Announcements of Asset-Quality Problems and Contagion Effects in the Life Insurance Industry
29 Pages Posted: 23 Apr 2007 Last revised: 9 Nov 2008
We investigate contagion effects in the stock returns of life insurance companies at the time of announcements by First Executive and Travelers of significant problems in their investment portfolios. We first demonstrate that investments in junk bonds or commercial mortgages are important for shareholder wealth effects of other insurance companies. We then directly link the shareholder wealth effects to characteristics of the firms' customers. Our evidence shows that effects on shareholder wealth are larger for companies with significant junk bond/commercial mortgage assets and readily mobile customers as represented by guaranteed investment contracts (GICs).
Keywords: contagion, disintermediation, life insurance, writedowns
JEL Classification: G14, G22
Suggested Citation: Suggested Citation