How Fair Value Information Changes Portfolio Rebalancing Behavior in the Property and Casualty Insurance Industry

Abstract

When making investment decisions, Property & Casualty insurers (P&Cs) carefully consider the impact of the mix of taxable and tax-exempt securities on their overall tax liability. However, changes in accounting regulations may have led managers of P&Cs to make decisions based on the accounting effects rather than the economic effects. We examine a relationship among operating and investment income and portfolio rebalancing surrounding the adoption of (SSAP) No. 100 - Fair Value Measurements. Our main results indicate that the association between operating and investment losses and rebalancing investment portfolios towards taxable investments was strengthened in the (SSAP) No. 100 period.