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

Shan Ge and Michael Weisbach

No 25677, NBER Working Papers from National Bureau of Economic Research, Inc

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 events that help us establish causality. Among corporate bonds, for which we can control for regulatory treatment, results suggest that when Property & Casualty (P&C) insurers become more constrained due to operating losses, they shift towards safer bonds. The effect of losses on allocations is likely to be causal since it holds when instrumenting for losses with weather shocks. The change in allocations following losses is larger for smaller or worse-rated 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 conditions in institutional investors’ portfolio decisions.

JEL-codes: G11 G21 G22 G31 G32 (search for similar items in EconPapers)
Date: 2019-03
New Economics Papers: this item is included in nep-cfn and nep-ias
Note: AP CF
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Published as Ge, Shan & Weisbach, Michael S., 2021. "The role of financial conditions in portfolio choices: The case of insurers," Journal of Financial Economics, Elsevier, vol. 142(2), pages 803-830.

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Journal Article: The role of financial conditions in portfolio choices: The case of insurers (2021)
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