The Role of Financial Conditions in Portfolio Choices: The Case of Insurers

59 Pages Posted: 26 Mar 2019

See all articles by Shan Ge

Shan Ge

New York University (NYU) - Department of Finance

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: March 2019

Abstract

Many institutional investors depend on the returns they generate to fund their operations and liabilities. How do these investors’ financial conditions affect the management of their portfolios? We address this issue using the insurance industry because insurers are large investors for which detailed portfolio data are available, and can face financial shocks from exogenous weather-related events. Results suggest that more constrained insurers have smaller portfolio weights on riskier and illiquid assets, and have lower realized returns. Among corporate bonds, for which we can control for regulatory treatment, results suggest that more constrained insurers have smaller portfolio weights on riskier corporate bonds. Following operating losses, P&C insurers decrease allocations to riskier corporate bonds. The effect of losses on allocations is likely to be causal since it holds when instrumenting for P&C losses with weather shocks. The change in allocations following losses is larger for more constrained insurers and during the financial crisis, suggesting that the shift toward safer securities is driven by concerns about financial flexibility. The results highlight the importance of financial flexibility to fund operations in institutional investors’ portfolio decisions.

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Suggested Citation

Ge, Shan and Weisbach, Michael S., The Role of Financial Conditions in Portfolio Choices: The Case of Insurers (March 2019). NBER Working Paper No. w25677. Available at SSRN: https://ssrn.com/abstract=3359434

Shan Ge (Contact Author)

New York University (NYU) - Department of Finance ( email )

New York, NY
United States

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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