The results of this study show that past profits have a major impact on future profits, thereby supporting that profits continue to be generated in the P-L insurance sector. The findings are consistent with two additional profit measures. Additionally, this research finds that lagged growth is benefitting present profit, specifically assessed by ROE. The growth model shows a positive association between lagged profit and current growth. This study further demonstrates how quickly smaller-sized businesses expand in this market. Other firm characteristics are identified in the profit and growth models as well.