Capital Structure Decisions in the Insurance Industry: Stocks Versus Mutuals

Posted: 8 Mar 2003

See all articles by Scott E. Harrington

Scott E. Harrington

University of Pennsylvania - Wharton School

Greg Niehaus

University of South Carolina - Darla Moore School of Business

Abstract

Mutual insurers generally face higher costs of raising new capital than stock insurers. Other things being equal, the higher costs of raising capital should cause mutual insurers to have higher ex ante target capital to liability ratios than stock insurers. Mutual insurers' capital ratios also should be more sensitive to income than capital ratios for stock insurers and therefore adjust more slowly toward their long-run targets. We provide evidence concerning these issues using aggregate time series data for stock and mutual insurers during 1984-1999 and a large panel data set during 1991-1998. Our regressions provide strong evidence that annual changes in capital to liability ratios are more sensitive to income for mutual insurers than for stock insurers. We also provide evidence that mutual insurers' capital ratios are on average higher than those for stock insurers after controlling for several factors that could influence capital ratios.

Keywords: Insurance, mutual, capital structure

Suggested Citation

Harrington, Scott E. and Niehaus, Greg, Capital Structure Decisions in the Insurance Industry: Stocks Versus Mutuals. Available at SSRN: https://ssrn.com/abstract=382922

Scott E. Harrington

University of Pennsylvania - Wharton School ( email )

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HOME PAGE: http://scottharringtonphd.com/

Greg Niehaus (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

College of Business Administration
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Columbia, SC 29208
United States
803-777-7254 (Phone)
803-777-6876 (Fax)

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